Blown away

Outlook – hopefully mild and windy 

Wind supplied almost 27% of the UK’s annual power for the first time ever last year. Wind also accounted for a greater proportion of UK energy generation than nuclear at 15.5%. However, gas also increased its share of power generation, reaching a three-year high at 38.5%. Indeed, the UK became a net exporter of power for the first time ever in 2022 reflecting the problems France has experienced with at some of its nuclear plants.

Mild weather across Europe has seen wholesale gas prices continue to fall easing some of the concerns about UK energy security during this winter. However, concerns are mounting about next winter. This is because of the risk that two of the UK’s older nuclear power stations in Lancashire and Hartlepool could close in March 2024. These produce enough energy to power 4 million homes. Both are operated by French energy giant EDF which is considering a two-year extension of their lifespan. Unfortunately, the picture has been clouded by Chancellor Jeremy Hunt’s windfall tax levy on electricity generators, which was announced in the Autumn Statement in November. EDF has warned the windfall tax may damage the business case for the two nuclear plants at a time when inflation is already pushing up other costs.

Energy analysts have warned that the closure of the two nuclear plants would remove four-gigawatt of spare capacity, which National Grid maintains to avoid blackouts on still, overcast days when wind and solar generation is limited. Love or loathe nuclear power, the fact remains that the UK is replacing readily dispatchable energy generation with intermittent wind generation.

The UK government is supporting nuclear, but Hinkley C is not due to start-up until mid-2027, while Sizewell C has only just been given the go ahead by Chancellor Jeremy Hunt after a review of government spending. One of the lessons from the war in Ukraine is the importance of energy security. One would hope that the government has also taken this on board, given the staggering cost of the energy support scheme as well as the cost of bailing out Bulb. However, media reports suggest discussions with Centrica over the funding mechanism for the UK’s offshore gas storage facility have stalled and it is only 54% full, compared with the 80%+ capacity levels achieved in Europe.

What have we been watching?

UK and European equities received a boost at the start of last week from China’s re-opening of its borders. Indeed, the value of the UK’s top 100 companies hit a 4-year high. The ‘China’ effect also saw strong demand for commodities with copper -seen as an economic barometer – up by 8% already this year. US inflation dropped in December – the fifth month in a row, once again supporting the argument for a slower pace of interest rate hikes from the Fed and eventually a ‘Fed pivot.’ However, some members of the US Federal Reserve (Fed) tried to dampen market enthusiasm by re-iterating calls for interest rates of above 5% to curb inflation.

The global economy is ‘perilously close to falling into recession.’ This warning came from the World Bank which cut its 2023 global growth forecast from 3% to 1.7% – the lowest rate of growth since 1991, with the exception of the recessions of 2009 and 2020. Growth in the world’s richest economies is forecast to fall from 2.5% in 2022 to just 0.5% in 2023. Markets had already been factoring in the risk of recession to some degree during 2022 so the latest World Bank forecast did not produce any shocks. Instead, markets focused on China exiting lockdown and the support this may hopefully provide to the global economy later on in 2023.

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In the UK, the government confirmed that it will scale back support for businesses with energy bills from April. Heavy energy-using sectors such as glass and steelmaking will get larger discounts. The new scheme will run until March 2024 and is forecast to cost £5.5bn compared with over £18bn during the last six months. Meanwhile, the Bank of England’s chief economist Huw Pill said that a ‘distinctive context within the UK creates the potential for inflation to prove persistent.’ Meanwhile, there was a small positive surprise from November’s GDP (gross domestic product) data which has increased the likelihood that the UK avoided an outright contraction in the final quarter of 2022. GDP was +0.1% with World Cup driven socialising boosting activity. The generally positive trading updates from many retailers so far in January are also suggesting that the expected UK downturn may not be as severe as many economists envisage.

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The European Central Bank (ECB) re-iterated its concerns about ‘wage growth over the next few quarters which is expected to be very strong compared with historical patterns.’ A number of ECB policy makers were ‘hawkish’, suggesting that further interest rate hikes are needed to dampen inflation, with one member thinking these should be ‘significant.’

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In the US, inflation dropped to an annualised rate of 6.5% in December compared with 7.1% in November. This was the fifth month in a row of decreasing inflation and was in line with market expectations. The core rate of inflation, which excludes energy and food prices, was 5.7% compared with 6% in November. The case for the Fed adopting a slower pace of interest rate hikes of 0.25% has become stronger. Meanwhile, Treasury Secretary Janet Yellen, in a letter to congressional leadership, has said the US was projected to reach its borrowing limit of $31.4 trillion later this week and that the US would need to ‘start taking certain extraordinary measures’ to prevent a default.

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China’s consumer inflation rose modestly in December to 1.8%, and given Beijing had targeted an annual rate of 3%, it may provide scope for the authorities to provide much-needed stimulus to the economy. This looks necessary given Covid-19 disruption with December exports down by almost 10%.

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Brent oil edged up to $84 in line with the general pick-up in demand for commodities on hopes of a recovery in demand from China as the economy emerges from lockdown.

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Finally, it no doubt sounded like a great marketing idea at the time. Brewdog has had to pay out almost £500,000 to winners of the company’s ‘solid gold’ beer can promotion after complaints to the ASA about authenticity and value as they were only gold-plated. Brewdog argued that consumer expectations of a solid gold 330ml can were unrealistic as each would have had a value of £363,000. Sounds like someone in the marketing department is probably in the Brew-dog house!

Read Last Week’s Alpha Bites – Fog warning

 

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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.