Uncertainty settles in following Brexit shock

Infrastructure investors underline their portfolios are relatively insulated – but the UK’s leap in the dark leaves many deeply concerned.

As the archetypal risk-lite asset class, infrastructure is deemed by most as one of the safest places to put your money when push comes to shove.

At least this is the argument put forward by key market players as the initial shock delivered by Britain’s decision to sever ties with the EU after more than 40 years of membership gives way to questions about what comes next.

“Infrastructure assets are resilient by nature. They’re unlikely to be seriously affected by Brexit, at least in the medium term,” Vincent Levita, co-founder, chief executive and chief investment officer of Paris-based InfraVia told Infrastructure Investor.

Some highlighted the protective measures they have taken or the relative lack of UK assets in their portfolio.

“iCON’s funds invest in unlisted businesses for the long term and most of the funds’ foreign exchange exposures are hedged, as a result of which they have limited exposure to short-term sentiment in the markets,” stressed Paul Malan, the senior partner of London-based iCON Infrastructure.

But read between the lines and investors sound less sanguine about the repercussions of what many observers qualify as the biggest shock to the continent since the fall of the Berlin Wall.

Beyond the personal sadness some privately express, wild jitters on the currency and stock markets, added to longer-term harm to the country’s macroeconomic prospects, are creating a climate that makes many industry players feel uncomfortable.

“Equities and the pound may remain vulnerable given the likely hit to UK growth, and risk now of weaker ties with our main trading partner, FDI foregone, and a diluted relationship with the US and other third parties,” commented Neil Williams, group chief economist of Hermes Investment Management. “Getting to the next stage looks a long, drawn-out ‘can of worms’, leaving considerable uncertainty for UK assets and markets.”

A pre-Brexit survey by Standard & Poor’s found that 71 percent of respondents expected investment in the UK to decline in the two years following the vote, while Fitch warned sterling depreciation could put pressure on ports and airport volumes, with steeper interest rates also exposing debt issuers to potential refinancing risk.

“We expect rating actions could occur in the medium term if macroeconomic performance deteriorates and leads to breaches of our downgrade sensitivities at the issuer level,” it said this week in a note.

Moody’s today joined both agencies in stating that the UK’s sovereign credit rating would likely be cut owing to the weight of uncertainty on economic and financial performance.

“In the short term, banks and credit ratings may take a hit, which could have consequences for the broader asset class,” echoed Levita.

A proportion of managers Infrastructure Investor polled declined to comment, eager to wait for the dust to settle before making a proper assessment. “As an infrastructure fund very focused on Western Europe, we hope Brexit won't affect us too much, or even affect us at all. But it's too early to be optimistic,” said Renaud de Matharel, chief executive and managing partner of Cube Infrastructure.

“It is simply too early to say what the consequences will be for infrastructure. Once market turmoil and liquidity pressures have abated we’ll take a view,” agreed the founder of a large-cap European firm.

Lenders and advisers, colder in their appreciation of the situation, meanwhile underlined the hoops fund structures and their managers would have to go through post-Brexit to stabilise their ship.

“Alternative fund managers will have numerous valuation issues to contend with in reflecting the impact of the UK’s exit from the EU,” said valuation advisory firm Duff & Phelps. “Forthright and transparent communication with limited partners and other stakeholders will be key.”