Trouble with wind?

Nuclear Power versus Wind Power. Weekly newsletter from Alpha PM
One of the reasons for the UK Government’s decision to push ahead with the Hinkley Point nuclear plant was no doubt due to the need to address long term international carbon emission standards. Green campaigners have been pushing for greater investment instead in wind power, although onshore planning issues or ‘not in my back yard’ (Nimby) have possibly restricted expansion. Instead the UK is therefore seeing sizeable investment in offshore wind production.

China has no ‘Nimby’ issues and according to the International Energy Agency (IEA) has been building two wind turbines every hour. China currently has the biggest programme of wind turbine installation in the world which, is almost double the rate of the nearest rival, the USA

However, while at first glance this may lessen concerns that some of you may have about global warming and China’s attempt to tackle carbon emissions, it is not that straight-forward. The IEA has warned that China has built so much coal -fired energy generating capacity in recent years that it is having to temporarily shut down wind turbines for 15% of the time. This is because coal -fired power stations are given priority access to China’s electricity grid.

China is now planning a moratorium on all new coal-fired power stations until 2018. According to the IEA, China’s position is unsustainable suggesting that it will need to invest in its electricity grid to integrate the new variable renewable energy sources.

We continue to monitor developments in renewable energy closely but currently find better potential investment opportunities in those companies supplying services to the sector rather than the green energy producers themselves.

What have we been watching?

After the central bank meetings of the previous week, markets returned to watching, the US Presidential race, a positive OPEC meeting, some worrying signs in the European bank sector and the departure of yet another England football team manager.

The health of the European banking sector was once again in the spotlight as shares in Deutsche Bank were marked down sharply. The shares hit a thirty-year low on stories that German Chancellor Angela Merkel had ruled out providing state aid for the bank as it faces a multibillion-dollar claim against it from the US Department of Justice (DoJ) concerning allegations of mis-selling mortgage securities. Despite Deutsche bank insisting it was financially sound, it was reported that hedge funds had started to pull some of their business from the bank. Subsequent stories that the size of the DoJ fine could be reduced appeared to ease market nerves slightly. However, to add to the German bank sector woes, Commerzbank, the country’s second biggest lender unveiled plans to cut 9,600 jobs and scrap the dividend for the time being.

Meanwhile, it was Deutsche Post causing a stir in the UK with the £243m purchase of Royal Mail competitor UK Mail. This is another British company being acquired by a larger overseas business, following the EU referendum and Sterling’s fall.

The World Trade Organisation (WTO) cut its forecast for global trade growth for 2016 from 2.8% to 1.7%. The WTO’s director-general warned that the ‘dramatic slowing of trade growth is serious and should serve as a wake-up call’ to governments around the world.

UK investment News
In the UK, mortgage approvals slipped to a two-year low, extending a slowdown that began before the Brexit vote. However, broader bank lending remained robust with consumer borrowing showing the fastest growth since May. Minouche Shafik, Deputy Governor for Markets and Banking at the Bank of England was quoted as saying ‘it seems likely to me that further monetary stimulus will be required at some point in order to ensure that a slowdown in economic activity does not turn into something more pernicious’. Brexit does not yet appear to have affected the UK consumer but the uncertainty is starting to affect some parts of UK industry. For example, Nissan announced it is delaying new investments in its Sunderland plant until the UK has concluded Brexit negotiations with the UK.

Theresa May, speaking at the Conservative party conference confirmed that the Brexit process is likely to commence by the end of March 2017. This news was reflected in currency markets with Sterling dropping to $1.285.

According to press reports, the Conservatives are looking to support housebuilding in the UK with a £5bn support package. This will include £1bn towards loans to smaller builders, £2bn to create infrastructure to support housebuilding and the provision of some £2bn of surplus government land for housebuilding.

EU investment news
In Europe, Mario Draghi, the president of the European Central Bank (ECB), faced criticism at a meeting with German politicians after he struggled to convince them that his policies were fixing the Eurozone’s economy. Elsewhere, Hungary went to the polls and voted to reject EU migrant quotas creating another headache for European leaders alongside Brexit although the turn-out was too low for the result to be considered valid.

US investment news
In the USA, the general view was that Hilary Clinton won the first televised Presidential debate with her implied chances of victory increasing by about six percentage points, reversing the recent trend in favour of Donald Trump. The market re-action was most noticeable in the Mexico peso which rallied by 2% against the US Dollar! The next two debates are on October 9th and 19th. Subsequently, Donald Trump’s tax affairs came to the fore which might damage his campaign. Elsewhere, the Conference Board measure of consumer confidence was better than expected in September and touched a nine-year high.

Japanese investment news
Japan has begun a revamp of its GDP figures because of rising concern about their accuracy, following a Bank of Japan report that suggests a huge understatement of growth in 2014.

Chinese investment news
In China, manufacturing activity in August was in line with expectation. More significantly, seven local governments tightened house buying rules given national price increase are running at a six-year high. China’s property bubble remains one of the main threats to China’s GDP growth expectations.

Investment news
Elsewhere, Turkey’s lira dropped sharply, shares slid and the country’s bonds were sold off after credit rating agency Moody’s downgraded Turkey’s debt to junk.

Commodity investment news
Brent oil jumped to $50 as OPEC outlined a plan to cut output by between 0.5m-1m barrels a day. However, the proposal does not detail how the production cut is to be achieved, and has to be agreed at the next OPEC meeting in November. While clearly a supportive development for the oil price there should be some scepticism over whether this will result in an actual change in global supply levels particularly given Iran’s previous comments.

Finally, a sign of how technology continues to impact traditional business models. InterContinental Hotels shares dropped last week on fears that Airbnb which, allows people to list, find and then rent holiday homes, has been eating into its most profitable segment ‘compression nights’ in the USA. As Bob Dylan once sang ‘times they are a changing.’

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This publication is for informational purposes only and should not be relied upon. The opinions expressed here represent analysis by an Alpha Portfolio Management representative at the time of preparation and should not be interpreted as investment advice.

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