Britain’s new Prime Minister Liz Truss and her new Chancellor, Kwasi Kwarteng, have
confirmed measures aimed at easing the ‘cost of living crisis’ as part of the planned fiscal
event or “mini-budget” held on Friday 23 September. One of these measures is the reversal
of the planned increase in UK corporate tax from 19% to 25%.
The reversal will see the government surrender a boost to corporation tax receipts
(approximately £17 billion anticipated from 2025/26) and increase the nation’s debt that has
ballooned in response to the Covid-19 pandemic. Despite this, Truss will hope that lower
rates of corporation tax will strengthen incentives for investment across the UK, helping to
drive economic growth towards a target rate of 2.5% a year.
Scrapping the planned rise in corporation tax should be beneficial for valuations across the
London-listed infrastructure and renewable funds, given tax is a key component in their
project cash flow modelling. Indeed, this sensitivity to changes in tax rates was
demonstrated as recently as 2020, when many of the funds with significant UK exposure
saw their NAV's (Net Asset Values) reduced after the planned reduction in UK Corporation
Tax from 19% to 17% was reversed in Sunak’s March budget. For funds that had adjusted
their valuation assumptions for higher UK corporation tax from 2023 onwards, we expect the
opposite this time around and anticipate imminent uplifts to NAVs. Based on data published
by the funds last year, the approximate impact on NAVs could be as high as +2.3% across
the infrastructure sector and +4.1% within the renewables space.
There has also been uncertainty surrounding ‘windfall taxes’ for electricity generating
companies, following the imposition of the ‘Energy Profits Levy’ which targeted UK oil and
gas company profits earlier this year. The newly installed Prime Minister has dismissed
additional windfall taxes, providing a further boost across renewables, which have enjoyed
short-term gains from the current elevated levels of power prices. The risk of an additional
tax appeared to have been ‘priced in’ by the market, with most of the funds trading on
historically low premia to NAVs throughout the summer, reflecting weak investor sentiment.
With that risk now having all but disappeared, the outlook for the renewable energy
generators looks brighter and valuations across the sector may be reassessed.
Given the long-life nature of the projects, stable (and often growing) cashflows generated
and the potential for inflation protection, we believe listed infrastructure and renewable
energy investments can serve as a useful diversifier within a traditional multi-asset portfolio.
Further to providing a reliable income stream for investors, these vehicles have shown
resilience against a backdrop of market volatility this year and have historically exhibited low
correlation with other asset classes, improving risk-adjusted returns.
“This article was originally published on 28 September on the MHA MacIntyre Hudson website.”
Luke McAfee, Chartered FCSI- Investment Manager