Green with envy

Tony Danker, director-general of the Confederation of British Industry (CBI), recently warned that the world has entered a green technology ‘subsidy arms race.’ This followed news that the EU is to make ‘unprecedented’ investments in clean technologies in a bid to counter the Biden administration’s $369bn Inflation Reduction Act. The fear is that without government action, UK investment could be lured to the US by the huge green stimulus package.

The head of the CBI has urged the UK government to launch a new green investment strategy to prevent business investment haemorrhaging to the US. The CBI wants regulatory changes, including the approval of easier construction of infrastructure such as on and offshore wind farms, as well as greater support for new technologies such as hydrogen, carbon capture and sustainable aviation fuels. The recent collapse of battery start-up Britishvolt, that went into administration, has already raised questions over the UK’s ability to become a leading player in the electric vehicle market.

Meanwhile, the UK government is expected to provide £600m of funding to Tata Steel UK and British Steel – Indian and Chinese owned respectively. This is to secure jobs at both companies and support the transition from coal-fired smelting, to greener electric arc furnaces. Will this sum be enough? Tata estimates the cost of switching its Port Talbot plant to emissions-free ‘green steel’ could be £3bn. In addition, the support for British Steel is a tricky one for the government as it would be helping a Chinese owned business that has suffered competition from cheaper, heavily subsidised Chinese imports. Oh, the irony!

Subsidies have been a ‘bone of contention’ in numerous traditional industries for many years, with the fight for aircraft sales between European owned Airbus and American Boeing being a good example. It now appears as if green subsidies will be the new global battleground. For example, Biden’s Inflation Reduction Act will offer Americans who buy a US manufactured electric car, a tax credit of $7,500. No wonder European car manufacturers are alarmed by this development. Looking at the scale of the US renewables investment package, many smaller countries must be green with envy.

 

What have we been watching?

 

Another week and back once again to market hopes that the US Federal Reserve will slow the pace of interest rate hikes, given the challenging short-term US economic outlook. This was reflected in the continued rally in US ‘tech’ stocks. The euro hit a nine-month high against the US Dollar. This in turn, was supported by ‘flash’ Eurozone PMI business activity indicators which would appear to support the European Central Bank’s (ECB) current monetary tightening plans. The week ahead will see meetings by the US Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE). The Fed is expected to shift to a 0.25% interest rate hike, while the ECB and BoE are each likely to deliver another 0.5% increase. 

The US joined Germany in agreeing to supply battle tanks to Ukraine which will in turn allow other NATO members to send tanks. The West has ‘called Putin’s bluff’ and this move will increase tensions with Moscow. Meanwhile, Lockheed is reported to be ramping up F-16 production as Ukraine’s allies debate sending fighter jets. As the anniversary of Russia’s invasion of Ukraine fast approaches, all eyes are now on the Spring offensive.

European energy prices have continued to fall, even though Russian Gazprom’s gas supplies to Europe are about half the level of that seen in the second half of 2022. This still transits through Ukraine via the Sudzha pumping station. Meanwhile, the US Henry Hub natural gas spot price fell below $3, the lowest level since mid-2021, reflecting record domestic production. Lower energy prices are good news all round, especially so as far as inflation is concerned.

---

 

In the UK, government borrowing hit a new high in December, driven by the cost of supporting households with their energy bills and higher inflation-linked interest payments. Meanwhile, the ‘flash’ PMI services sector, regarding business activity, produced a reading in January of 47.8, which was weaker than expected at a 24-month low. The PMI for the manufacturing sector saw the rate of decline in activity ease albeit it remains in contraction with a reading of 45.3. Encouragingly, the impact of easing supply chain issues on imported costs was reflected in a decline in December producer price inflation, which was also helped by the recovery in Sterling.

---

 

The Eurozone ‘flash’ PMIs showed tentative signs of a return to growth after six-months of contraction, accompanied by a jump in the in the level of confidence in the outlook. The composite PMI was 50.2 with manufacturing at 48.5 and the service sector at 50.7. Germany and France remained in contraction. The latest PMI survey would seem to support the view that any downturn is likely to be far less severe than previously feared.  

---

 

The US economy grew by 2.9% in the fourth quarter of 2022 which was slightly better than expected. Household consumption remained the key driver of economic growth with good demand for new cars. The first quarter of 2023 is expected to see a significant slowdown in the economy and durable goods orders were soft in December for the second month in a row.

---

 

According to official data, China reported 13,000 Covid-19 deaths last week, adding to the 60,000 reported since December, although the data seems to ignore deaths in rural areas.  Some 80% of the population – more than 1 billion people – are believed to have been infected since the Chinese authorities lifted lockdown measures. While Covid-19 has been allowed to rip through the population in the short-term, the re-opening of China will be supportive of the global economy later in 2023. However, will the release of pent-up demand create inflationary pressures and a headache for central bankers? One report suggests that Chinese households could be sitting on an estimated £585bn of savings. Like their western counterparts, could China see a massive release of pent-up demand by Chinese consumers? If consumers and businesses want the same goods at the same time, we all know what will happen to prices!

---

 

Brent oil held steady at around $86 on hopes of a pick-up in demand by China later in the year.

---

Finally, according to Civitas, for the first time more than half of UK households – 36 million people -are estimated to be receiving more from the government than they pay in tax. A slightly different interpretation perhaps of ‘friends with benefits?’

Read Last Week’s Alpha Bites – Great expectations

 

Further information about Alpha Portfolio Management, our products and services, please visit www.alpha-pm.co.uk or email info@alpha-pm.co.uk. Alternatively, you can call us on 0117 203 3460.

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.

You should seek professional advice before making any investment decisions. The past is not necessarily a guide to future performance. The value of shares and the income from them can fall as well as rise and investors may get back less than they originally invested. The sender does not accept legal responsibility for any errors or omissions, in the context of this message, which arise as a result of internet transmission or as a result of changes made to this document after it was sent.

Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the FCA.
Registered Office: 1 The Square, Temple Quay, Bristol, BS1 6DG. Registered in England No. 2489639
Copyright © 2021 Alpha Portfolio Management, All rights reserved

Trading name text

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