Stormy Waters

A political storm, not to be confused with the ‘Storm’ brewing in the United States…

The Environment Agency recently published data which revealed the frequency of discharge of sewage into our rivers by the water companies. This showed a staggering 825 sewage spills per day into England’s rivers and seas in 2022. Over 300,000 sewage spills were recorded last year, although this was 19% lower than in 2021. However, the Environment Agency put the lower level of spillage down to drier weather, rather than actions by the water companies. How have water companies, industry regulator Ofwat and the government let this happen?  

Storm overflows are used to spill excess wastewater and rainwater into inland waters and the sea. Storm overflow releases happen when the sewerage system is at risk of being overwhelmed. They are “safety valves” used in combined sewer systems to protect properties from overloaded sewers causing flooding and sewage backing up into streets and homes during heavy storm events. There are around 15,000 storm overflows in England and approximately 13,350 of these discharge to inland rivers. The Environment Agency (EA) regulates discharges from storm overflows by issuing environmental permits for individual storm overflows.

The challenge for the industry is that to really address the sewage issue it will take massive investment over many years. It is estimated that the complete separation of wastewater and stormwater systems – eliminating storm overflows – would cost between £350bn and £600bn.

While population, rivers and length of coastline have no doubt played a part, it was noticeable that the league table of shame was topped by the three still quoted companies  – United Utilities, South West (Pennon) and Severn Trent. With local elections fast looming, not surprisingly, this issue has grabbed even greater media coverage. Environment Secretary Thérèse Coffey is now acting and has said she would ‘be making sure that money from higher fines and penalties – taken from company profits, not customers is channelled directly back into our rivers.’

If England’s water companies have to ramp-up capital expenditure on sewage overflow it would mean customers face significant bill increases, not great news given the cost-of-living crisis and inflation. Meanwhile, Ofwat has announced new powers that will enable it to stop the payment of dividends if they would risk a water company’s financial resilience.

Of the ten water companies that were privatised in 1989, only three are still quoted. The others are owned by foreign investment firms, private equity, pension funds and in some cases, businesses based in tax havens. Green activists want to renationalise England’s water companies without compensation!

What have we been watching?

A slightly shorter working week and Alpha Bites due to the Easter break. Markets remain a bit like the bank holiday weather – sunny spells, occasional showers and windy!

Interest rates and inflation remain the key influence although geo-political tensions remain unhelpful. US Treasury Secretary Janet Yellen expects the world’s largest economy will continue to grow, despite heightened recession concerns following the recent banking crisis. Meanwhile, Kristalina Georgieva, head of the IMF said ‘we don’t envisage, at this point, central banks stepping back from fighting inflation.’  While, the banking crisis appears to have calmed down for the time being, some analysts are predicting a continued flow of deposits from smaller US regional banks into government-only money-market funds. One report by Barclays has suggested a potential outflow of $1.5trillion – not a great vote of confidence in the US regional banking system!

China declared it had ‘successfully completed’ three days of war games around Taiwan with a show of force that saw it simulate targeted strikes and practice a sea blockade. The exercise was a response by Beijing to Taiwan President Tsai Ing-wen’s recent meeting with US House Speaker Kevin McCarthy.

NATO foreign ministers met as Finland became the 31^st member to join the organisation in the aftermath of Russia’s invasion of Ukraine. Work is still underway to admit Sweden to NATO, where formal approval is still dependent upon Turkey. Meanwhile, the US and EU have outlined a plan to reduce their dependency on Russia for nuclear materials and fuel cycle services.

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China’s Caixin services activity indicator climbed to a two-year high of 57.8 in March as the economy continues to recover from lockdown.

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Brent oil held steady at $85 following the surprise production cut announcement from OPEC+.    

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Finally, another case of the law of unintended consequences. Wealthy Russians were the biggest international investors in Dubai real estate last year. The UAE has adopted a neutral stance since the invasion of Ukraine. Last month the UAE central bank even issued a licence to Russia’s MTS bank to start operations. The result has been a surge in property prices and in turn a 36% leap in average rents. That is a real cost-of-living squeeze for the expatriates which are the backbone of the economy. Nearly 90% of the UAE’s 10 million inhabitants are foreign nationals.

 

Read Last Week’s Alpha Bites – A big bang or a pop?

 

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.