GOVERNMENT policy is an increasing risk factor for investors, particularly in the resources and energy sectors, says our head of equities, Crispin Murray.
“As an investor, you really need to have conviction — and part of that comes from your ability to understand all the risks within an investment case,” Murray says.
“You are always worried about unpredictable events, and this is where the influence of government becomes a bigger issue, particularly around unpredictable policy.”
Murray, speaking at The Australian Financial Review Live conference, says sovereign risk can be more unpredictable than competitor risk.
“Competitors are largely focused on returns, so you can anticipate what they’re likely to do.
“But governments overlaying policy agendas can create more unpredictable outcomes.”
“Largely speaking, competitors are focused on returns — so you can anticipate what they’re likely to do.
“If you have governments with other policy agendas overlaying, that can create quite unpredictable risks.”
Murray uses the recently introduced federal safeguard mechanism in Australia as an example.
The safeguard mechanism effectively regulates the emissions of Australia’s 215 biggest polluters, including many fossil fuel companies, forcing them to reduce carbon output.
It comes into effect from July.
“They are still negotiating on details, but it means we’re asking mining companies, as an example, to quickly cut their scope one emissions,” Murray says.
“That means cutting diesel emissions over the next seven years – and there’s no proven commercial solution to that.
“That creates an extra cost and is going to deter investment.
“In isolation that is not going to be a huge issue. But when you add a few other things in — new taxes and things like that — it can very quickly start weighing on the market.”
Resource and energy companies are hit hardest.
“Where you have an unpredictable fiscal environment where the rules can change, retrospectively … that ultimately deters capital from wanting to be deployed,” Murray explains.
“Maybe as a society we are saying we don’t want capital deployed in the resources or energy sectors anymore, but that is the sort of example that will ultimately have an impact on society.”
Companies and investors will need to work into financial models the cost of carbon — even though in Australia there is no mandated carbon price — because under the safeguard mechanism many companies will have to purchase carbon offsets.
“I think we will see carbon price go up more than people realise,” says Murray.
“And it’s not beyond the realms of possibility that we will see a carbon price by the end of the decade.”
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.
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