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Outlook 2017: The will of the people

Political risk is a perennial infrastructure talking point, but this year’s stunning electoral upsets served as a reminder of just how disruptive voters can be.

The UK’s decision to leave the EU and Donald Trump’s surprise US Presidency win were, for many, upsets of such magnitude they felt the world as they knew it had just been upended. While pundits are still scrambling to make sense of what it all means, one thing is abundantly clear: voters felt the status quo was not working for them and they were not afraid to smash it up.

Of course, taking a hammer to the status quo is, in many ways, the easy bit – the big question now is how all of the pieces are going to be put back together and, importantly, how will these changes affect the notoriously risk-averse, long-term infrastructure community? So far, the answer has been far from black and white, with much still to be known.

Take Brexit. For some, like Hastings Funds Management, Brexit effectively put a damper on their fundraising plans, pushing them to adopt a ‘wait and see’ approach given renewed instability in Europe. But for others, Brexit has arguably been a boon. You need only look at the chart on p. 35 of our recent keynote interview with 3i Infrastructure to see how its share price has spiked since the UK’s vote to leave the EU. Currency volatility has also made some deals costlier, as hedging had to be adjusted midway through, but it has also effectively imported inflation, benefitting some managers.

Trump’s victory is also shaping up to produce similar winners and losers. On the one hand, there is tremendous excitement about the President-elect’s $1 trillion infrastructure plan and how it can give a very welcome boost to the US infrastructure market. Not all infrastructure investors will benefit equally, though. Clean energy investors immediately emerged as potential losers, but anyone owning a port in Asia should be alarmed at Trump’s belligerent protectionist rhetoric.

There is also a slew of longer-term questions posed by these so-called populist votes that should concern investors, particularly in Europe, which is looking at a fraught electoral calendar in 2017. But the most important is this: nationalist sentiments aside, the Brexit and Trump votes are a powerful demand for economic redress and for taking back control over areas of life which are perceived to have spun out of voters’ grasps.

To think that private ownership of infrastructure, with the increased (if justified) costs it often carries will be immune to this sentiment is a dangerous folly. Writing in the Guardian, Aditya Chakrabortty recently turned his guns on Macquarie. He was particularly scathing about Thames Water, which Macquarie owns. The company recently had three high-profile mains burst in London that effectively flooded parts of the capital and caused Mayor Sadiq Khan to bluntly tell it to “up its game”.

Immigrants may be target number one of nationalist discontent right now, but as one Leave voter told Chakrabortty: “I’m angry at the British government. They sold the country out. There’s nothing we own any more.” If that anger is not quelled somehow, infrastructure investors might find themselves in voters’ crosshairs sooner rather than later. In fact, governments from the UK to Australia have already started to make noises about restricting foreign ownership of certain domestic assets.

What’s more, one of the main consequences of the Brexit and Trump votes is that they have made the unthinkable, thinkable; the unspeakable, speakable; and scenarios previously thought of as extreme a reality. Nationalisation of foreign assets in developed infrastructure markets may not be a part of the public discourse today. But wise long-term investors should not bank on that being the case tomorrow.