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Autoblog – Stung by Asian dominance, Germany pours cash into EV battery ventures.

Reporting by Michael Nienaber; additional reporting by Edward Taylor, Ilona Wissenbach, Ludwig Burger and Andrea Shalal.

BERLIN — Germany has earmarked 1 billion euros ($1.2 billion) to support a consortium looking to produce electric car battery cells and plans to fund a research facility to develop next-generation solid-state batteries, three sources told Reuters.

The measures, expected to be announced next week, are designed to reduce the dependence of German carmakers on Asian electric vehicle (EV) battery suppliers and protect German jobs at risk from the shift away from combustion engines.

Berlin’s push to shape industrial policy marks a break with its generally “hands off” approach to business decisions and is part of European efforts to forge battery alliances to counter the dominance of Chinese, Japanese and Korean firms.

Ensuring local companies are involved throughout the electric vehicle supply chain is particularly important for Germany as it has become so economically dependent on the success of its car industry.

But Germany’s car battery push could be too late. Asian market leaders are ramping up output and some experts say there’s a risk of a glut that could hinder the establishment of large-scale battery cell production by European newcomers.

For Chancellor Angela Merkel’s fractious ruling coalition, the plan is also a way to show voters ahead of three elections next year in eastern Germany that it can get its act together to help Europe’s largest economy thrive in the electric car era.

“We have a concentration of risk in the automobile sector. The industry is too dependent on the combustion engine,” Deputy Economy Minister Christian Hirte told Reuters. “The government therefore wants to help the sector in its efforts to diversify.”

Hirte said Berlin was in talks with several companies and other governments in Europe to support a battery cell factory.

“There are possibilities for example in the Lausitz region, maybe in cooperation with Poland,” said Hirte, who is the government’s coordinator for Eastern German affairs and for small- and medium-sized enterprises policy.

“One thing is clear: you cannot ignore east Germany if you are planning such mega projects. There is a lot of space and the acceptance among the population is great.”

Companies involved in talks with Economy Minister Peter Altmaier about building a factory include German battery maker VARTA Microbattery, chemical giant BASF and Ford’s German subsidiary Ford-Werke GmbH, three people familiar with the matter told Reuters.

A spokeswoman for BASF said it would attend a meeting with Altmaier next week. Varta and Ford declined to comment.

Varta specializes in batteries for hearing aids and large storage systems for solar energy. It said last month it was studying the production of large lithium batteries and was in intensive discussions with relevant market actors.

TOO LATE?

Volkswagen’s supervisory board is due to discuss its electric car and battery cell strategy at a meeting on Nov. 16. The German carmaker has said in the past that it was studying battery cell production at its plant in Salzgitter.

A source told Reuters on Thursday that the board would discuss a far-reaching alliance with South Korean battery cell maker SK Innovation.

Some analysts say Europe is already too far behind in the race with Asian firms, at least with the current technology.

Boston Consulting Group (BCG), for example, has estimated global battery cell production capacity will exceed demand by about 40 percent in 2021, exerting massive pressure on prices and making it hard for new entrants to make money.

South Korea’s LG Chem is already supplying some German carmakers with EV batteries made in Poland while Samsung SDI Co and SK Innovation are planning factories in Hungary.

The announcement by the world’s biggest EV battery maker — China’s Contemporary Amperex Technology Ltd (CATL) — that it would build its first European plant in eastern Germany and has struck a deal with German carmaker BMW has been welcomed by the government.

But Merkel told business leaders it was “extremely important” Germany also develops its own battery cell capacity to secure the country’s role in the car industry.

For years, German car bosses have been reluctant to push ahead with electric cars, instead focusing on diesel engines. But they now face a challenge to make combustion engines comply with tougher emissions rules introduced following the emissions cheating scandal that engulfed Volkswagen.

Despite BCG’s predictions of a glut, analysts at consultants McKinsey & Company and Germany’s Fraunhofer Institute say there will be room for European newcomers as demand is likely to outstrip supply when automakers ramp up EV production.

German carmakers have warned, however, that jobs could disappear — because it takes less time to build electric cars and as positions shift overseas to foreign battery makers.

Germany’s VDA auto industry association has said a ban on combustion engine-powered vehicles in 2030 would threaten 436,000 jobs at car companies and their suppliers.

“Battery cells are a key technology and an important part of the value chain. That’s why we want to locate this in Germany,” Hirte said.

EUROPEAN ALLIANCE

Recognizing the importance of a homegrown battery industry for jobs and profits, the European Commission launched its own European Battery Alliance (EBA) in 2017 but Sweden’s Northvolt is seen as the only serious contender to emerge so far.

As part of Berlin’s push, Economy Minister Altmaier is talking to German and European companies as well as neighboring countries to try to join forces. He is coordinating his efforts with Brussels to resolve any state aid and antitrust issues.

“In a few years, Europe will have a competitive battery cell sector that can survive without state aid,” Altmaier said in September after meeting the E.U.’s Vice-President for Energy Union Maros Sefcovic, who has been the driving force behind the EBA.

Altmaier is expected to announce more details of his battery cells plan during a two-day conference in Berlin starting on Nov. 12 that will be attended by Sefcovic.

The billion euros earmarked for a German battery cells consortium would help establish a first factory, probably in western Germany, two sources familiar with the plans said.

Berlin is also willing to support a second plant, possibly in the Lausitz region near the German-Polish border where two of the regional elections in 2019 will take place, they said.

An Economy Ministry spokeswoman said Altmaier was in talks with all relevant parties and no decisions had been made.

In addition, the government wants to spend up to 500 million euros to co-finance a research factory to help put German companies ahead of the curve when solid-state batteries are ready for the mass market, another source told Reuters.

Lithium-ion batteries are likely to be overtaken in a matter of years by solid-state technology that is expected to produce cheaper batteries with higher energy density.

The location of the research factory has not been decided and the government is about to start a tender process in which authorities and firms can pitch for the site, the source said.

A Science Ministry spokesman said the government was supporting efforts to develop solid state batteries by bringing together leading research institutes with the private sector.

Companies involved in the network, known as FestBatt, include Varta, BASF, Volkswagen, BMW, car parts maker Continental, conglomerate Thyssenkrupp, carbon fiber specialist SGL Carbon, Belgian materials firm Umicore, Coperion and Heraeus, the spokesman said.

For now, German carmakers are sourcing battery cells predominantly from Asian suppliers such as CATL, LG Chem and Samsung SDI although BMW has struck a partnership with Northvolt.

Underlining the uphill battle German firms face, one of the world’s biggest automotive suppliers, Bosch, has opted out of making lithium-ion cells, saying it would be too costly.

Hans-Martin Henning, an electric mobility researcher at Fraunhofer, is less pessimistic.

“If automakers boost their electric car production to 10 to 20 percent of total sales in coming years, Europe will need battery cell factories with more than 100 gigawatt hours,” he said, well above the capacity planned by Asian producers so far.

“We’ll need far more battery cells in Europe — and this must happen pretty fast indeed,” Henning said.
The expected shift to solid-state batteries could also make European suppliers less dependent on the rare earth resources largely controlled by China that are used in lithium-ion cells.

“The landscape will change dramatically in coming years,” Porsche CEO Oliver Blume told Reuters. “Europe absolutely has a chance.”

Full article here

Ken Baksh – November Market Report – Is it safe to put a toe in?

November 2018 Market Report

During the month to October 31st, 2018, major equity markets displayed a very weak trend, falling by 8.52% overall and the VIX index rose sharply to 22.05. The month was the worst equity performance for more than six years. There continued to be an abundance of market moving news over what is traditionally a volatile month, at macro-economic, corporate and political levels.

The European Central Bank appeared to become more certain of removing QE over coming quarters, with more hawkish policy statements, but delaying any interest rate increase until 2019, while economic news seems to have been weaker than forecast in recent months, particularly in Germany. Political events were not in short supply, and in Turkey for example, continued to affect bond and currency markets while Italian bonds oscillated with the growing tension between the two-party Government and the ECB. Angela Merkel stood down as CDU leader late in the month, a position occupied for 18 years.  US market watchers continued to grapple with ongoing tariff discussions, Federal Budget, Turkish stand-off, NAFTA follow up and North Korean meeting uncertainty as well as Trump’s growing domestic issues, ominously becoming higher profile, before the important November midterm elections. US economic data and corporate results so far have generally been above expectation and the official interest rate was increased again in September to a range of 2%-2.25%. Provisional third quarter GDP growth figures showed very buoyant consumer trends but weak corporate investment and foreign trade.  In the Far East, China flexed its muscles in response to Trump’s trade and other demands while relaxing some bank reserve requirements and “allowing” the currency to drift to a recent low. Recent indicators and statements would suggest a slowdown in 2018 growth to a still very respectable 6%-6.5%. Japanese second quarter GDP growth appeared higher than expected and Shinzo Abe consolidated his political position, both perceived as market friendly, and the ten-year bond continues to trade near the recent yield high. At the October BoJ meeting, the current easier fiscal stance was reconfirmed.  The UK reported mixed economic data with satisfactory developments on the government borrowing side, inflation higher than expected, but poor relative GDP figures and deteriorating property sentiment, both residential and commercial. Recent retail data shows mixed trends, some “weather related”. Market attention, both domestic and international is clearly focussed on ongoing BREXIT developments and their strong influence on politics. Although the Budget presented on October 29th, showed a slightly higher GDP forecast and a more expansionary fiscal approach, the Chancellor made frequent references to the unsettling effects of any unsatisfactory Brexit outcome.

Aggregate world hard economic data continues to show steady expansion, although forecasts of future growth have been trimmed in recent months by the leading independent international organization. Fluctuating currencies continued to play an important part in asset allocation decisions, the stronger Yen being the major recent feature recently, largely for haven reasons. Emerging market currencies have had a particularly volatile period, showing some relative recovery over October from very weak levels. Government Bond holders saw mixed moves over the month-some more inspired by equity market turmoil rather than changed fundamentals.

At the end of the ten -month period, “mixed investment” unit trusts all showed negative performance, and only a small number of asset class sub sectors are showing a positive return. Source: Morningstar

Equities

Global Equities displayed a strong downwards trend over the month of October the FTSE ALL World Index falling 8.52% in dollar terms and now showing a negative return of 6.55% return since the beginning of the year. The UK broad and narrow market indices fell by 5.09% and 5.42%  respectively over the month and have both underperformed world equities in  sterling adjusted values from the end of 2017 by about 6%. The NASDAQ index, driven by technology companies, saw some of the steepest declines with many bell weather stocks showing significant falls. In sterling adjusted terms, America and Japan are the only two major markets now showing positive returns year to date The VIX index rose 75.84 % over the month, and at the current level of 22.05 is up about 115% from the year end.

UK Sectors

Sector volatility remained high during the month, influenced by both global factors e.g. commodity prices, tariffs, as well as corporate activity and a general risk aversion mood. Industrial stocks fell significantly while utilities and banks registered positive returns. Over the ten-month period, pharmaceuticals are outpacing the worse performing major sector, telecommunications by around 45%.

Fixed Interest

Gilt prices rose marginally over the month largely on haven buying but are still down 2.67% year to date in capital terms, the 10-year UK yield standing at 1.26% currently.  Other ten-year yields closed the month at US 3.1%, Japan 0.13%, and Germany 0.3% respectively.  UK corporate bonds rose 1% in price terms ending October on a yield of approximately 2.71%. Amongst the more speculative grades by contrast, yields rose, although US lower grade bonds are still one of the few sub-categories showing year to date price gains. Floating rate bond prices underperformed gilts over the month but are still showing positive year to date total returns. I continue to strongly recommend this asset class. See my recommendations in preference shares, convertibles, corporate bonds, floating rate bonds etc. A list of my top thirty income ideas (all yielding over 5%) from over 10 different asset classes is available. 

Foreign Exchange

Amongst the major currencies, a stronger Yen was the monthly feature largely on safe haven buying as global equities tumbled. Currency adjusted, the FTSE World Equity Index is now outperforming the FTSE 100 by around 6% since the end of 2017 and about 20% since the June 2016 BREXIT vote.

Commodities

A generally weak month for commodities with the notable exception of gold, related precious metals, iron ore and sugar Over the year so far, oil, wheat and uranium (renegotiation of longer-term contracts) have shown the greatest gains.

Looking Forward

Over the coming months, geo-political events and Central Bank actions/statements will be accompanied by the continuation of the third quarter corporate reporting season, resulting in an abundance of stock moving events. With medium term expectation of rising bond yields, equity valuations and fund flow (both institutional and Central bank) dynamics will also be increasingly important areas of interest/concern, and it is expected that any “disappointments”, economic or corporate, will be severely punished.

US watchers will continue to speculate on the timing and number of interest rate hikes 2018/2019 and longer-term debt dynamics, as well as fleshing out the winners and losers from any tariff developments -a moving target! Third quarter figures (and accompanying statements) will be subject to even greater analysis after the buoyant first half year, and the growing list of headwinds. Additional discussions pertaining to Saudi Arabia, North Korea, Russia, Iran,Brazil, Venezuela, and Trump’s own position could precipitate volatility in equities, commodities and currencies, especially with the November mid-term elections just days away. In Japan market sentiment may be calmer after recent political and economic events although international events e.g. exchange rates and tariff developments will affect equity direction. The recent China/Japan summit may signal closer co-operation in the area. European investment mood will be tested by economic figures, EU Budget discussions, Italian bond spreads, German, Turkish and Spanish politics, and reaction to the migrant discussions. It must also be remembered that the QE bond buying is being wound down over coming months.  Hard economic data and various sentiment/residential property indicators will continue to show that UK economic growth will be slower in 2018 compared to 2017, and any economic upgrade over current quarters appear extremely unlikely.  Whichever Brexit outcome is agreed, it is highly likely that near term quarterly figures will be distorted.  The current perceptions of either a move to a “softer” European exit, or a “no deal” will undoubtedly lead to pressure from many sides.  Political tensions stay at elevated levels both within and across the major parties and considerable uncertainties still face individual companies and sectors. Industry, whether through trade organisations, international pressure e.g Japan, or directly e.g. Bae, BMW, Jaguar Land Rover, Toyota, Honda, Ryanair is becoming increasingly impatient, and vocal, and many London based financial companies are already “voting with their feet”.

On a valuation basis, most, but not all, conventional government fixed interest products continue to appear expensive against current economic forecasts and supply factors, and renewed bond price declines and further relative underperformance versus equities should be expected in the medium term, in my view. See my recent ‘iceberg’ illustration for an estimate of bond sensitivity, particularly acute for longer maturities. Price declines are eroding any small income returns leading to negative total returns in many cases.  On the supply point there are increasing estimates of US bond issuance against a background of diminished QE and overseas buying. European bond purchases are also winding down. Apart from debt implications, corporate earnings growth and discounting purposes, remember that higher bond yields also are starting to play into the alternative asset argument. In the US for example the ten-year bond yield at 3.1%, is over 100 basis points higher than that on equities.

Equities appear more reasonably valued after recent price falls, but there are wide variations. Equity investors will be looking to see if superior earnings growth can compensate for higher interest rates in several areas. Helped in no small part by tax cuts, US companies have been showing earnings growth more than 20% so far this year, although the current quarter is widely expected to be the peak comparison period, and ‘misses’ are being severely punished e.g. Caterpillar,3M Facebook, General Electric,Kellogs, and Twitter. Accompanying corporate outlook statements are being carefully scrutinised.

Outside pure valuation measures, sentiment indicators and the VIX index are showing significant day to day variation, after the complacency of last year. The current level of 22.05 reflects the uncertain market mood, as does the relatively high put/call ratio.

In terms of current recommendations,

Depending on benchmark, and risk attitude, first considerations should be appropriate cash/hedging stance and the degree of asset diversification.

An increased weighting in absolute return, alternative income and other vehicles may be warranted as equity returns will become increasingly lower and more volatile and holding greater than usual cash balances may also be appropriate, including some outside sterling. Among major equity markets, the USA is one of the few areas where the ten-year bond yields more than the benchmark equity index. The equity selection should be very focussed. Certain equity valuations are rather high, especially on a PE basis (see quarterly), although not in “bubble” territory. A combination of sharper than expected interest rate increases with corporate earnings shocks would not be conducive to strong equity returns. Ongoing and fluid tariff discussions could additionally unsettle selected countries, sectors and individual stocks Harley Davidson, German car producers, American and Brazilian soy producers etc.

  • UK warrants a neutral allocation but is starting to look good value on certain metrics. Ongoing Brexit debate, political stalemate and economic uncertainty could cause more sterling wobbles, which in turn could affect sector/size choices. I would expect to see more profits warnings (Countryside,Foxtons,H&M,BHS,Homebase,WPP,Computacentre- latest casualties) and extra due diligence in stock/fund selection is strongly advised.
  • Within UK sectors, some of the higher yielding defensive plays e.g. Pharma, telco’s and utilities have attractions relative to certain cyclicals and many financials are showing confidence by dividend hikes and buy-backs etc. Over recent months, value stocks have been staging a long overdue recovery compared to growth stocks. Oil and gas majors may be worth holding despite the outperformance to date. Remember that the larger cap names such as Royal Dutch and BP will be better placed than some of the purer exploration plays in the event of a softer oil price. Mining stocks remain a strong hold, in my view (see my recent note for favoured large cap pooled play). Corporate activity, already apparent in the engineering (GKN), property (Hammerson), pharmaceutical (Glaxo, Shire?), packaging (Smurfit), retail (Sainsbury/Asda), leisure (Whitbread), media (Sky), mining (Randgold) is likely to increase in my view, although the Government has recently been expressing concern about overseas take-overs in certain strategic areas.
  • Continental European equities continue to be preferred to those of USA, for reasons of valuation, and Central bank policy, although political developments in Italy, Spain and Turkey should be monitored closely. European investors may be advised to focus more on domestic, rather than export related themes. Look at underlying exposure of your funds carefully and remember that certain European and Japanese companies provide US exposure, without paying US prices. I have recently written on Japan, and I would continue to overweight this market, despite the large 2017 and 2018 to date outperformance. Smaller cap/ domestic focussed funds may outperform broader index averages e.g. JP Morgan Japanese Smaller Companies and Legg Mason.
  • Alternative fixed interest vehicles, which continue to perform relatively well,in total return terms, against conventional government bonds, have attractions e.g. floating rate funds, preference shares, convertibles, for balanced, cautious accounts and energy/ emerging/speculative grade for higher risk. These remain my favoured plays within the fixed interest space. See recent note
  • UK bank preference shares still look particularly attractive and could be considered as alternatives to the ordinary shares in some cases. If anything, recent sector “news” has highlighted the attractions of the sector.
  • Alternative income, private equity and renewable funds have exhibited their defensive characteristics during the October market wobble and are still strongly recommended as part of a balanced portfolio. Most of these are already providing superior total returns to both gilts and equities so far this year, and indeed some produced positive returns during October. Reference could be made to the renewable funds (see my recent solar and wind power recommendations). Recent results from Green coat and Bluefield Solar reinforce my optimism for the sector. Selected infrastructure funds are also recommended for purchase after the recent Corbyn/Carillion inspired weakness (see note). The take-over of JLIF during the month highlights the value in the sector!
  • Any new commitments to the commercial property sector should be more focussed on direct equities and investment trusts than unit trusts (see my recent note comparing open ended and closed ended funds), thus exploiting the discount and double discount features respectively as well as having liquidity and trading advantages. However, in general I would not overweight the sector, as along with residential property, I expect further price stagnation especially in London offices and retail developments e.g. (Hammerson, Intu). The outlook for some specialist sub sectors e.g. health, logistics, student, multi-let etc and property outside London/South-East, however, is currently more favourable. Investors should also consider some continental European property See my recent company note.
  • I suggest a very selective approach to emerging equities and would continue to avoid bonds. Although the overall valuation for emerging market equities is relatively modest, there are large differences between individual countries. A mixture of high growth/high valuation e.g. India, Vietnam and value e.g. Russia could yield rewards and there are signs of funds moving back to South Africa on political change. Turkish assets seem likely to remain highly volatile in the short term and much of South America is either in a crisis mode g. Venezuela or embarking on new political era e.g. Mexico and Brazil. As highlighted in the quarterly, Chinese index weightings are expected to increase quite significantly over coming years and Saudi Arabia, is just being allowed into certain indices.

 

Full fourth quarter report will shortly be available to clients/subscribers and suggested portfolio strategy/individual recommendations are available. Ideas for a ten stock FTSE portfolio, model pooled fund portfolios (cautious, balanced adventurous, income), 30 stock income lists, hedging ideas and a list of shorter-term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring. Feel free to contact regarding any investment project.

Good luck with performance!   Ken Baksh 01/10/2018

Independent Investment Research

Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.

Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.

Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.

Phone 07747 114 691

kenbaksh@btopenworld.com

 

Disclaimer

All stock recommendations and comments are the opinion of writer.

Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.

All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.

You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk

The author may have historic or prospective positions in securities mentioned in the report.

The material on this website are provided for information purpose only.

Please contact Ken, (kenbaksh@btopenworld.com) for further information

Oil price rally boosts electric car sales – Via Oilprice.com

Article by OilPrice.com

Tesla’s competition is about to get more crowded next year with many legacy automakers and luxury brands launching a record number of battery electric vehicles and plug-in hybrids.

All EV makers will have one common element that could help lift demand for battery vehicles—rising oil prices leading to fuel prices at four-year highs, which could turn consumers towards EVs.

To be sure, charging infrastructure and range are still key concerns in consumers’ minds regarding EVs, but utilities and major oil firms such as Shell and BP are already looking to expand the charging infrastructure, especially in Europe.

Battery pack prices have been dropping constantly this decade and are expected to continue to fall. In terms of cost comparison, some estimates point to battery pack costs becoming competitive with the internal combustion engine (ICE) cars by 2027.

Rallying oil prices, with Brent Crude topping $85 a barrel this week, come just as the number of global offerings of EVs next year is expected to rise by 20 percent to 216 models, research by Bloomberg NEF shows.

“The higher the price of oil the more tailwind we’re going to have behind electric cars,” Bloomberg quoted Carlos Ghosn, chairman of Renault and Nissan Motor, as saying at the Paris Motor Show this week.

Next year, Nissan will launch the sale of a longer-range model of its best-selling EV Leaf.

German carmakers are also jumping into the EV competition.

Mercedes-Benz unveiled last month its first all-electric model Mercedes-Benz EQC, which will be launched on the market in 2019. BMW is teasing the premiere of a new concept EV, BMW Vision iNEXT. Audi has started mass production of the Audi e-tron, the brand’s first all-electric SUV, and deliveries are scheduled to begin in the spring of 2019.

Ultra-luxury brands will also be offering electric vehicles. Aston Martin is building Rapide E with a target range of over 200 miles and projected top speed of 155 mph, with customer deliveries set for Q4 2019. Porsche is working on its first purely electric series, Taycan, and plans to invest more than US$6.9 billion (6 billion euro) in electromobility by 2022, doubling its initially planned expenditure.

While almost every carmaker out there is unveiling or planning EV models, gasoline prices are up and even after the end of the U.S. driving season, the national gas price average as of October 1 was $2.88 – a pump price not seen since mid-July.

“The last quarter of the year has kicked off with gas prices that feel more like summer than fall,” AAA spokesperson Jeanette Casselano said.

“This time of year, motorists are accustomed to seeing prices drop steadily, but due to continued global supply and demand concerns as well as very expensive summertime crude oil prices, motorists are not seeing relief at the pump.”

High fuel prices could be part of consumers’ motivation to buy more EVs.

Global cumulative EV sales are already 4 million, according to Bloomberg NEF, which notes that the time for reaching each of the million sales has been rapidly shrinking. The first million in sales, reached in Q4 2015, took around 60 months to achieve; the second million came in 17 months; the third million took 10 months; and the fourth million needed just six months. Bloomberg NEF expects the next million EVs to take just over 6 months and the five-millionth EV to be sold in March next year.

The EV share of the global car fleet is still minuscule, considering that the world’s stock of cars is 1.2 billion units. But battery costs and range are less and less the stumbling blocks in EV adoption, according to Wood Mackenzie. Battery is one third of the cost of an EV today. Yet, costs have already declined by 80 percent this decade and will fall further. Battery pack prices will drop below US$200/kWh this year and then fall by around 10 percent each year, WoodMac said in July.

“The critical threshold is US$100/kWh – that’s when EVs will compete on commercial terms with ICE vehicles. We think we’ll get there by 2027,” WoodMac says.

EVs will displace around 5 million bpd to 6 million bpd of oil demand by 2040—some 5 percent of total oil demand, the consultancy has estimated.

ICE cars are not going anywhere in the next decade or two, but the higher the price of oil, the more competition they’ll have from EVs and the more incentives consumers will get to pick an EV for their next new car.

By Tsvetana Paraskova for Oilprice.com

Ken Baksh: August Investment Review….Stay with equities versus bonds….for the time being!

August  2018 Market Report

During the month to July 31 st, 2018, major equity markets displayed a stronger trend and the VIX index fell significantly, indicative of a preference for greater risk-taking. There continued to be an abundance of market moving news over the period whether at corporate, economic or political level.

The European Central Bank appeared to become more certain of removing QE over coming quarters but delaying any interest rate increase until 2019, while economic news was generally dull. Political events were not in short supply, and in Turkey for example, dramatically affected bond and currency markets. European leaders and policy makers are having an uncharacteristically active summer, with debates on US tariffs, immigration, Japanese trade pact and post Brexit implications just four of the more topical issues.  US market watchers continued to grapple with ongoing tariff discussions, Federal Budget, Iranian nuclear/sanctions, NAFTA friction and North Korean meeting uncertainty as well as domestic issues. Economic data and corporate results so far have generally been above expectation.  In the Far East, North and South Korea made faltering progress towards an agreement while China flexed its muscles in response to Trump’s trade and other demands and relaxed bank reserve requirement late in the month. Chinese economic growth slowed slightly while there was a little speculation that the Bank of Japan may tweak it’s QE programme.  The UK reported mixed economic data with satisfactory developments on the government borrowing side, inflation slightly lower than expected, but poor relative GDP figures and deteriorating property sentiment, both residential and commercial. The data and ongoing Brexit confusion appear to be keeping the MPC in a wait and see mode regarding interest rates, although mathematically the’ hawks’ are gaining ground. An important day for MPC policy statements tomorrow (2nd August).

Aggregate world hard economic data continues to show steady expansion, excluding the UK, as confirmed by the IMF and the OECD with some forecasts of 2018 economic growth in the 3.3% to 3.6% area, a little lower than January forecasts. Fluctuating currencies continued to play an important part in asset allocation decisions, the stronger US dollar again being the major recent feature recently, although lagging the yen year to date. Government Bond holders saw modest price falls over the month. Of note was the large jump in the Japanese Government Bond Yield. Oil was the main commodity feature during the month, falling after the long rally seen so far this year. Tariffs, whether actual or rumoured, are continuing to bear on certain metals and soft commodities, the latter also responding to extreme weather conditions. The price of wheat for example has climbed nearly 30% so far this year.

At the end of the seven-month period, “mixed investment” unit trusts show a very small positive price performance, with technology and most overseas equity regions showing above average performance, and bonds, Asia-excl Japan and Emerging markets in negative territory. Source Trustnet:01/08/2018

Equities

Global Equities rose over the month the FTSE ALL World Index gaining 3.43% in dollar terms and now showing a positive return since the beginning of the year. The UK broad and narrow market indices lagged other major markets over the month in local terms and have underperformed in both local and sterling adjusted values from the end of 2017.Asia and emerging markets were the relative underperformers and declined in absolute terms while Europe jumped quite strongly, although the DAX Index is still down in absolute returns since the beginning of 2018. In sterling adjusted terms, America has jumped to the top of the leader board year to date, largely helped by the technology component (NASDAQ up 10.9%) and a recently strengthening dollar. The VIX index while still up about 30% from the year end, dropped 13% over the month, as “risk on “trades returned.

UK Sectors

Sector volatility picked up during the month, influenced by both global factors e.g. commodity prices, tariffs, as well as corporate activity and ex-dividend adjustments. Utility stocks fell over 4%, while pharmaceuticals gained 5.8 %, largely on encouraging results and lingering corporate activity. Over the seven-month period, pharmaceuticals are outpacing the worse performing major sector, telecommunications by nearly 33%.

Fixed Interest

Gilt prices fell marginally over the month and are now down 1.64% year to date in capital terms, the 10-year UK yield standing at 1.39% currently.  Other ten-year yield closed the month at US 2.97% Japan, 0.06% and Germany 0.33% respectively.  UK corporate bonds remained broadly unchanged, ending July on a yield of approximately 2.75%. Amongst the more speculative grades, emerging market bonds fell while US high yield rose, in price terms. Floating rate and convertible bond prices showed mixed performance over the month. See my recommendations in preference shares, convertibles, corporate bonds, floating rate bonds etc. A list of my top thirty income ideas (all yielding over 5%) from over 10 different asset classes is available.

Foreign Exchange

Amongst the major currencies, a stronger dollar was the major monthly feature rising largely on relative economic news. Sterling fell versus the dollar while rising against the Yen and Euro. Currency adjusted, the FTSE World Equity Index is now outperforming the FTSE 100 by over 3% since the end of 2017.Just over two years since the BREXIT vote, the FTSE has risen by about 19% compared with the 32% gain in sterling adjusted world indices.

Commodities

A generally weak month for commodities with the notable exception of some of the softs, the latter largely reflecting weather conditions! Over the year so far, oil seems to be stabilising over $70, while gold, falling on the month and year-to date languishes at around $1223 currently.

Looking Forward

Over the coming months, geo-political events and Central Bank actions/statements will continue be key market drivers while early second quarter company results will likely add some additional volatility. With medium term expectation of rising bond yields, equity valuations and fund flow dynamics will also be increasingly important areas of interest/concern.

US watchers will continue to speculate on the timing and number of interest rate hikes 2018/2019 and longer-term debt dynamics, as well as fleshing out the winners and losers from any tariff developments (steel, aluminium, EU, China,NAFTA)-a moving target! Additional discussions pertaining to North Korea, Russia, Iran, Venezuela, and Trump’s own position could precipitate volatility in equities, commodities and currencies. In Japan market sentiment is likely to be influenced by economic policy and Abe’s political rating. It will be interesting to see if there is any follow through from recent BoJ speculation regarding bond yield policy. Recent corporate governance initiatives e.g. non-executive directors, cross holdings, dividends are helping sentiment. European investment mood will be tested by economic figures (temporary slowdown or more sustained?), EU Budget discussions, Italian, Turkish and Spanish politics, and reaction to the migrant discussions.  Hard economic data and various sentiment/residential property indicators will continue to show that UK economic growth will be slower in 2018 compared to 2017, and further down grades may appear as anecdotal second quarter figures trends are closely analysed. Brexit discussion have moved to a new level, discussions on the “custom union” being currently hotly debated. The current perception of a move to a “softer” European exit will inevitably lead to pressure from many sides.   Political tensions stay at elevated levels both within and across the major parties and considerable uncertainties still face individual companies and sectors. Industry, whether through trade organizations or directly e.g. Bae, BMW, Honda, Ryanair is becoming increasingly impatient, and vocal, and many London based financial companies are already “voting with their feet”.

On a valuation basis, most, but not all, conventional government fixed interest products continue to appear expensive against current economic forecasts and supply factors, and renewed bond price declines and further relative underperformance versus equities should be expected in the medium term, in my view. See my recent ‘iceberg’ illustration for an estimate of bond sensitivity. Price declines are eroding any small income returns leading to negative total returns in many cases.  On the supply point there are increasing estimates of US bond issuance against a background of diminished QE and overseas buying. European bond purchases are expected to wind down later this year.

Equities appear more reasonably valued, apart from some PE metrics, (especially in the US), but there are wide variations, and opportunities, in both broad asset classes. Equity investors will be looking to see if superior earnings growth can compensate for higher interest rates in several areas. Helped in no small part by tax cuts, US companies have been showing earnings growth more than 20% so far this year, although the current quarter is widely expected to be the peak comparison period, and ‘misses’ are being severely punished e.g. Facebook and Twitter.   Corporate results from US, Europe and Japan have, on aggregate, been up to expectations over the current period.

Outside pure valuation measures, sentiment indicators and the VIX index are showing significant day to day variation, after the complacency of last year. The current level of 13.23 appears rather low in the context of potential banana skins.

In terms of current recommendations,

Continue to overweight equities relative to core government bonds, especially within Continental Europe and Japan. However, an increased weighting in absolute return and other vehicles may be warranted as equity returns will become increasingly lower and more volatile and holding greater than usual cash balances may also be appropriate. Among major equity markets, the USA is one of the few areas where the ten-year bond yields more than the benchmark equity index. The equity selection should be very focussed. Certain equity valuations are rather high, especially on a PE basis (see quarterly), although not in “bubble” territory. A combination of sharper than expected interest rate increases with corporate earnings shocks would not be conducive to strong equity returns. Ongoing and fluid tariff discussions could additionally unsettle selected countries, sectors and individual stocks Harley Davidson, German car producers, American and Brazilian soy producers etc.

  • UK warrants a neutral allocation after the strong relative bounce over the quarter on the back of stronger oil price, sterling weakness and corporate activity. Ongoing Brexit debate, political stalemate and economic uncertainty could cause more sterling wobbles, which in turn could affect sector/size choices. I would expect to see more profits warnings (Countryside,Foxtons,H&M- latest casualties) and extra due diligence in stock/fund selection is strongly advised.
  • Within UK sectors, some of the higher yielding defensive plays e.g. Pharma, telco’s and utilities have attractions relative to certain cyclicals and many financials are showing confidence by dividend hikes and buy-backs etc. Oil and gas majors may be worth holding despite the outperformance to date. Remember that the larger cap names such as Royal Dutch and BP will be better placed than some of the purer exploration plays in the event of a softer oil price. Mining stocks remain a strong hold, in my view (see my recent note for favoured large cap pooled play). Corporate activity, already apparent in the engineering (GKN), property (Hammerson), pharmaceutical (Glaxo, Shire?), packaging (Smurfit), retail (Sainsbury/Asda) is likely to increase in my view, although the Government has recently been expressing concern about overseas take-overs in certain strategic areas.
  • Continental European equities continue to be preferred to those of USA, for reasons of valuation, and Central bank policy, although political developments in Italy, Spain and Turkey should be monitored closely. Improving economic data adds to my enthusiasm for selected European names, although European investors may be advised to focus more on domestic, rather than export related themes. Look at underlying exposure of your funds carefully. Remember that certain European and Japanese companies provide US exposure, without paying US prices. I have recently written on Japan, and I would continue to overweight this market, despite the large 2017 outperformance. Smaller cap/ domestic focussed funds may outperform broader index averages e.g. JP Morgan Japanese Smaller Companies and Legg Mason.
  • Alternative fixed interest vehicles, which continue to perform relatively well against conventional government bonds, have attractions e.g. floating rate funds, preference shares, convertibles, for balanced, cautious accounts and energy/ emerging/speculative grade for higher risk. These remain my favoured plays within the fixed interest space. See recent note
  • UK bank preference shares still look particularly attractive and could be considered as alternatives to the ordinary shares in some cases. If anything, recent sector “news” has highlighted the attractions of the sector.
  • Alternative income, private equity and renewable funds have exhibited their defensive characteristics during recent equity market wobbles and are still recommended as part of a balanced portfolio. Many of these are already providing superior total returns to both gilts and equities so far this year. Reference could be made to the renewable funds (see my recent solar and wind power recommendations). Results from Greencoat on February 26nd and Bluefield Solar the following day reinforce my optimism for the sector. Selected infrastructure funds are also recommended for purchase after the recent Corbyn/Carillion inspired weakness (see note). The take-over of JLIF during the month highlights the value in the sector!
  • Any new commitments to the commercial property sector should be more focussed on direct equities and investment trusts than unit trusts (see my recent note comparing open ended and closed ended funds), thus exploiting the discount and double discount features respectively as well as having liquidity and trading advantages. However, in general I would not overweight the sector, as along with residential property, I expect further price stagnation especially in London offices and retail developments e.g(Hammerson,Intu). The outlook for some specialist sub sectors and property outside London/South-East, however, is currently more favourable. Investors should also consider some continental European property See my recent company note.
  • I suggest a selective approach to emerging equities and would currently avoid bonds. Although the overall valuation for emerging market equities is relatively modest, there are large differences between individual countries. A mixture of high growth/high valuation e.g. India, Vietnam and value e.g. Russia could yield rewards and there are signs of funds moving back to South Africa on political change. Turkish assets seem likely to remain highly volatile in the short term. As highlighted in the quarterly, Chinese index weightings are expected to increase quite significantly over coming years and Saudi Arabia, is just being allowed into certain indices.

Full third quarter report is available to clients/subscribers and suggested portfolio strategy/individual recommendations are available. Ideas for a ten stock FTSE portfolio, model pooled fund portfolios (cautious, balanced adventurous, income), 30 stock income lists, hedging ideas and a list of shorter term low risk/ high risk ideas can also be purchased, as well as bespoke portfolio construction/restructuring.

Good luck with performance!   Ken Baksh 01/08/2018

Independent Investment Research

Ken has over 35 years of investment management experience, working for two major City institutions between 1976 and 2002.

Since then he has been engaged as a self-employed investment consultant. He has worked with investment trusts, unit trusts, pension funds, charities, Life Fund,hedge fund and private clients. Individual asset managed have included direct equities and bonds pooled vehicles currencies, derivatives and commodities.

Projects undertaken in a number of areas including asset allocation, risk control, performance measurement, marketing, individual company research, legacy portfolios and portfolio construction. He has a BSc(Mathematics/Statistics) and is a Fellow Member of the UK Society of Investment Professionals.

Phone 07747 114 691

kenbaksh@btopenworld.com

 

Disclaimer

All stock recommendations and comments are the opinion of writer.

Investors should be cautious about all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion.

All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action.

You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk

The author may have historic or prospective positions in securities mentioned in the report.

The material on this website are provided for information purpose only.

Please contact Ken, (kenbaksh@btopenworld.com) for further information

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