InvestmentsJun 27 2017

Equities are still best option for pensions

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Equities are still best option for pensions

Every so often the investment world changes. This happened in the 1950s as a consequence of economic lessons learned from the 1930s depression and the second world war. The business cycle was tamed by political action and that made companies safer – and with that came the cult of the equity.

So it proved to be the case for many investors, but not all. Those who ignored a changing world invested in traditional blue chips such as textiles, and the engineering support structure for those industries, shipping and shipbuilding. They saw their savings disappear as conservative managers failed to adjust to a more competitive age.

 

Never forget the competition

Now an equally significant change is on the way. Renewable energy is becoming more efficient and cheaper. President Trump has problems with coal miners not because of the Paris climate accord, but because US coal companies gave up human miners in favour of cheaper automated strip mining. Yet coal is still not competitive with cleaner and friendlier sources of energy, and the US solar industry alone already employs more than double the numbers of the mining industry.

Jeremy Grantham, founder of Boston asset manager GMO, and one of the wisest of market commentators, believes much of this change is obscured in countries where climate change is still contested. “I think it is happening much faster than most well-educated business people in America understand. Because the science is being deliberately obfuscated in the US, the consequences are being obscured as well.”

Smog-choked China has already designated renewable energies and electric cars as strategic industries. Conscious of this, the US military agrees with Grantham. The CNA Military Advisory Board – a Virginia-based think-tank – believes the US must take a leadership role in the transition to advanced energy by stepping up research and development of technologies such as renewables, nuclear power, energy efficiency and electricity storage.

It considers that this advanced energy revolution, which is driven by the plunging cost of renewable generation and battery storage, has major consequences for US defence. 

 

Watch for a tipping point

The future can affect the present even if market penetration is low. In 2016, less than 1 per cent of all cars sold were electric, but today every major car manufacturer is putting the bulk of its research budget into electric cars to make them cheaper rather than improve the emissions of existing models.

Although wind, solar and other renewables now account for less than 0.5 per cent of world energy consumption, this type of energy accounted for more than half of the increase of world-wide energy generation last year – for the second year in succession.

It seems that the last 20 years have seen a complete change in the green energy business. Today, according to the FT and McKinsey Global Institute, it is much more focused, differently organised, and very much more efficient. 

As the FT noted: “After years of hype and false starts, the shift to green power has begun to accelerate at a pace that has taken the most experienced experts by surprise. Even leaders in the oil and gas sector have been forced to confront an existential question: will the 21st century be the last one for fossil fuels?”

 

Going green

The world has German taxpayers to thank for much of this. More than 20 years ago, generous subsidies helped drive a green revolution, turning a 9 per cent share of renewables within the country’s electricity mix to 32 per cent last year.

That was when two of the country’s largest power utilities – Eon and RWE – each divided into two, creating a legacy fossil power business and a clean, renewable power company for the future.

Electrical power utilities – a preferred share choice for widows and orphans – have been hit by collapsing wholesale power prices from the US to China. 

Of course the replacement of the fossil fuel industry will not take place overnight. It took more than a century before wood was replaced by coal, and the present system that heats our homes and fuels our cars and trucks cost some $25trn (£20trn) to create during the last century. But a shift has occurred, as proved by Eon and RWE. 

 

The underlying problem

What was once a confident and growing industry has now become defensive. Now other iconic industries are feeling the squeeze: first it was cars and in future it will be basic portfolio constituents such as Royal Dutch Shell, BP and Exxon. Their problem is urbanisation. 

Urban congestion is one of the world’s unresolved problems, as is air quality. More of us are continuing to leave the countryside to work in cities – the UN calculates that some 55 per cent of the world’s population is urbanised, compared with less than a third 40 years ago, and it predicts that this percentage will keep rising. 

Public transport has improved, but it will become busier. As urban housing costs rise more, workers are forced to live further from their jobs and to commute longer distances – at enormous cost in terms of wasted time, stress and pollution. 

The problem for green energy has long been storage, but the answers are seen in electric cars and, probably more importantly, self-driving cars. With that in mind, battery production is ramping up and production costs are falling fast.

Tesla and Panasonic are building a ‘giga-factory’ in Nevada that, in full production by 2018, will produce more lithium ion batteries annually than were made worldwide in 2013. This is only one of 14 planned or being built, of which nine are in China. 

Enel is Europe’s largest power company; it reckons that battery prices will fall some 30 per cent from 2018 to 2021, and is already pairing solar panels with batteries to supply energy in places with hot climates after dark. Next will be the pairing in those parts of the world that are not so hot, as the technology of both improves.

 

Where to invest?

In effect, a range of technologies are stimulating a whole series of new industries – a rerun of what happened at the end of the 19th century when horsepower was replaced by the internal combustion engine, and candle and paraffin lights by gas and electricity. Who and what will win is entirely unknown, but those that do will make sure that their shareholders retire wealthy.

Apple, Amazon, Microsoft, Facebook and Google have already proved that, and their shares are now selling at unprecedented highs – the exact reason that investors should not buy them now.

No monopoly lasts forever, particularly with powerful governments more concerned than ever before with social media, fake news and hate propaganda, as well as an evolving terrorism threat and lack of taxes. 

The answer for private investors is investment trusts, and especially those that have proved themselves so far, such as Baillie Gifford and Aberdeen Asset Management.

The combination of fixed sums of money and a hierarchical management and investment organisation gives the best chance of thriving in this very rapidly changing and evolving industrial world. Choosing the future will require keen eyesight and strong nerves.