InfrastructureOct 4 2017

Labour spooks infrastructure trusts

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Labour spooks infrastructure trusts
Labour speech hurts trust shares

Specialists have forecast more rhetoric-induced volatility for infrastructure investment trusts after the Labour party said it would crack down on finance arrangements commonly used in the space.

Last week shadow chancellor John McDonnell said the party would bring private finance initiative (PFI) contracts “back in-house” if Labour was returned to government. 

The announcement – which would affect existing contracts for public assets such as schools, hospitals and transport – produced a sell-off in infrastructure trust shares. Popular vehicles such as John Laing Infrastructure and HICL endured material share price falls, though they later retraced some losses. 

With Labour riding high in the polls and the government still beset by infighting, commentators have said investors should be on the lookout for further reactions.

“You will start to see price movements as Labour gains or loses support,” said Philip Bagshaw, a portfolio specialist for City Asset Management. “You would expect these trusts to move in line with that. We back these [trusts] for stability. Adding political rhetoric to the equation is not a good thing.”

The Labour proposal has complicated the outlook for infrastructure vehicles after a period in which they benefited from expectations that politicians would start adopting a more positive stance on public spending.

Labour’s manifesto at the 2017 general election, which called for significant increases in expenditure, had been touted as an example of how political winds were now blowing favourably for infrastructure assets. 

The AIC’s infrastructure sector has risen 1.6 per cent over the past 12 months, according to FE.

For some, the focus has now turned to which sectors and trusts would be hardest hit by a PFI crackdown.

Broker Numis warned there appeared to be “particular focus on the use of PFI in the NHS”.

The sector represents a significant weighting for some trusts. HICL has a 29 per cent exposure to healthcare, while John Laing has a 30 per cent allocation, according to Numis analysis.

“There are many listed companies which could be impacted by any change to existing PFI companies, including contractors and facilities management businesses,” the firm added.

Numis noted that the PFI proposals had the potential to “spook investors”. Other analysts have downplayed the viability of such plans.

“In reality, we remain unconvinced by the practicalities of nationalising PFI contracts given the complexities involved and the significant compensation that would be required to terminate these contracts,” said Canaccord Genuity analysts Ben Newell and Alan Brierley in a note.

For those who maintain conviction in the sector, any added share price volatility presents a potential buying opportunity. Factors including higher inflation expectations and demand for yield have seen investors pile into infrastructure trusts, driving premiums on the vehicles into double-digit territory.

Mr Bagshaw said last week’s sell-off had ultimately proved too short-lived to top up on exposure.

Others believe share prices are unlikely to budge substantially, given the appeal of such trusts versus other assets.

Charles Murphy, of Panmure Gordon, said: “These are at a significant premium to a zero-risk asset. I don’t see them coming off that hard – I don’t necessarily think we are going to see a derating of the sector because of politics.

“We might see a derating if the expected return on lower-risk offerings like gilts goes up.”