Note from the MD: Threats and opportunities of a greener economy

The manager of our National Electricity Market has warned that we will soon start running short of power generation and transmission capacity, risking blackouts, unless we act fast.

The manager of our National Electricity Market has warned that we will soon start running short of power generation and transmission capacity, risking blackouts, unless we act fast.

It’s a cautionary tale about what can go wrong when a complex system such as our national grid is transformed too rapidly, and when sensible and cost-effective solutions get drowned out by the clamour of lobbying and political point-scoring.

But finger-pointing won’t help. Successive governments have committed Australia to net zero by 2050, and the Climate Change Bill 2022 has already passed the lower house, so investors need to factor in the coming transition to a very different economy and the threats and opportunities this will bring.

It could be a bumpy ride, and negative energy supply shocks may become a regular feature, meaning repeated inflation spikes for years to come.

One investor who evidently has a sharp ear to the ground within the energy landscape and the macro themes surrounding climate change is Joseph Constable, portfolio manager at Hancock & Gore. He will be highlighting three of his favourite microcaps, including one that is well-placed amid the European energy crisis and another that is coming back strongly after being directly affected by the recent Australian bushfires.

But with fossil fuels so politically on the nose these days and the government declaring nuclear power off the table, the only way out of our energy crisis appears to be big spending on transmission infrastructure, renewables and storage such as battery or pumped hydro.

Long term, it’s hard to know where this will lead us. Economist Ross Garnaut speculates about new investment on the scale of that which went into our mining industry during the China boom, and it has even been suggested we could reindustrialise our economic base by attracting energy-intensive industries from around the world to set up here off the back of cheap and clean electricity.

Yes, Australia has a serious energy problem today. But spare a thought for Europe, where aluminium production has fallen back to 1970s levels as power prices render smelters unviable, and ‘warm banks’ are being planned for families who can’t afford to heat their homes this winter.

Back on the home front, investors have even more uncertainty ahead with US government bond yields surging as the closely watched services Purchasing Managers’ Index reported an unexpected gain, increasing the likelihood of an aggressive interest rate hike in September.

The probability of a 75-basis-point increase in interest rates later in September reached 72% on Tuesday, compared with 57% on Friday, according to the CME Group’s FedWatch Tool.

The XJO has fallen over the past week and is now trading below the 50-day moving average (6861.7) and above support at 6765. The past three sessions have seen the index consolidate at current levels, while volatility has remained relatively stable, only falling 0.74% since 29th August.

With implied volatility at 15.78% and an IV rank of 33, we could see a large move up in volatility with any move down in share price. To take advantage of a potential increase in volatility and fall in price, purchasing simple long puts might be an effective strategy at current levels.

One investor who evidently has a sharp ear to the ground within the energy landscape and the macro themes surrounding climate change is Joseph Constable, portfolio manager at Hancock & Gore. He will be highlighting three of his favourite microcaps, including one that is well-placed amid the European energy crisis and another that is coming back strongly after being directly affected by the recent Australian bushfires.

Joseph will be joining us this Friday, 9th September, at 12pm (AEST) for The Insider: Meet the Fund Manager webcast, where he will provide insights into why the current ‘tricky’ market is seeing lots of value emerging in the microcap space. He’ll also discuss his investment strategy and why he thinks now is a unique time to deploy capital into microcaps. To join us for this session, click here.

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