Source: 4D Infrastructure.
A cornerstone of our investment process is company management meetings and site visits. These meetings serve several purposes, including providing an insight into management – how they think and run their business – and whether management priorities align with ours as investors. Our Company Quality Grading process involves explicitly ranking company management, so first-hand contact is vital.
The 4D investable stock universe is dispersed broadly around the globe. This necessitates our team travelling widely to call on companies, meet management and conduct site visits. This invariably provides a great insight into not only the specifics of the company being visited, but also a real perspective on what is happening more broadly in the relevant sector, economy and society. We prepare detailed notes after those meetings which capture and relay the key issues and themes of the day.
This is the fifth in our series of Trip Insights, where we share those experiences. It follows three trips during 2018 when Sarah Shaw, 4D Global Portfolio Manager, completed an extensive company engagement and calling program in Latin America and Europe, meeting with management teams from Oil & Gas Infrastructure, Regulated Utilities, Renewables, Transport (road, rail, air sea) and Communications Infrastructure.
Politics
Populous movements have gained further traction this year, ready to pounce on any electoral opportunities that present themselves – a clear sign that globally the masses want change and are dissatisfied with the incumbent ruling class.
Europe
While the economic mood remains reasonably buoyant for European companies, it has deteriorated over 2018 as a result of politics.
- The Brexit outcome is still very uncertain, despite deadlines looming. There are also increasing concerns around what a government shift in the UK would mean for infrastructure operators, with UK Opposition Leader Jeremy Corbyn arguing for nationalisation of the water utilities.
- Many are still waiting on promised execution by Macron in France as he continues to battle strikes.
- There has been yet another change in government in Spain as a result of corruption allegations.
- The Italian election created significant uncertainty, with a far right and a far left party trying to form a coalition.
Mexico
The year has been dominated by the elections, with the initial January concerns around the traction gained by populous, left leaning candidate Andrés Manuel López Obrador (commonly referred to by his initials AMLO) giving way to his resounding majority win in July. All eyes are now on how he will execute on campaign promises, including the cancellation of the Mexico City Airport project.
The other big overhang for Mexico in 2018 was the North American Free Trade Agreement (NAFTA), with the consensus view in January of a renegotiation over a cancellation, given the latter would have negative ramifications for both Mexico and the USA. This proved to be the case, with Trump posturing aggressively and then negotiating a new Agreement which was not significantly different from the original.
Reform is critical for the new government in 2019, having promised to clean up corruption, improve rural living standards and improve wealth equality across the country. While some of AMLO’s rhetoric has been concerning, we hope that given his supporters include some big names in the Mexican corporate world (e.g. Carlos Slim) his bark is worse than his bite.
From an infrastructure standpoint:
- the cancellation of the Mexican airport was a major negative for sentiment, but we believe it could represent an opportunity for the existing Mexican airport operators as they develop alternate hubs for transfer passengers – particularly relevant for OMA and GAP;
- we will be watching energy reform closely, but at this stage AMLO seems supportive of ongoing reform as long as it doesn’t involve core national assets (eg. CFE); and
- regulatory change has not been a focus of the election campaign, so we are not expecting any near-term shifts; and the operators remain confident in the strength of the regulatory model and their contracts, despite an AMLO government.
Brazil
The economy continues to show signs of recovery, but this has largely been overshadowed in 2018 by the October elections. Exiting President Temer has been unable to execute on much-needed reforms, and in some cases has had to backtrack. The mid-year truckers strike saw the government cede some concessions, not to mention de-rail the economic recovery for a number of weeks.
The election in October of far-right candidate Jair Bolsonaro gives hope of some meaningful reforms, including:
- reduced government influence over State-owned companies (Bolsonara is supportive);
- more State-owned companies to be privatised across all sectors (Bolsonara is supportive);
- assets will have to come to the market, which is necessary for the government to raise money. This is starting to happen with Federal road auctions under way and some suggestion of the sale of gas reserves to fund budgets;
- international operators showing increased interest in operating assets – not just the constructors looking, but long-term operators; and
- cleaning out all levels of government with nowhere to hide from the Car Wash (corruption scandal enquiry) fallout.
We are definitely seeing positive signs for the infrastructure players in Brazil, with:
- the ‘New Infrastructure Plan’ highlighting assets to be auctioned;
- new laws to support investment and concession renewals/extensions;
- improvements to the return profiles of utility operators;
- increased auctions in both the transport (airports, roads, urban mobility) and utility (transmission auctions and diversified generation sources) space;
- the sale of State-owned assets – for us, Eletrobras assets are coming to the market in batches and CESP has finally been sold (third time lucky);
- a resurgence in M&A interest from foreign players, as existing operators continue to look very cheap (e.g. Ecorodovias, Eletropaulo); and
- the government making regulated returns increasingly attractive, as they can no longer rely on State-owned enterprises to be the ‘buyer’ of last resort for new infrastructure projects. This is being seen in the attractive transmission returns being offered – definitely improved from historic auctions as government needs the investment, but has also resulted in increased competition from new and existing operators.
Argentina
What a roller coaster 2018 has been for Argentina. In January, the country was the poster child for the LatAm conference, with panels on Argentina as ‘The New Opportunity’ and regarded as the most politically stable of the LatAm nations. President Mauricio Macri continues to work hard to reform the country, but his efforts have been derailed by economics and now with the return of hyper-inflation. It appears the economic base was not stable enough to withstand a rising rate environment in the USA, and this must now be resolved as a priority.
USA
Trump’s ongoing nationalism continues to pressure markets, and is now flowing through to global economics. 2018 started with NAFTA and progressed to both Europe and China, with trade wars an ongoing battle.
With NAFTA, Trump took a hard line until negotiations were underway, when he accepted a re-negotiation on very similar terms to the original Agreement. There were some small wins for the USA so Trump can cry success, but in reality his bark proved a lot worse than his bite. This was largely expected as while Mexico would have been hit harder than the USA with a cancellation, key swing states in the USA would have been hit very hard and could have derailed Trump’s political career.
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Trip Agendas
Latin America, January 2018
Europe, April 2018
UBS Renewables day, London, September 2018
Santander Conference NY, September 2018