8 Oct 2023
At some time I wrote that it is wrong to try to work out how much a company is worth and then compare that to the share price. It’s more productive to do the exercise backwards – look at the valuation of a business and ask if the implied outlook is plausible. You can do this equally effectively with optically high and low valuations.
A bonus of this approach is that it indicates what people really think because whatever they say (e.g. about ESG…grrrr) if they don’t invest in it they don’t believe it. But it’s not as simple as that. The propensity to invest in anything is also affected by the cost of money.
If your cash earns zero you are more likely to take a bit of a punt. If National Savings is paying 6.2% (which it was until a few days ago), safety looks far more attractive.
FREE MONEY = GREEN MONEY
I think we will look back on the Greta years (2018 – ?) and observe that the perceived virtue of reversing economic development was a luxury correlated with the age of QE and free money. From 2009 to 2021, the white collar classes were coddled by unprecedented government-sponsored liquidity. They worked from home while the less well-paid delivered the essentials of life to their front doors.
You could say that a general complacency crept in. Investments in electric cars and wind turbines were characterised almost as no brainers and if their promised financial rewards were rather long term, many public subsidies (more free money) were available. Low interest rates (10 year gilts still yielded only 1% at the end of 2021) apparently discouraged financial scrutiny and (historic term) cost-benefit analysis. .
In 2022 the Bank of England ceased its gilt purchases and, deliberately or not, infamously torpedoed the new PM Truss by commencing sales of its portfolio in September. Politics aside, the attitude to public and private investment has changed markedly in 2023.
THE RETURN OF COST-BENEFIT ANALYSIS
The 2010 HS2 rail project was going to cost £33 billion. By 2020 this had risen to £88 billion and allegedly to more than £100 billion in 2023. Naturally the project has now been abandoned though a number of past politicians and present consultants declare themselves to be outraged. Sorry chaps, we’re in a high interest rate world now.
To return to Greta….
We cannot help what we believe. We can only defer to our own research and our consequent assessment of plausibility. I think that the concept of net zero is ridiculous. More, while I can see that the Earth’s climate changes, I find the notion that we are changing it by irresponsibly encouraging carbon dioxide (apparently 0.04% of our atmosphere) unconvincing. Yet the war on carbon is a source of a million fortunes, all, as it turns out, funded by free public money.
My opinion on the “climate emergency” appears to make me an outlier. The other side of the argument in fact recognises no argument. There is a barrage of propaganda from hundreds of media outlets paid for by organisations such as Covering Climate Now and the loftily named World Weather Attribution. Despite the fact that scepticism is supposed to be the foundation stone of science, scientists such as Dr Judith Curry who question the consensus are ruthlessly de-platformed.
GREAT NEWS! PEOPLE AGREE WITH ME!
But I have great news. It turns out that almost everyone secretly agrees with me.
Wherever you look, investments in green technology are melting away as the era of unthinking subsidy slides into the past.
The most recent UK offshore wind auction received no bids. The government was blamed for mispricing (i.e. under subsidising).
In July Vattenfall dropped its plans to build a wind farm off the Norfolk coast due to rising costs and a lack of subsidies.
The UK government has backtracked on its autocratic pledge to ban the sale of petrol and diesel cars from 2030 – this has been extended to 2035. Most of us have had some experience of electric cars and know them for what they are – mediocre and overpriced vehicles badly supported by charging infrastructure and attracting rapacious insurance premiums. Consequently while fleet sales (paid for public and corporate bodies) are rising nicely, private sales are not.
ESG funds are seeing net withdrawals. According to the Daily Telegraph_
The surge in gilt yields following higher-than-expected inflation data pushed investors to overhaul their strategies and shed ethical equity funds as they chased higher returns.
I acknowledge that I may be completely wrong on the climate issue. I don’t care. What seems important to me is that the searchlight of high interest rates has illuminated my hitherto concealed fellow travellers.