After the Conservative Party managed the gravity-defying feat of simultaneously winning, but actually losing, the UK general election, infrastructure investors need to treat the new Tory-led government as little more than a lame-duck caretaker and set their eyes on where the wind is blowing.
Direction of travel is key in politics and direction of travel, at the moment, lies squarely with the nationalisation-friendly Labour Party. In the event of another election in a few months' time, there is now a real possibility that Labour, led by Jeremy Corbyn, will be able to form government. And that means UK asset owners need to confront the spectre of nationalisation.
Corbyn made it clear as day in his party's manifesto what he plans to do once he's in power. Of particular interest to our readers are his pledges to “regain control of energy supply networks […] transition to a publicly owned, decentralised energy system [and] replace our dysfunctional water system with a network of regional publicly owned water companies”.
Take a “dysfunctional” water company like Thames Water, now owned by Borealis Infrastructure, Wren House Infrastructure Management, BT Pension Scheme, Abu Dhabi Investment Authority, British Columbia Investment Management Corporation, AMP Capital, QIC and Fiera Infrastructure.
Does anyone have any doubt that an already popular figure like Corbyn, if voted into power, would have much trouble persuading the public to nationalise a company that was recently sentenced to a record £20 million fine for presiding over the worst sewage spillage to hit the River Thames?
Here’s a hint at the answer. Prior to the election, a March YouGov poll asked the British public what they thought about nationalisation. Fifty-nine percent said water companies should be publicly owned, followed by 53 percent for energy firms. The only industries where the public felt comfortable with the idea of private ownership were airlines (68 percent), banks (53 percent) and telephone and internet companies (also 53 percent).
Following last year’s Brexit vote, we wrote there was a dangerous mismatch between an austerity-hit populace wanting economic redress and a Conservative government made up of enthusiastic free-marketers seeking an even more globalised Britain. If anything, last week’s vote underlined just how fed up people in Britain really are with austerity and declining living standards. The crucial difference now is that the UK economy is showing its first signs of what could turn into a major slowdown.
More importantly, though, is that everything that was ridiculed about the Labour Party and its antiquated, hard-left ideas for economic redistribution is, after this election, firmly in play, including nationalisation. At the very least, investors need to prepare for a repeat of Tony Blair’s infamous 1997 ‘windfall tax’, which hit private utilities and other companies to the tune of some £5 billion. If worse comes to worst, they could find themselves on the wrong side of the negotiating table, hammering out the details of their expropriation packages.
Political risk and instability have skyrocketed since last year’s Brexit vote and, with EU negotiations due to start 19 June, show no sign of abating. It’s true that the UK has long been a safe investment destination, thanks to stable regulation, a reliable legal system and ready availability of quality assets. But with old certainties being torn left, right and centre, investors cannot assume that past is prologue.
Instead, they need to seize on what may prove to be a relatively short transition period to prepare for the potential challenges ahead. That means looking at how risk can be mitigated, reducing portfolio concentrations where appropriate, and, perhaps, hitting pause on future UK investments.
Illiquids do not offer the luxury of a quick exit. And as Prime Minister Theresa May painfully discovered, strong and stable is not where the UK is at.
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