AMP: Less energy sovereignty after Brexit

AMP Capital, the Sydney-headquartered asset manager, expects UK energy prices to go up in the post-Brexit world as a lower pound makes power imports dearer.

The firm believes such inflation will come at a time when Westminster’s control over energy policy weakens in a context where Britain continues to rely on the EU’s integrated market without having a say on the rules governing it.

“The UK is increasingly reliant on imports from and through continental Europe, its energy market is deeply integrated with Europe and a material share of the UK's electricity is exchanged with EU partners,” said Andrew Jones, AMP’s head of infrastructure debt, in a statement.

“It is widely anticipated that the energy market could not practicably be separated from Europe's energy networks and so the UK would have to continue to adhere to some extent to EU energy policy, but without having any influence over Europe's energy policy and consequently less sovereignty over its own energy policy.”

The wider uncertainty surrounding the economy will likely lead to a short-term blip in investment activity, Jones added, though he specified the picture could vary depending on whether projects are largely domestic or dependent on other European nations.

Boe Pahari, AMP’s global head of infrastructure equity, echoed this view, stating that GDP-linked assets could wobble, but he expected most of the asset class to otherwise be fairly resilient to short-term economic fluctuations.

“As a result of [direct infrastructure’s] defensive nature – given the essential nature of the services provided, long-term contracted revenues, low volatility and stable cash yields – we do not expect to see a material impact on asset valuations.”

More concerning perhaps were expected delays in ongoing or planned transactions. “Expected sales processes for UK and European assets could be delayed whilst the current market turbulence settles and the appetite of investors and debt providers in both UK and Europe becomes clearer,” Pahari noted, adding that recovery would likely follow as demand for infrastructure remains.

Listed infrastructure, a more immediate barometer of market sentiment, took a hit shortly after poll results came out. But Tim Humphreys, AMP’s global head of listed infrastructure, remained sanguine. “Listed infrastructure companies in the UK (largely regulated utilities) have very little exposure to the economy, are largely protected against inflation and have access to long-term funding. Outside of the UK some companies, like Eurotunnel, and European airports are exposed to the UK economy via trade and tourism flows, but we expect any impacts from these linkages to be small and short-lived.”

In the medium-term, Humphreys said the most attractive risk-adjusted returns for listed infrastructure stocks would probably be found in continental Europe.