EUROPE - Macro uncertainty will exert downward pressure on European transport infrastructure asset prices as demand increases for regulated utilities, according to a report from AMP Capital.

The report - on medium-term opportunities in 'defensive' infrastructure investment - suggested assets closely correlated with GDP, such as ports, airports and toll roads, would be marked down in line with downward revisions of medium-term economic growth prospects. Meanwhile, prices would rise for utility-type assets with strong cashflows, such as energy and water, which remain largely unaffected by the downturn.

"The utility sector would appear to offer safer prospects in the larger economies, unless the pricing of economic assets fully reflects the poor medium-term outlook for their host economies," said the report.

AMP's analysis is predicated on the assumption that European governments will target infrastructure spending to stimulate economic growth as an antidote to debt reduction.

However, its authors acknowledged that both of the models it believes governments were likely to take - public-private partnership (PPP) or full privatisation - carry significant risks. Governments may be unlikely to incur political risk by privatising infrastructure assets amid high unemployment and government vacillation on PPP was likely to hold up progress.

While the UK remained the most active market for PPP - with £1.8bn (€1.2bn) deals signed in the first half of this year and a further £5bn in the pipeline - the report's authors were sceptical if the UK government's attempts to persuade pension funds to finance its National Infrastructure Plan would succeed.

"UK pension funds may be in no position to resist these overtures but foreign investors may remain unimpressed," said the report. In addition, the high cost of borrowing will increase PPP funding risk.

Despite the political risks associated with privatisation, AMP suggested governments could wind back their majority ownership of listed European utilities by selling all or part of their shareholdings. Meanwhile, vertically integrated utilities could spin off non-core operations either via listings or private sales.

According to the report, investors are likely to target Poland and Turkey for high-growth prospects, relatively low public debt and their governments' pro-privatisation stance.

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