Blogs

Please see the below article from EPIC Investment Partners detailing their thoughts on the renewable energy market and discussions on a potential rise in nuclear energy. Received this morning 01/08/2024.

Before we look at the nuclear option, we note that a subsidiary of Zhejiang Akcome New Energy Technology Co has become the latest solar panel manufacturer to declare bankruptcy.  This follows quickly after another smaller manufacturer, Gansu Golden Solar Co, entered a pre-reorganisation process earlier this month.  Expect many, many more to fall by the wayside.

This is not because China is holding back on rolling out renewable, quite the reverse. An interesting article published by The Guardian recently compared global solar and wind power projects currently under installation.  China accounted for a staggering 64.5% of the total with the US next at 7.6%. No other country accounted for more than 2.5%.  Indeed, the Asia Society Policy Institute recently suggested that China’s National Bureau of Statistics is severely underreporting renewables power generation as it does not include, amongst other things, rooftop solar.

A recent survey, attributed to the OECD, asked the question “Would you be willing to live near a …..”  Over 80% of respondents replied “no” to landfill sites, waste incinerators, large airports and chemical facilities.  Interestingly nuclear, at 35%, recorded the lowest “no” vote among the nine other options which included wind farms, high voltage transmission cables and mobile relay stations.

Oklo Inc, an advanced nuclear technology company based in California, estimates that a 15MW (scalable to 50MW) reactor with a 40 plus year life could be installed on just a two-acre site within 12 months and cost just $70mn. Oklo provides nuclear fission reactors which can be fuelled by recycled nuclear waste. We understand that spent fuel, similar to naturally occurring uranium, only contains around 1% of the all-important U-235 isotope (capable of sustaining a chain reaction in a thermal-neutron reactor) compared to the 5% needed for a traditional pressurised water reactor.

If ‘nimbyism’ is not a problem, as the OECD survey suggests, watch out for a small nuclear power plant in your neighbourhood! For the adventurous investor Oklo is New York listed.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Clare

01/08/2024

Please see the below article from Brewin Dolphin which provides a brief analysis of the key factors currently affecting global investment markets. Received late last night – 30/07/2024

A challenging week for the equity market’s hottest stocks

Last week was challenging for investors, with the so-called “pain trade” hitting hard. Pain trade is a term used in financial markets to describe a scenario where the market moves in a direction that causes the maximum discomfort or losses to the largest number of market participants.

The pain trade has been building for a few weeks since the improvement in small-cap stocks. A couple of weeks ago, we described how semiconductor stocks had been hit by political pressure from both sides of the aisle – the Biden administration threatening to clamp down on companies facilitating the use of U.S. technology in the Chinese chipmaking industry, and former President Donald Trump casting doubt over the willingness of the U.S. to defend Taiwan against Chinese aggression.

Last week saw some of the biggest technology companies reporting earnings, which weren’t taken well. On the face of it, with 40% of the S&P 500 having now reported, the headlines will seem familiar: 79% of companies have exceeded analysts’ estimates of their earnings. The average company has beaten earnings estimates by 4% and been rewarded by a 0.5% share price fall. The market has seen the earnings glass as half empty over the past few weeks.

As the week ended, the technical outlook for equity markets remained challenging. They fell through key support levels and have not yet fallen into oversold territory.

Beyond tech

The majority of the market’s recent declines seem to relate to profit taking and sector rebalancing. Technology and associated stocks became the clear outperformers, and many sectors were left behind.

The prospect of an interest rate cut is seen as a boost to small caps, real estate, and other forgotten sectors, and investors have begun to look for less crowded ways to play the spread of artificial intelligence (AI).

Within real estate, data centres are perhaps the most obvious beneficiaries of AI, but focus has also shifted to their power needs. Utilities have staged a few rallies during 2024 as beneficiaries of the increased electricity demand from data centres. The International Energy Agency estimates electricity consumption demand for data centres could double over the next two years to 1000 TWh, the equivalent of Japan’s power needs.

The current wave of technology-led returns has prompted some challenges of course, but some of these are quickly dismissed. Is this like the technology bubble of the late 90s and early noughties? No, because these companies are very profitable and seem to be on relatively sensible valuations in many cases. Challenges remain nonetheless.

Are we heading for an anticlimax?

We’ve all seen the incredible rise of Nvidia, with its sales doubling over the last two years – but can those sales be maintained? Inevitably, there will be a cycle of investment in demand for computing capacity. But the questions remains, how long will the current upswing last and how severe will the subsequent downswing be?

This comes down to the strength of the use case for AI. If AI is used widely and effectively in the economy, the demand will remain. Alternatively, if it proves to be more hype than reality, cloud providers may find themselves with too much computing capacity, leading to a lack of demand for new semiconductor investment.

We are quite hopeful of the potential of AI because, unlike other general-purpose technologies, there are relatively few barriers to use. The venues for many AI implementations are computing clouds, which are accessible to all. For many medium-sized companies, it’s possible to develop AI applications in-house. For those without the capability, providers are deluging them with offers of service.

At the same time, the potential applications of AI seem broader than for the internet, which was essentially a communication mechanism. This seems quite different from the early days of the internet when development expertise was scarce, technology hardware was expensive, connections were slow, and not all customers were online.

Unlike previous general-purpose technologies such as rail, electricity, telecommunications, and the internet, a viable infrastructure for widespread adoption of AI already exists.

What do we know about Kamala Harris?

Another major development last week was that the Democrats were on the brink of formally confirming Vice President Kamala Harris as their U.S. presidential election candidate. Even before President Joe Biden stepped down, it was clear she would be the only viable candidate. Harris has access to existing campaign funds, which were raised for her and Biden, although funds swelled upon confirmation that Biden would no longer run.

The best guess is that she would provide a degree of continuity with the Biden administration, although the role of vice president essentially means deferring to the president’s agenda, so it can serve to mask her own preferences.

Harris is considered to come from the progressive (meaning left wing) side of the party. She also hails from California, which has a poor reputation for having a high cost of living, heavy tax burden, and burdensome regulation, while also struggling to address issues of homelessness.

Republican attacks blame her for the increase in illegal border crossings, which is perhaps unfair given this didn’t fall within her area of responsibility. She also has a reputation for being prone to gaffes.

The biggest challenge Harris faces may be found in her failed attempt to run against Trump in 2020. She wasn’t able to generate much enthusiasm and was fairly easily beaten in the primaries by Joe Biden. Of course, this is a competition against former President Trump rather than President Biden, who has endorsed her, so her ability to appeal to neutrals is in focus.

It will take some time for the American public to form a view on Kamala Harris. In the meantime, election forecasts, in terms of the presidency and the U.S. Congress, will be unusually uncertain.

China holds third plenum

It would be easy to overlook the Chinese Communist Party’s third plenum, which took place the week before last and was reported to the public over that weekend. These party meetings are held every five years and map out the general direction of the country’s long-term social and economic policies.

Understandably, the plenum ends up being a little vague. The important point is that there would be no material clarification of the role of Chinese-style modernisation, or so-called socialism with Chinese characteristics.

This essentially means continuing with the common prosperity principles that President Xi Jinping has been espousing, while recognising a greater role for markets in the economy, but confusingly, still committing to a model in which assets are state-owned or state-directed.

It’s a model that must be concerning for Chinese investors because it leaves companies unclear on the extent to which profit motives should be balanced against social goals, and whether something might be socially desirable one year and less desirable the next.

If the concern is that this might lead to poor allocation of investment, then bear in mind that China’s commitment to invest and build capacity in certain key industries has seen huge overcapacity in solar and is now doing the same in battery technology. It’s unclear whether this strategically guided investment has resulted in the kind of technological advantage the Communist Party was aspiring towards. Many of the most efficient solar panels are built by non-Chinese companies across a range of jurisdictions. However, they have resulted in substantial declines in costs and seem to be doing the same for battery cells.

The tension here is between patient capital deployed by China and the Western model. The former works on the basis that companies can develop a strategic competitive advantage through state ownership, whereas in the Western model companies are assumed to be more nimble, motivated, and efficient if they are pursuing a profit motive.

Please continue to check our blog content for the latest advice and planning issues from leading investment firms.

Alex Kitteringham

31^st July 2024

Please see today’s daily update from EPIC Investment Partners received this afternoon:

The four-day Third Plenum in Beijing was the first meeting of the Central Committee that President Xi presided over since securing a third term in power. The lack of specific measures to tackle the ongoing residential property woes was disappointing although the shift to increase overall funding to local authorities was welcome. President Xi also vowed to make “high-quality development” the guiding force of the economy. 

The global manufacturing of solar panels is totally dominated by China. Estimates vary but the surge in capacity in recent years has seen capacity utilisation slump to 50-60%. P-type solar cells dominate capacity at present (circa 85% market share) but are likely to be replaced by the more efficient N-type solar cells .

N-tyle cells are designed with a specific doping process to improve efficiency and performance. Doping refers to introducing impurities into a pure silicon wafer to alter its electrical conductivity. P-type cells have an efficiency of between 15-22% although some have been rated as high as 23.6%. N-type cells can reach efficiencies of 25.7% and one would expect that number to climb further.  

The International Technology Roadmap for Photovoltaic projects that N-type cells’ mono-crystalline silicon (c-Si) will reach a market share of 28% by 2028, up from a mere 5% in 2017, while Solar Magazine estimates that N-type cells will account for 70% of production by 2032. 

Interestingly the Ministry of Industry and Information Technology (MIIT) recently announced new guidelines stipulating that existing and new capacity on N-type solar cells must exceed an average photoelectric conversion efficiency of 25% and 26%, respectively. Is this the death knell for the 85% market share P-type cells as “high-quality development” accelerates? Probably. Some estimates suggest that over 20% of current capacity will exit the market in short order, potentially lifting capacity utilisation significantly. 

The larger, better financed and better managed firms will survive and benefit from the exit of bit time players. We have seen this in the Chinese steel industry where decarbonisation and digitalisation dominate official policy. 

Please continue to check our blog content for the latest advice and planning issues from leading investment firms.

Charlotte Clarke

30/07/2024

Please see the below article from EPIC Investment Partners detailing their insights into GPU’s (graphic processing units), AI and the Energy Market. Received yesterday 24/07/2024.

Data centres are hardly new. Global installed capacity has been compounding at 10-20% per annum for twenty years plus. Traditionally driven by central processing units (CPUs), the advent of graphics processing units (GPUs), which excel at parallel processing, has been a game changer. GPUs can handle many smaller tasks simultaneously making them ideal for complex calculations involving large datasets. The drawback is that they consume three or four times the power of a CPU.

Google’s AI driven Gemini gives a handy analogy “imagine a chef (CPU) in a kitchen. The chef can handle complex recipes (complex tasks) but can only work on one dish (one task) at a time. On the other hand, a bakery (GPU) with multiple ovens can handle many simpler tasks (calculations) simultaneously, like baking cookies (smaller calculations)”. 

Electricity demand in developed economies such as the United States and Europe has been more or less static for the past two decades but the arrival of EVs, heat pumps and now GPU driven data centres looks to be transforming the outlook for global electricity demand. Jefferies recently published an excellent report highlighting the likely trends. Using IEA data, Jefferies estimate that European electricity demand will climb 7% over the next two years with EVs, heat pumps and data centres accounting for half the increase in demand.

Underlying these findings are Jefferies’ expectations that European data centre capacity will compound at 10-20% over the next decade. We wonder if these forecasts are too conservative.  While there remains a lot of ‘hype’ in the capital markets when it comes to AI developments, there is little doubt that AI is transformational.

With ‘net zero’ targets seemingly falling by the wayside, an unexpected boom in electricity consumption is unhelpful. To quote from a recent Bloomberg article “The world needs to be capturing about 1 gigaton of CO₂ a year by 2030 to be on track to reach net-zero emissions by 2050 and limit the global temperature rise to 1.5 degrees Celsius (2.7 degrees Fahrenheit) above mid-19th century levels, the International Energy Agency estimates. That’s 26 times what’s being removed annually now. And it’s three times what would be captured if all the projects now planned or under construction are operating by 2030”.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Alex Clare

25/07/2024

Please see below, Brewin Dolphin’s ‘Markets in a Minute’ update which offers a brief analysis of the latest movements in global markets. Received late last night – 23/07/2024

Markets had a lot to digest last week, which began with the high drama of an assassination attempt on former U.S. President Donald Trump. The details of the shooting have been well-covered elsewhere, but the impact on markets and the economy was determined by the boost it gave to former President Trump’s already soaring odds of victory.

Later in the week, Trump accepted the Republican nomination and named 39-year-old Ohio Senator J. D. Vance as his running mate. Trump’s miraculous escape, and a charismatic and articulate performance by the new potential vice president, marked a very successful week for the campaign.

The travails of President Joe Biden have also been helpful. Over the course of his week, his chances of victory were downplayed by giants of the Democratic Party including, according to the Washington Post, former President Barack Obama. The Democrats’ top-ranking senator, Chuck Schumer, was reported as having urged Biden to step down. A statement issued by his office didn’t deny the report. Furthermore, former Speaker of the House of Representatives Nancy Pelosi reportedly told House Democrats she believed he could be urged to exit the race.

To cap the week, Biden contracted Covid-19 and left the White House to self-isolate. Over the weekend he then succumbed to pressure and stepped down. What happens next is really uncharted territory.

The Democrats hadn’t formally named Biden their candidate – however, they’ve gone through the primary process, which should have made that a formality. He won almost all of the just under 3,900 delegates who would get to nominate him in a vote at the Democratic National Convention on 19-22 August.

Because Biden has stepped down, those delegates are understood to be able to transfer their votes. However, they’ll want to avoid doing so based upon personal whim. The President’s endorsement of Vice President Harris makes that process easier. Harris should also have access to Biden’s campaign funding. Indeed, funds began flooding in once news of Biden’s withdrawal became known.

Another candidate would need to begin fundraising from scratch, so it seems very likely that Harris will be the Democratic candidate. Whether the candidate is confirmed at the nominally open convention or pre-determined in a preparatory online poll should be decided this Wednesday, when Democratic National Convention organisers hold a meeting to discuss protocol.

Political analysis site 538’s polling tracker shows Trump has increased his polling lead by three percentage points. This suggests the race for the White House remains competitive. In head-to-head polling, Harris performs about the same as Biden against Trump.

Although recent events have been favourable for Trump, the objective evidence is that he’s now leading in what’s still a surprisingly tight race. The Democrats changing candidates will see them lose the advantage of incumbency but offers an opportunity to reset their campaign.

How has this impacted markets?

In terms of the market impact of these events, the increased possibility of Trump winning was accompanied by a steepening of the yield curve. He’s assumed to have plans to raise debt and generate inflation, which means longer-term interest rates should be higher. Longer-dated bonds rallied in early trading after Biden’s withdrawal, suggesting a small reversal of the Trump trade of higher longer-term borrowing costs. This comes alongside evidence from last week that the Federal Reserve (the “Fed”) would be in a better place to cut interest rates having now seen two months in which so-called “supercore” inflation (services consumer price index excluding housing costs) was negative.

Supercore inflation had been running frustratingly high throughout 2024, but May and now June have given negative readings, which will be massively reassuring to the Fed. Potentially lower short-term interest rates and potentially higher longer-term interest rates mean the yield curve has started to steepen, or at least become less inverted.

In an interview with Bloomberg released early last week, Trump made some important remarks. On the positive side, he seemed to indicate he would allow Fed Chairman Jay Powell to complete his term. Although he added the caveat, “especially if I thought he was doing the right thing.”

Trump signals clearly that he won’t allow the central bank as much independence as more conventional candidates would. That said, he isn’t indicating there should be a change in policy.

Developments in chipmaking

Markets experienced a stumble last week and Trump’s words may well have had something to do with it. After a period in which stocks have performed well (mainly driven by large-caps such as technology and communications services, with a specific focus on semiconductors), we have begun to see a reversal of some of these trends.

Firstly, small-caps began outperforming, then a sharp sell-off began in the semiconductor names. In the previously mentioned Bloomberg interview, Trump refused to commit to protecting Taiwan from potential Chinese aggression. Indeed, he accused the island state of having “stolen” America’s chips industry.

America’s support for Taiwan is important, most obviously in terms of being prepared to provide direct naval support, as Biden has promised. However, assuming Taiwan retains its territorial defences, the challenges of an amphibious assault would seem to be almost insurmountable.

If Trump’s comments did lead to conflict in Taiwan and that led to disruption to the Taiwan Semiconductor Manufacturing Company’s (TSMC) production, the implications for the sector would be harsh, with shortages downstream and a big reduction in demand upstream.

However, if Trump’s preference is reducing reliance on foreign-manufactured semiconductors, that implies a big increase in demand for semiconductor manufacturing equipment makers.

During Trump’s tenure, TSMC committed to building plants in Arizona. But its appetite may be waning as construction difficulties and a chipmaking skills shortage have slowed construction and dimmed the outlook for output. Trump may be calculating that a little jeopardy would keep TSMC focused on expanding its U.S. operations.

One such company would be ASML, which also fell as the market reacted to Trump’s comments. However, it would be wrong to suggest that Trump was the only factor weighing on the stocks. The Biden administration is reportedly considering more severe curbs on the use of U.S. technology within Chinese chip manufacturing processes. This is a threat designed to encourage companies like ASML to limit their business with China.

The news came in a week when earnings from companies within the chipmaking value chain have seemed quite robust. ASML, which makes chip manufacturing equipment, and TSMC, which uses that equipment, both reported strong orders.

Will the Bank of England cut interest rates?

Back in the UK, we had a succession of data to welcome in the new government.

As speculated in previously weekly round-ups, the welcome declines in the consumer price index (CPI) were most impressive in the last report ahead of the election. In June, CPI failed to drop below the 2% target, as had been the consensus forecast. Instead, headline inflation remained at 2% while core inflation accelerated slightly. This was considered bad news for the Bank of England’s Monetary Policy Committee (MPC), which might discourage it from cutting interest rates.

However, we noted the decline in median CPI, which seems a more stable estimate of underlying price pressures. It suggests that eventually, like in the U.S., underlying inflation will ease in the UK.

If, on the surface of it, CPI data might prompt the Bank of England to delay cutting rates, subsequent wage growth rates were stable enough to rekindle its appetite. Furthermore, Friday’s retail sales were weak and will provide another modicum of encouragement for the MPC, which seems eager to reduce interest rates if the move can be supported by recent data.

In totality, last week’s data should provide the ammunition it needs, although the market believes it’s a coinflip whether rates get cut or not.

Over and outage…

Lower interest rates would be encouraging for the markets. However, last week ended in a downbeat mood. Following the semiconductor sell-off, there was a global technology outage due to a flawed cybersecurity software update by CrowdStrike. This impacted Microsoft and had ongoing implications for many other users.

Most striking was the impact on air travel, which itself suffers from cascading effects when parts of the schedule are disrupted. With both airlines and airports affected, the impact was significant. However, a botched update is a less concerning cause than a malicious cyberattack and should not on its own cause lasting market angst.

Please continue to check our blog content for the latest advice and planning issues from leading investment firms.

Alex Kitteringham

24^th July 2024

Please see below today’s Daily Investment Bulletin from Brooks Macdonald, which was received this morning, 23/07/2024:

What has happened

Equity markets began to regain their footing yesterday with the Magnificent 7 (+2.33%) leading the recovery after a 4-day slump last week. The renewed vigour comes just as the corporate earnings season is set to ramp up, with industry giants Tesla and Alphabet poised to release their financial results after market close in the US today. The anticipation of these announcements has infused the market with a sense of optimism, contributing to significant gains in major indices such as the S&P 500, which rose by 1.08%, and Europe’s STOXX 600, which increased by 0.93%. Both indices experienced their best sessions since the early days of June, recouping a portion of their recent declines.

Politics driving market?

In the political arena, the aftermath Joe Biden’s withdrawal from the presidential race captured the media’s attention, though there remains some scepticism regarding any immediate, substantial changes in the election’s trajectory. Donald Trump continues to be viewed as the leading candidate, with a Republican victory still perceived a likely outcome. While Trump’s momentum has contributed to some of the recent significant shifts in the market, it is the narratives of disinflation and a potential ‘soft landing’ for the economy that appear to be more influential. Investors are keenly awaiting the release of the second-quarter GDP and June’s core PCE inflation data, which are anticipated to reinforce these themes. The bond market has already fully factored in expectations for a rate cut in September.

What does Brooks Macdonald think

There is no single catalyst behind the resurgence in momentum and growth stocks. A commonly cited explanation is that the market rotation into small caps following the CPI announcement last week may have been overly aggressive. Despite some concerns about capital expenditures in AI versus their monetization, and a projected deceleration in earnings growth for major technology firms, expectations remain high. The six largest companies within the index—Amazon, Apple, Alphabet, Meta, Microsoft, and Nvidia—are still projected to achieve an impressive y-o-y earnings per share growth of 30%, while the remaining companies in the index are expected to see a more modest growth of 5%.

Bloomberg as at 23/07/2024. TR denotes Net Total Return.

Please continue to check our blog content for advice, planning issues and the latest investment, market and economic updates from leading investment houses.

Charlotte Clarke

23/07/2024