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14 | 26TH MAY - 1ST JUNE | UTILITY WEEK Policy & Regulation US Chile Morocco France Mexico Analysis Politics spooks investors Following the dramatic success of Brexit last summer, politics is once again dominating stock markets. Nigel Hawkins reports. A lready this year, the Dutch have voted while the French presidential election resulted in triumph for Emmanuel Macron. On 8 June, the UK electorate is once again asked to cast its votes while Germany's federal elections in September could see the defeat of the EU's iron lady, chancellor Angela Merkel. Given this packed list of political events, discerning investors have had to respond and make judgements on likely outcomes. In the UK, unless the opinion polls are hopelessly wrong, the Conservatives will be re-elected – and probably with a thumping majority. Indeed, virtually all investors in UK stocks have concluded that a Conservative majority is a near certainty. Consequently, the Labour party's plans for lower energy bills and nationalisation of key elements of the energy network have so far attracted mainly academic interest. But energy costs are firmly on the agenda because Conservative party leader Theresa May has confirmed that a price cap will be imposed by Ofgem. Details of how it will be implemented are scarce. Nonetheless, it has already caused a sharp fall in Centrica's share price, since both its operating margins and, more importantly, its dividend may be cut. SSE's share price has also been weak of late. Predictably, from within the energy sector there have been cries about the unintended consequences of such a cap – with further doubts cast on future baseload generation investment. The Conservative manifesto may also pro- pose additional protection for strategic UK businesses from foreign takeovers, thereby depressing merger and acquisitions activity. While political turn-ups are hardly unknown – both president Trump and Labour leader Jeremy Corbyn were hardly shoe-ins for their current posts – it really would be astonishing if the Labour party pre- vailed on 8 June. Consequently, the chances of a dramatic turnaround in utility share prices are slim. The remarkable 18 per cent surge in water stocks the day aer former prime minis- ter John Major's surprise win in 1992 does, though, provide a precedent that political turn-ups do impact utility stocks. Assuming that the overall result on 8 June is broadly in line with current opinion polls, and Theresa May emerges with a strong popular mandate, Brexit negotiations will resume their place dominating the politi- cal agenda. Quoted UK utility stocks, except for National Grid, have minimal earnings – unlike EasyJet, for example – from mainland Europe, and are therefore less exposed to developments on the Brexit front. Elsewhere in the EU, political issues will continue to be very relevant to stock market ratings. Brexit aside, EU investors will be focusing on the first few months of a totally new administration in France, which may result in the relatively unknown president Macron having to govern without a parlia- mentary majority. His political agenda is opaque. Aer all, it could be argued that he was elected because he was not a National Front member, nor was he embroiled in parliamentary expense allegations, nor was he a former Maoist. But importantly for the UK energy market, he is a strong advocate of EDF's Hinkley Point C investment. From this summer onwards, the focus will move increasingly to Germany. Following an encouraging win in Schleswig-Holstein, Angela Merkel's position has been strength- ened but she must face down new SDP leader Martin Schulz, an inveterate Eurocrat, in September's key federal elections. The tumultuous political arena, not just in the EU but globally, has rattled investors. EY's latest renewable energy country attrac- tiveness index saw the UK climb back into the Top 10, arresting its four-year slide from 4th to 14th. However, this is as a result of "other coun- tries falling away – notably Brazil. which cancelled a wind and solar auction in Decem- ber – rather than any particularly encourag- ing resurgence", according to EY's head of energy corporate finance, Ben Warren. He adds: "Investors are still waiting for clarity around the post-Brexit landscape. Question marks linger around renew- able energy targets, subsidies and con- nections with mainland power markets. Unfortunately, the likelihood of getting com- plete answers to those questions before the UK exits the EU are slim." This clarity is required, and should become a lot clearer aer 8 June, when the new government – whatever its colour – will be able to set out its energy policies and Brexit stance. In the meantime, UK utility executives will be eagerly awaiting details of the pro- posed energy cap, which are far more rel- evant to them than interminable Brexit negotiations. Nigel Hawkins, director, Nigel Hawkins Associates EY ATTRACTIVENESS INDEX, TOP 20 China India Germany Australia Turkey Italy South Africa Sweden Argentina Denmark Brazil Netherlands Japan UK Canada Rank 1 Rank 1 Rank 1 Rank 1 Rank 1 Rank 1 Rank 1 Rank 1 Rank 1 Rank 1 Rank 1 Rank 1 Rank 1 Rank 1 Rank 1 Rank 1 Rank 1 Rank 1 Rank 1 Rank 1 CENTRICA SHARE PRICE, THREE MONTHS SSE SHARE PRICE, THREE MONTHS 240 230 220 210 200 190 1,550 1,500 1,450 1,400 1,350 22 Feb 09 Mar 23 Mar 6 Apr 20 Apr 4 May 18 May 22 Feb 09 Mar 23 Mar 6 Apr 20 Apr 4 May 18 May