The Hargreaves Lansdown
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Each fortnightly episode will feature special guests as we get the inside scoop of the challenges and opportunities faced by key industry sectors. Plus, regular slots from our own equity research and fund management teams, on business news, the economic outlook and trends, and what’s driving their portfolios.
This podcast isn’t personal advice. If you’re not sure what’s right for you seek advice. Investments rise and fall in value, so investors could make a loss.
Susannah: Hello, and welcome to Switch your Money On from Hargreaves Lansdown. I'm Susannah Streeter, I'm the senior investment and markets analyst at Hargreaves Lansdown. And I'm here with Sarah Coles, our senior personal finance analyst.
Hi there Sarah - so this episode brings together interest rates, ethical banking and Christmas. It means we're talking gold, banking sense and more... do you see what I did there?
Sarah: Oh no that's terrible. But yes, all the talk has been about the rate rise that didn't happen, and it has all sorts of implications for banks and businesses.
Susannah: So today we're focusing on the financial sector, in an episode we're calling, 'are you banking on a rate rise?'
Sarah: Yes, Sophie Lund Yates - equity analyst here at Hargreaves Lansdown is going to take a look at a few key banks in detail, including Lloyds and HSBC. Hello Sophie.
Sophie: Hi Sarah. Yes, Lloyds is a classic UK name which we all know, but important to remember there's more to a company than its name though as we'll find out later
Susannah: And we are going to find out what it's like operating a bank in such uncertain times - with our guest on the programme today Gareth Griffiths, UK head of retail banking at Triodos Bank, in Bristol. Hello there Gareth, great to have you on the program.
Gareth: It's great to be with you, thanks for having me.
Sarah: And Emma Wall our head of investment research here at Hargreaves Lansdown is going to speak to fund manager, Andrew Jones, from Janus Henderson Investors about the prospects for global financial stocks.
Plus we'll have our quiz, and Susannah has been digging out some gems from the bank vaults.
Susannah: Yes, you are going to have to chip away fact from fiction when it comes to gold, copper and forgeries.
Sarah: But we're not just going to talk about sensible saving, because we're getting to that time of year when suddenly it's all about spending. I can't believe we're already in Black Friday sales territory.
Susannah: Yes, and the latest stats from the ONS show that we didn't wait for Black Friday this year, even at the start of November we were snapping up Christmas food and presents because of all the worries over the shortage of goods in the shops.
At the start of this month, one in eight adults said they had already bought festive items that they would ordinarily have purchased later in the year, with most common items purchased or ordered in advance being food. Consumers are also concerned that the coveted presents on Christmas lists might be hard to come by, they have been snapping up toys in advance. The buy-early strategy to avoid disappointed faces on Christmas day is likely to accelerate over the next few weeks given warnings from retailers that some popular items may be scarce on the shelves.
Sarah: This research was really interesting. Every year we get the same old warnings that must-have toys will sell out, which we've learned to take with a pinch of salt. But this year it's different. Already people are saying they've not been able to buy some of the things on their weekly shopping list, and in the previous two weeks around one in six said specific items weren't available.
Susannah: Yeah - after Christmas was cancelled last year for so many families, it seems many are desperate to avoid a scrooge-like celebration this year, so they are stocking up now, to ensure the table and tree are fully laden with treats.
And of course, all of these expectations of shortages of goods - and warnings of price rises is partly why there was so much expectation that the Bank of England would raise interest rates to put a brake on inflation during the last meeting - but it didn't quite happen like that did it.
Sarah: No - in the run up to the Monetary Policy Committee meeting, a number of members of the committee, including governor, Andrew Bailey, gave strong hints that a rate rise was on the cards. It means the markets started pricing in a rise in November.
However, when the time came, nothing materialised. There were some pretty sound reasons for putting things off. It's mainly that the bank is worried about unemployment. There were over a million people still on furlough when the scheme ended in September, and there was uncertainty around what this would mean for unemployment. So, the Bank has decided to hold off until we get a clearer picture.
Susannah: That's going to have disappointed wait and see savers - who were hanging on for better deals after a rate rise - they are now likely to be in for a far longer wait then they expect. Even when we do get a rate rise, the high street banks are highly unlikely to pass it on. anks have suffered a couple of years of horribly squeezed margins, with rock bottom rates leaving them little room to manoeuvre - so no surprise that banking shares fell back after the Bank of England sat on its hands this time round - given the long squeeze on net interest margins they have experienced - it means they're likely to see any rises as an opportunity to get a bit of breathing space, so they're unlikely to raise rates very quickly.
Sarah: Yes, all this means investors should be taking steps beyond their portfolios with their wider finances. It really is the time to start shopping around if you are a saver - in the past six months we've seen the rates on some competitive short term fixed accounts double. It means there are far better deals out there for anyone getting next to nothing from their high street bank.
Susannah: And if you have a mortgage, there could be a tendency to sit back and relax - but it's not really time to be too laid back with this area of your finances.
Sarah: No, there are around 2 million borrowers on variable rates who should consider whether it's worth fixing their rate now. Rates have already started to rise, but we're still around historic lows, so now could be the time to act. It's more difficult for those locked into variable rates with hefty fees, so you need to work out if a switch would save you money overall. However, if you're on a fixed rate with less than six months left to run, you can usually book in a new rate now, you don't have to wait for your deal to expire.
Susannah: So the Bank of England certainly pulled the rug on expectations - if you were a saver or a borrower - but just what's it been like if have you have been running a bank?
Gareth Griffiths is UK head of retail banking at Triodos Bank. Gareth thanks so much for talking to us. Tell us, what do rising interest rates mean for the banks? What's is going to mean for Triodos?
Gareth: Yeah sure. We had our interest rate preparations all ready for the last Monetary Policy Committee meeting and we're very much looking forward to the next one on the 16 December. Because as you said, the jobs market data is out this week so it's going to give us a really interesting first view as to what might happen at the Monetary Policy Committee (MPC) voting, given that only 2 members of the MPC voted for a rate increase last time around. And I'm sure, as you said, the 'wait and see' army of cash savers will be certainly welcoming any rate rise that might be forthcoming. Whilst at the same time, mortgage borrowing rates have already increased and we're seeing that people on variable rates, some of them starting to really take action. I think that there are a couple of points that you pulled out which were really interesting there. One, is that I'm already seeing banks increasing their mortgage rates now, ahead of the rate rise as the market prices-in increased swap rates. And ultimately, that is banks taking their net interest margin and making sure that the last few months of the year are going to be more comfortable. At Triodos, we certainly made preparations to pass on rates to customers in an orderly fashion and I guess the call-out I would make to the rest of the industry is how quickly that's going to be done by them, because a month or six weeks worth of sitting on the increased interest rate for banks is only upside for them. We would really always encourage people to not only look at the rate, but what's behind the rate. Customers are really wanting to use their money more sustainably.
Susannah: For your customers, it's not just about the rate though is it, it's about the whole ethos of the bank. Are ethical concerns increasingly important to consumers now?
Gareth: Yeah, you're absolutely right. Our customer-base grew 20% in 2020 which is a really exciting tick in the box which says that moving your money is probably one of the most powerful choices that you can make. It can really drive measurable change, both positive social and environmental change. The challenge I think we're now starting to see in the marketplace is that there's lots of different options which are labelled 'ethical' or 'sustainable' and it's often I think really difficult for customers to sift through the different options and work out what's actually going to deliver the impact people are hoping for and what's just greenwash. And I think we need to be careful as an industry, financial services has got a real obligation to our customers to really actually make a difference. Ultimately, this term 'ESG': Environmental, Social, and Governance, can be very easily used as a mis-selling tactic so I'd really urge consumers to look at what really sits behind the fund and the interest rate.
Sarah: Do you think it would be helpful if the FCA came out with a definition of what 'ethical saving' actually is?
Gareth: Yeah, I think that's important. Ultimately there is an EU taxonomy on investments, and as soon as we get nearer to the net-zero transition I would implore the regulator and also the industry itself to uphold the highest level of ethical labelling standards. I mean if you just look a little bit behind things like the UN sustainable development goals, I'd really encourage the industry also to orientate, say investment portfolios towards the UN sustainable development goals. So, there's a real clear linkage for consumers as to where their money is going in a transparent way.
Sarah: There have been a number of sustainable product launches, including NS&I's green bond, is this helpful for building awareness?
Gareth: It's a positive step that more green savings are being offered now and I think it's raising the overall consumer awareness. However, I think my disappointment is that the rate in question on the NS&I bond, there's nothing to dispel the myth that you actually have to pay to be ethical in the rate. It's simply not true. When I think back to last year during the height of the pandemic, we saw ethical and sustainable funds outperforming their competitors and the benchmark. The point you raised I think is absolutely the most important one, in that it's imperative that there's a transparent criteria on what is actually considered green. I think that's the only way forward to make sure consumers have a valid transparent choice. And I think therefore that having a taxonomy in place to unlock the kind of potential of green and ethical savings and investments is really important.
Sarah: One of the things we know through our research is how difficult it is to persuade people to switch their savings. Is that a challenge for you?
Gareth: It is and I think there's still the impending question of, you know, 'But I can get a really good headline rate for one year and ultimately I don't know the bank, I don't know where that money is going' and that's quite a significant part of the Triodos mission and ethos is about, is that all of our savers can see where every penny of their money is going. As we come off the back of COP26, which has been a real moment in time, we know that consumers are wanting to use their money to make a real difference in the world. But however, clearly the headline rate in a low interest rate environment where rates have been depressed for so long is quite a powerful motivator for many. But I think as we build a net-zero transition and really transition our economy to net zero, you know, I was really heartened the other day with Rishi Sunak's announcements that all financial institutions and listed companies are going to have to publish all of the plans that they've got to transition to net zero. And we are therefore going to see underneath the bonnet of quite a lot of banks and what they continue to finance and why they are able to therefore pay those top rates. It's going to be a really interesting next couple of years.
Susannah: Gareth, doesn't all of this show that in terms of finance as well, it's much more difficult for poorer people to be green. Those people who are wealthy can afford to pay for a current account at Triodos but a lot of people are struggling right now. Have you got plans to widen your customer base to those people as well?
Gareth: I think that's a really interesting question around what I'd actually call the 'poverty premium', which I think is much less associated with example the £3 per month we charge for a current account but stems much further. And, if I think about 2 things, firstly overdraft rates and we now see the most predominant overdraft rate on current accounts up at around 39.9%. And that was after a piece of regulation was passed around the high cost of credit and banks being more transparent in the way that they charge rates and charge for overdraft usage. And the poverty premium extends itself one step further, in that people with basic bank accounts, poor credit, etc. May not be able to get access to accounts where they've got access to standing orders and direct debits, and that increases the poverty premium even further because clearly then people can't pay even the very basics through a standing order or direct debit. So again, I'd really encourage people to look a bit further, understand how they use their products and what might actually benefit them. There's lots of advice on the internet (Ethical Consumer, Which) and just take that research maybe one step further because headline rate isn't everything.
Sarah: Increasingly we're asking people to look a bit deeper into their finances and do the maths on things like overdraft rate and current account charge, and then look a bit deeper into where that bank is invested. And I'd be interested to know, do you think that that's a mass market - do you think that people have the time and the energy for that sort of thing across the board or do you think that that's something that's got to grow over time?
Gareth: I think we've to make it easier, actually I think we've got to make it much easier. If I look at the raft of consumer websites out there, I think they take one big step to make it easier for customers. I really do think that there's probably quite a lot of complexity and detail that could be made easier for customers, but I think as an industry it's one of the things we can help consumers with and be much more transparent and comparable.
Susannah: OK Gareth, thank you so much for being with us on Switch Your Money On, it's been really interesting talking to you.
I want to bring in Sophie Lund-Yates now who's a Senior Equity Analyst at Hargreaves Lansdown. Sophie, really interesting to hear what Gareth has been talking about with rate rises and transparency within the banking industry, Tell me some of the stocks that you've been looking at where there have been similar issues being faced.
Sophie: Hi Susannah, so yes, obviously we have these bigger trends that are affecting all of the banks one way or another but that doesn't mean that all of the stories are the same. But starting with something that all the listed banks do have in common, they've all had results relatively recently, so there are a couple of common factors where the UK's banks are concerned. First one being, that they assumed the absolute worst when the pandemic hit, that meant they put aside enormous sums of money as provisions because they were concerned people wouldn't be able to pay their debts, essentially. But actually what's happened is that the macro-economic outlook is actually a lot better than feared, so the banks have been able to release large chunks of those provisions, which has hugely boosted profits. Which is great, you know they're all on sort of better footing than maybe they had feared would be the case. But injections to profit like this are short-term and it's important to focus on the differences between the banking giants and their longer-run investment cases.
So, I'll starting with Lloyds. Everyone knows Lloyds, it's a high street staple which is actually one of the interesting parts of it, it's one of the largest UK branch presences and also it's got less of a fee-based investment banking income. So what I mean by that is some of the other listed names earn money form big investment bank arms, so they earn money from advising on IPOs and trading commission, stuff like that. Lloyds has a lot less of that, so that does mean that the low interest rate environment that we're in at the moment and the lack of a rise is even more important, because while rates are on the floor it limits the profitability of its loans, and Lloyds is a lot more exposed to traditional lending than the other banks.
The flipside of that is it means the increasing likelihood of a rate increase would be even better news for Lloyds than some rivals who have a more varied source of income. At time of recording there hasn't been any announcement of a rate increase.
For Lloyds, the main thing I'll be watching over the coming year is how it handles its vast estate. So, there's one thing to say that being one of the last men standing on the high street is it benefits from rivals closing, or will it need to further accelerate its digital strategy?
Susannah: Yes, that will be really interesting to watch how that plays out, but what about banks that have got less of a UK focus?
Sophie: It would be remiss not to talk about HSBC, which is the UK's biggest listed bank. The majority of its income comes from Asia though, which means the fortunes of HSBC, and therefore a reasonable chunk of the FTSE, are largely tied to foreign shores, which I think is something that sometimes get forgotten sentiment-wise when we're talking about the banking giants. At the moment, the Asian business is actually lagging other areas, so HSBC is picking up the slack from other regions, but those are the regions it has been planning to shrink. It hasn't faltered in its plans to shrink other areas and focus even more on Asian economies in the longer-term though, which is a dynamic I'm watching quite closely.
The other bank to talk about is Barclays. To a lot of people, Barclays brings up images of being a traditional high street staple, maybe a bit like Lloyds, but it actually has an enormous investment bank too. It makes a lot of its money from things like fees when it advises companies on IPOs for example, or commission from big corporate deals. A lot of people don't actually realise Barclays was in the running for buying out Lehman Brothers before it collapsed right at the start of the financial crisis. So, just to give you an idea, it's really a massive global name, not just kind of a frequenter of the UK high street. Having those extra sources of income are really helpful when interest rates are so low. The biggest hurdle to clear now is how quickly and how well the new CEO settles in after the unexpected departure of Jes Staley a couple of weeks ago.
Susannah: Yes, reall interesting to see how that plays out. Sophie many thanks for all of your analysis there.
Now we can hear from Emma Wall our head of investment research here at Hargreaves Lansdown - she's been talking to Andrew Jones, who's a Portfolio Manager from Janus Henderson Investors.
Emma: Hi Andy
Andy: Hi Emma, it's good to talk to you today.
Emma: You too. And we're talking about banks. Now historically banks have been quite good dividend payers. You of course run an income fund, a responsible income fund no less. You have a couple of banks in the portfolio. Last year was not so great for dividends and banks because the regulator encouraged them to cut the dividend, given the stressed economic backdrop of the lockdown. But dividends are returning, aren't they, so perhaps you could give us a bit more detail about the couple of banks in the portfolio.
Andy: That's absolutely right yeah. Obviously 2020 was an incredibly difficult time for the UK market from an income point of view overall. And particularly banks did have to spend their dividends last year. The regulator was very, understandably cautious about the effects of the pandemic. But as the year went on and the effects turned out to be not quite as serious as first feared, at the end of the year it did give the banks permission to start paying dividends again. So, what we've seen this year, is a relatively modest return to dividends from UK banks. But going forwards we would expect to see greater dividends. The stocks that I hold in the portfolio in the sector, Lloyds and Natwest, we think they've got very strong capital positions, which with that improving profitability we'd expect to see, means they're well placed to increase dividends going forward. And we think they're going to be offering yields of around 4.5-5% next year.
Emma: What about the broader sector then, because financial services is not just banks, not just high street domestic banks that you have in the portfolio but it's quite a wide-ranging sector isn't it. What else are other ways to play this and how does that feed into the better economic backdrop we are seeing going into 2022.
Andy: Obviously banks are an important sector for the UK, but we do have a very large insurance sector, and very viable financial services sector. So, one company we own in the insurance sector is Aviva, which has got a relatively new Chief Executive who has taken a long overdue restructuring of the company. So, since she's been in charge, she's exited a significant number of businesses, both in Europe and in Asia, focussing on where they're very strong, which are the core markets of the UK, Ireland and Canada. And generally, economic growth is quite good for insurers, so what we think will happen is that with this improved focus, they'll be able to improve the returns they have. And the great thing about them having sold the businesses overseas is, like Lloyds and Natwest, they've got a really strong capital position so dividends there will pick up next year as well. So, it's a really good restructuring story with a favourable backdrop and dividends to resume there as well.
Emma: Now the adage goes that equity investors are perpetually optimistic and fixed income investors are perpetually pessimistic, but I do feel perhaps we should add a bit of balance because you've just spoken there about 3 companies for whom the outlook looks more positive because the economic backdrop looks positive, but it's not smooth sailing for the financial services sector is it, because it's a not a done deal that the economy is going to grow next year and indeed, inflation could have a big impact on that.
Andy: That's absolutely right. Obviously, these are quite macro-sensitive stocks, so what we always try and do in the portfolio is try and have a balance so you're not just beholden to macroeconomic forces. So, Aviva's a good example, we think that they can do well even if things don't pan out in a favourable way economically. And similarly, we also own 3i Group in the portfolio which is an incredibly well-positioned private equity and infrastructure business. And we think that whatever the inflation outcome for the 3i, they've positioned themselves so well to strategically advantaged sectors such as a discount retailer, healthcare and technology, we'll think they'll be able to carry on growing even in a more difficult environment. So, we think it's important with the potential for interest rates to pick up to have some banks in the portfolio, but we also want other drivers of companies as well, which is why we've got restructuring with Aviva and then also better structural growth with 3i Group.
Emma: And Andy, finally, you are the manager of an responsible investment mandate, which means there are environmental, social and governance considerations woven into your investment process. How do you marry that process, that mandate and that passion with investing in financial services, which for some people is a bit of a sin sector?
Andy: The fortunate thing about the companies we invest in is a lot of them have actually been thinking about responsible investing for a long time. A company like 3i has a very long standing in the responsible investment sector and it's one of the reasons they've delivered such strong growth. So, they've been avoiding a lot of difficult sectors overall. A lot of the companies we own in that area have actually been thinking about it in a similar to how we would think about it. And whilst banks historically have had a lot of issues overall, we do think that the ones we own are moving in the right direction. I takes time to work through the legacy issues because they're big, complex organisations but we think we're owning ones that are definitely going in the right direction and have a very useful part to play in society and are definitely better-placed businesses than they have been historically.
Susannah: Emma Wall with Andrew Jones, a Portfolio Manager from Janus Henderson Investors. And we do need to mention that yields are variable and any dividends or growth aren't guaranteed. You're listening to Switch your money on from Hargreaves Lansdown
Sarah: And finally, it's time for the quiz
Susannah: Yes, I've been swotting up top Bank of England facts, including some of the weirder tales from the vaults, some of which are maddeningly difficult.
So to start us off, which coins are made of copper?
Sarah: Well, you've said they're maddeningly difficult, so this seems too easy, but why not... I'll say 1p and 2p.
Susannah: Well, only very slightly. They did used to be made mainly of copper, but now they're coated in a tiny fraction of copper, and the rest is steel. It means they actually have less copper in them than the 20p, which is nicely confusing.
Now, delving back into the vaults, the Bank of England issued war bonds in 1914 to help fund the First World War. They were claimed to be a runaway success, but what did the Bank of England recently admit about the first sale?
Sarah: I've no idea... No I've got nothing... Was it all a sham?
Susannah: Well not exactly, but it was a disaster. People didn't buy anywhere near enough of them, but they didn't want to admit it for fear of destroying the market, so they got the Chief Cashier and his deputy to use Bank funds to buy the rest of the bonds in their own name, and rather than admitting it on the balance sheet, it listed the holdings as 'other securities', so the Bank's researchers only dug this fact out very recently.
Now, how many bars of gold does the Bank of England own?
Sarah: Well I know they own 1, because it's in the Bank of England museum, and at least before Covid you could pick it up. There's something strange about being able to pick something up that's worth more than your house. But beyond that I couldn't even hazard a guess.
Susannah: Well you're not far off, they actually own 2, and both of them are in its museum. They hold 400,000 others on behalf of the Treasury and other organisations, but they don't own them
And finally, between 1797 and 1821 a shortage of gold coins meant the Bank issued low denomination notes for the first time. There was a boom in forgery, but why were forgers so successful?
Sarah: These are really difficult questions. Were they really easy to copy? I suppose without holograms it might have been easier.
Susannah: Certainly, they didn't have the same anti-forgery protections as modern notes, but in this case, it was because the people receiving the notes had never seen them before, so had nothing to compare them to. Lots of them didn't read either, so weren't able to spot mistakes. It was such a problem, that during this people over 300 people were hanged for forgery, which was a pretty grisly period in the Bank's history.
Sarah: That was your hardest quiz so far. I think next time I'm going to have to set the questions and get my revenge.
I'm off to dig out some hideously obscure facts. But before we go, we need to remind you that this was recorded on 15 November, and all information was true at the time of recording.
Sarah: Nothing in this podcast is personal advice - you should seek advice if you're not sure what's right for you. Investments rise and fall in value, so you could get back less than you invest.
Susannah: Yes, this is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.
Sarah: And this hasn't been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
Susannah: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.
Sarah: You can see our full non-independent research disclosure on our website for more information. So, all that's left is for me to thank our guests, Gareth, Sophie, Emma and Andrew, and our producer Elizabeth Hotson.
Susannah: Thank you so much for listening. We'll be back again soon - so if you enjoyed this podcast please do let us know what you think and do subscribe wherever you get your podcasts, so you get a fresh new episode in your inbox as soon as it's ready. Goodbye.
In our most recent episode, Susannah and Sarah talk interest rates, before discussing the challenges facing the financial sector. HL’s Sophie Lund-Yates gives her assessment on a few key banks and their long-term prospects. Plus, guest interview with Gareth Griffiths, Head of Retail Banking at Triodos Bank. HL’s Head of Investment Research, Emma Wall talks to Andrew Jones, a Portfolio Manager from Janus Henderson Investors, on the potential return of dividends and balancing a responsible portfolio.
Susannah: Hello, and welcome to Switch your Money On from Hargreaves Lansdown. I’m Susannah Streeter, I’m the senior investment and markets analyst at Hargreaves Lansdown. And I’m here with Sarah Coles, our senior personal finance analyst.
Susannah: So, we’re back from half term break – I know Rishi Sunak disrupted your travel plans with his unfortunately timed Budget – so I imagine it was a staycation – if anything that you went on last week
Sarah: Yes, of all the people I worried might wreck my half term holiday plans, it turned out to be the Chancellor. The most exciting thing we managed was to go pumpkin picking in a muddy field. But everyone I talk to seems to be in the same boat – we’re all a bit desperate for a proper holiday now.
Susannah: Yes, a holiday is definitely top of the list at the moment – but at every turn – plans seem to be thwarted - if it wasn’t the onerous testing regime in place over the summer – then it’s the surge of covid cases - that’s led to plenty of cancelled holidays – and holiday homes put back on the listing sites after last minute cancellations.
Sarah: And that’s what we are going to be focusing on today – the much hoped for recovery in the travel industry – in an episode we’re calling – are we there yet? We’ll be talking to Brian Young on what it’s been like trying to run a travel business throughout all this uncertainty.
Brian, have we caught you on dry land?
Brian: I’d like to say so, but I’ve managed to get away for 3 days to Corfu in the last 20 months!
Susannah: Our senior equity analyst Sophie Lund Yates will be reading what the temperature is like for some of the most traded shares among our clients – like British Airways owner IAG - and why some shares offer diversification as we wait for turbulence to subside -
Sophie: Hi Susannah, looking forward to looking at some of the travel stocks. It’s definitely not a one-size-fits-all recovery here.
Sarah: And when we return from our deep dive into the travel business, we’re going to look a little closer to home – and focus in on the prospects for the UK – following the announcements made on Budget day. Our head of Investment Research Emma Wall will be having a chat to HL Select Fund manager - Steve Clayton.
But first let’s fasten our seatbelts for a look at the travel industry. The past 18 months has been a rough ride hasn’t it?
Susannah: Yes, and hopes that a smooth recovery would be underway for the sector – haven’t quite yet materialised…So if you look at passenger numbers in July there were just under one and a half million air passengers arriving in the UK, and although it’s higher than a year earlier, it’s only around one eighth of the number of people arriving in UK airports in July 2019, before the pandemic.
But there is a lot more optimism around than this time last year – when airline after airline was rocked by extreme turbulence – before those vaccine breakthroughs provided a glimmer of hope.
Sarah: Yes, and there has been some good news more recently, so the end of the controversial traffic light system came as a huge relief for airlines and travellers last month. The red, amber and green levels of restrictions had been incredibly difficult to work with.
In fact, the ONS asks returning holidaymakers how easy they found it to get hold of information about overseas restrictions while they were away, and in August almost four in five people either said it was difficult or very difficult. The ONS didn’t exactly blame the traffic light system for the confusion but said that traffic light changes over the summer need to be kept in mind when you consider these figures.
Susannah: Yes, the end of the traffic lights has been widely welcomed. There was also the change to the expensive testing regime, which had added too much to the price of travel – the cost of those PCR tests really added up especially for families and now only cheaper antigen tests are required for people returning on day 2 – certainly cuts the cost of a holiday – But
Sarah: I can sense this is going to be a significant but…
Susannah: There is another potential spanner in the works – particularly for travellers with children – because of the way our vaccine rollout has progressed – inoculation of teenagers has been slow – while some EU countries began vaccinating teens in the summer.
Sarah: Yes, and from personal experience I know that’s not been rolled out everywhere. In my local area, there’s no sign of vaccinations for teenagers.
Susannah: And even where teens have had the jab, Government policy is also to only offer teenagers one jab for now, with the date for their second to be confirmed later. This makes a difference, because other countries like France, Austria, Italy and Switzerland have made two vaccinations for teenagers a requirement to get a Covid pass – and it’s essential they have this before they can go into ski lifts, swimming pools, or even bars or restaurants. If they aren’t – and they won’t be in the UK for the foreseeable future, it seems – they’ll have to keep taking tests every few days – if they do want to do pretty much anything other than staying in their hotel rooms.
Meanwhile, 12 – 15 year olds also won’t be allowed into countries like Canada – without quarantining – if they haven’t been double vaccinated - even if their parents have had two jabs.
Sarah; So travelling with teenagers is still going to be difficult – and not just because doing anything with teenagers is always slightly stressful. And even solo travel means getting to grips with specific rules for each country. You have to complete the right tests and fill in the right forms, and when any part of the process doesn’t run smoothly, there’s the risk you could end up missing flights or not being allowed to travel. It all adds to the stress and the time it takes to plan a holiday and given the faff of it all – there’s the risk people just won’t bother, and we’ll miss another summer of international travel.
Susannah: So it’s a headache for travellers – but it’s probably a migraine for tour operators – trying to work out the new rules of engagement. Let’s bring in Brian Young who is a Managing Director of G Adventures, a tour company.
Brian – just how have you managed to survive during the pandemic – I imagine bookings plummeted like a stone.
Brian: Yes, it’s been a rollercoaster over the last 20 months, from the very start of the pandemic we’re obviously a global travel organisation with travellers on all seven continents. So, we could tell very quickly that the pandemic was here for a longer period than I think initially everyone thought. So, we had at the very start of it, repatriation of all of our customers as we could see borders closing in different destinations, in some cases a race against time to get people back. Then the second part of that is to understand how long the pandemic is to last for and what we need to do, and we will get travelling when the world opens up.
Susannah: To what extent did you get an uplift in bookings among international travellers when the restrictions were lifted – did they snap back or are people still cautious?
Brian: We have seen a shift in the bookings, most definitely. And more so, as lots of those destinations came off the red list. We had 54 destinations on a red list that came down to 7 which is now down to 0. Customers can now travel further afield, certainly the testing regime that’s been required from a PCR test and such, those changes have made a big difference and that’s shifting consumer sentiment. So there’s no doubt beforehand lots of confusions from a consumers perspective, but as that’s started to become clearer, and the less requirement of certain tests, definitely consumer confidence is coming back.
Sarah: How much extra complexity are all the current rules causing?
Brian: It has, the customer just wants more information and more hand holding now. It’s not just about ‘OK, the government in the UK say these are the requirements’ but there’s obviously the border requirements of going into a difference destination. What we’ve found is our call centres have gone up the amount of time people are on a call because they’re trying to get more information to understand exactly what’s required to travel to a destination. So, we now need to understand everything across a spectrum of destinations. From that perspective it’s quite complex, but certainly what we’ve seen is an increase in call volumes and bookings, so things are on the up.
Sarah: When the red list gets to 0, does that makes things easy for your planning as well?
Brian: It does, as it opens up more destinations. We’re very lucky as we’re a global company, we’ve operated trips throughout the whole of the pandemic. And what we’ve seen is that as North America has been able to travel and we’ve been able to open up destinations. And in the UK one of the things we’ve been clear about is if there’s a traffic light system then where do we think the first places are that are going to open up for UK travellers. And for us we knew Europe was going to be a big part of that before long-haul, and we knew customers wanted to travel closer to home, coming out of the pandemic. So we actually created a suite of new trips in our DNA – we’re an adventure travel company, so active, hiking, trekking tours are important to us, so we built out a suite of tours to places you probably wouldn’t know us for, like Ibiza, Corfu, Tenerife, etc. And then as we’ve seen places open and we’ve been able to operate globally, we actually operate over 1,000 trips in this period. So we’re slowly but surely coming back up now there’s confidence and restrictions are coming down.
Susannah: Do you think the travel bug that we have has changed dramatically and for the long term because of Covid? You mentioned switch in destinations maybe closer to home, do you think that’s going to last?
Brian: I think everybody wants to travel, and as more destinations open up, using Thailand as an example. As of today, people can travel to Thailand. Peru coming off the red list. As the world opens-up, I think what you’ll see is more people wanting to get further afield and will want to get off the beaten track. A lot of what we do is based around giving back to local communities, so for us it’s really important to get people travelling around the world, impacting in a positive way to all of these local communities who have been starved of tourism for the last 20 months.
Sarah: Are you getting the sense that some people are keen to treat themselves and now they can finally get to travel, want to do something really special?
Brian: Yes. What we’ve seen over the course of the pandemic, when we’ve looked at all of the search results and what people are looking for. People are looking for bucket list-type tours, so climbing Kilimanjaro, or base camp Everest, or a safari. These are the sort of things people may have had on a list of ‘I’d like to do or get to do at some point’. So, we saw through the pandemic, huge increases in those searches, which has translated into bookings. People have realised that travel is special. It got taken away from them over the pandemic, people have been out and about and being more active as well through the lockdown as the only form of getting out and doing any exercise was the one hour we were allowed to do at the time. So, I think people will have definitely got a desire to get travelling.
Susannah: Thank you so much Brian, it’s been fascinating to get all of your perspective on just what it’s been like running an adventure tour company during the pandemic and the way ahead. Let’s bring in Sophie Lund-Yates about this. Let’s start with the flight paths of the airline companies – they certainly have taken different routes - and aren’t in the same competitive position are they as we emerge from hopefully the worst of the crisis?
Sophie: A really interesting one for me is Wizz Air. Not just because I love the name of the stock – that’s not a reason to invest! But the reason that they’re interesting is that they’re focussed on eastern European routes, including native Hungary. And because of that area being slightly less popular or niche, it has a near monopoly on those routes which is a rare thing in the sector and has obvious benefits from a competitive position. It keeps costs incredibly low, as a carrier. One way it does this is by flying into smaller airports a bit further away from central hubs. Bit like flying into Luton instead of Heathrow. When your unique selling point is being as cheap as possible, customers don’t tend to mind this – it also means there’s less competition for your slots at the airport. That then feeds in to the super low prices it can charge and that also means there’s more scope for ancillary revenue – upselling to you and me. The group made more money from these services (think extra baggage allowance, seat booking fees and food), than it did on ticket revenue last year. At €413.3m, these were almost 27% higher in fact than its ticket revenue last year. Being a low-cost carrier should help hold the group up if the economy worsens. As alternative European holiday spots gather popularity, Wizz should stand to benefit too. And the really exciting stat is that it’s expected to fly 90-100% capacity over the summer, which is very impressive. I should point out, that the results are due out in the next few days, so we should soon know if they’ve hit that target. And finally, something that’s really important for me to mention, with all airlines really, is that they’re very cyclical, and by that I mean its fortunes track the wider economy quite closely. So, if the economy hits a rough patch, even better placed airlines will feel the crunch.
Susannah: Yes, it could really hit people’s disposable income if there’s a downturn so people won’t be splashing the cash so much on holidays. But let’s talk about the difference in companies like Wizz Air and the long-haul carriers.
Sophie: So the obvious one to talk about here is British Airways owner, IAG. So as an operation, it couldn’t be much further removed from the likes of Wizz, as it’s much more exposed to long haul and business travel, so unsurprisingly Covid is still weighing massively on demand. Whereas you have Wizz saying they expect to have flown close to full capacity over the summer, IAG definitely haven’t had that commentary. In the six months to 30 June, IAG flew 20.8% of 2019 capacity, and demand isn’t expected to recover fully until 2023. Again, I should point out we’re expecting some results in the next few days so there may be some kind of upgrade to that guidance but personally, I don’t think we’re going to see a massive amount of positivity coming out. The good news where IAG is concerned really is that immediate liquidity concerns have been put to rest. They’ve managed to take on a multitude of loans, deferred pension payments and shifted costs of the Air Europa merger further into the future. So they’ve actually got access to €10.2bn. There was a moment when things first kicked off and you’re looking at it thinking ‘oh my goodness, this could be an actual crisis crunch point’ and that is absolutely no longer the case, which is great. All the fat that’s been trimmed means it will emerge from the crisis as a much smaller but potentially more efficient company, and I should also add that it’s in a good place to capitalise on the shift as business travel resumes, thanks to its leading brand and strong reputation – but it’s likely to be a bumpy ride.
Susannah: So still a lot of turbulence out there, and of course, it’s not just airlines that have been affected by the fall in tourist numbers. You’ve been looking at one interesting company with its fingers in lots of pies, that is also exposed to changes in how we’ve been travelling.
Sophie: Any opportunities to talk about this business as I’m a fan of their products, is Disney. Obviously, it’s not just airlines that are reliant on tourism. Disney’s profits took a hammering when it was forced to close its theme parks and shut down its cruises during the pandemic. When you think about the fixed costs that go into running a cruise liner and those enormous theme parks, you know it’s not surprising what we’ve seen. But it’s turning a corner with third quarter revenues of $17.0bn, up 45% year-on-year and ahead of analyst forecasts. That reflects a very strong recovery in the group's theme parks as gates have started to reopen and profits came along for the ride.
But Disney’s not just about rollercoasters and parades anymore – the streaming business has been phenomenally successful and was buoyed by lockdowns. Whilst confined to our sofas it meant lots of people signed up to a Disney+ subscription. Disney+ now has a little over half the number of Netflix's subscribers. Throw in ESPN+ and Hulu, and Disney has surpassed 80% of Netflix's current total. This newer venture doesn’t contribute much to profit yet, but it’s a really exciting area to watch as it builds scale. As ever, it’s not always a picture perfect situation, and the one bug bear where Disney’s concerned really is its debt levels. As much as they’re heading in the right direction, the $71bn dollar acquisition of 21st Century Fox a couple of years ago means the balance sheet is carrying a bit more debt than is ideal – not looking at a fundamental crisis, but something to keep in mind.
Susannah: Thanks Sophie – now let’s pull focus back to the UK now – because of course Chancellor Rishi Sunak unveiled the budget at the end of October - and there are worries that the level of taxation facing the UK could drag on the very fragile recovery – let’s see what Steve Clayton, HL Select Fund manager makes of it all – and the other announcements in the budget – he’s been talking to our head of investment research Emma Wall.
Emma: Hi Steve
Steve: Hi Emma
Emma: So when the budget was announced from the chancellor, the market did very little at all, didn’t it?
Steve: On the day itself the market dropped by all of 0.1%, and even within the market there wasn’t an awful lot of reaction. Yes some individual companies reacted, pub companies took the news of duty cuts and business rate relief very well. But overall industries barely shifted, there was nothing moving by more than 2% on the day, so from the stock markets perspective it’s almost as if Mr Sunak could have taken a duvet day.
Emma: I always think for budgets, it’s much more about individual consumers and households that feel the impacts, not the markets. And as an investor, that’s how you can digest and be impacted by the budget, if there’s a change to pension policy or there’s a change to tax rates. And in fact the only budget I’ve ever covered where I’ve seen a sizeable move in the market is when we had pension freedoms, because that did very much affect people’s access to investments and the way people were going to invest and so the stock market reacted. Other than that, as you say, it’s a bit of a damp squib often for the stock market, isn’t it?
Steve: It is, and perhaps thankfully there was nothing on pensions because there’s been far too much tinkering on pension rules in recent years.
Emma: In terms of looking forward and what we can expect from the stock market over the next year, one of the things that was really interesting for me was the economic forecast. You know, we’ve had such a torrid couple of years in terms of UK economic growth and actually there was some good news there, wasn’t there?
Steve: Well that’s it, the Office for Budget Responsibility has revised up its expectations about how well the economy is going to recover from the deep recession that Covid brought with it. And as the OBR said, that extra economic growth is bringing in a lot of tax revenue, and this has created headwind for Rishi Sunak to actually start spending significantly more that people thought he would have had the capacity to. So far, he’s spreading it broadly across government departments, they’re all going to get an increase in real terms. But if the economy keeps moving and as the OBR is progressing, then potentially he could be building up a little bit of a war chest for tax cuts towards the end of this parliament. And he wouldn’t be the first politician to set the budget with the idea of having some fire power as he heads towards an election.
Emma: Good news for the economy then, and broadly some good news for households and for the public sector, as you say in the budget. One of the things however that is potentially less good news is this spectre of inflation. All this spending and indeed everything that’s happened in these last couple of years, with difficulties with trade, and energy prices, is building up inflations and that does affect markets doesn’t it? And it affects stock picking and fund picking, and your job.
Steve: Exactly, at the moment what we’re seeing is inflation being boosted by rising energy prices. Also when the world sort of shut down in response to the pandemic, it interrupted production schedules and it interrupted the movement of ships around the oceans, and we’ve ended up in a situation where there’s an awful lot of goods that were either not produced or have ended up in the wrong location, compared to where they were expected at this time, which is leaving manufacturers around the world struggling to get hold of all the components they need to produce finished goods. They’re all scrambling to try and get hold of stuff and paying up whatever is necessary to keep their own production moving, and this is all feeding through into inflation. We are seeing price rises accelerating in nations around the world, not just at home. Whereas previously we were looking at an economy that was flirting with deflation, now we’re seeing inflation rising well above the target levels central banks have been operating with in recent years. In the UK, I think the OBR was forecasting 4%+ inflation going forwards and we’ve already got inflation over 5% in the US. And this does impact markets. Markets fret that if the inflation does not prove to be transitory, it seems likely that interest rates will have to respond, and we’re expecting the first move in UK rates for some time to take place in the next few months.
Emma: And rates have already started to rise across the world, we’ve seen in Brazil in the last week that they’ve actually hiked rates in order to try and battle double-digit inflation. In New Zealand they raised rates earlier this month for the first time in seven years and indeed are forecasting 5 or 6 rises in the next couple of years. As you say, the Bank of England governor here in the UK, Andrew Bailey has signalled a potential rate rise, although the Monetary Policy Committee seems to be a bit more divided on that because only 2 of them voted for a rate rise in the last meeting. But let’s say that does play out and Andrew Bailey is correct, what impact do rising rates have on equity prices?
Steve: It depends how much they rise. At the moment people are talking about maybe 2 or 3 interest rate increases by the end of the next 12 months or so, and given the rates tend to move by about a quarter of a percent a time, that’s going to leave interest rates still pretty close to 1% which is very low in historic terms. And I think if that’s all that we get to see then equity markets will brush that off. Where we’ll get to see significant market reactions will be if inflation continues to rise and looks to be carrying ahead with steam because at that point, Central Banks could be forced to go a lot further than the sort of relatively token rate increases that we’re talking about so far. And that’s when companies will feel the pressure. When servicing debts could become harder to achieve and at that point, markets will be looking to differentiate between the stronger players and the weaker, and stock selection will be absolutely vital.
Emma: Steve, thank you very much.
Susannah: That was Steve Clayton, HL Select Fund manager with our head of investment research Emma Wall. You’re listening to Switch Your Money On from Hargreaves Lansdown.
Sarah: And finally, it’s time for the quiz.
Susannah: Yes, this time to reflect our travel theme, I’ve been looking at some of the more unusual trips and tours you can book, and as ever it’s up to you to guess which ones are actually bookable, and which ones I’ve invented.
So, Sarah, is there a wrestling themed cruise?
Sarah: I know wrestling is massive in the US, so I suppose, why not stick it on a boat too? It wouldn’t be my first choice of holiday, but I’m going to say this is real.
Susannah: You’re right, there is. Wrestler Chris Jericho took the Rock ‘N’ Wrestling Rager at Sea: Triple Whammy from Miami to the Bahamas at the end of October with wrestling shows, live music, and even… rather oddly a wrestling themed game of family fortunes.
Right, how about a cruise for bikers?
Sarah: Now that’s just daft. Surely bikers want to spend their holidays on their bikes, and this is the one place you can’t take them. So this is definitely not real.
Susannah: I’m afraid, you’re wrong. The High Seas rally has just returned to port in Florida after a trip round the Bahamas. It was wall-to-wall rock and roll, parties in every port, and the chance for bikers to hang out with other bikers.
How about a survival break on a desert island?
Sarah: Now that sounds like a brilliant way to turn a sunny beach holiday into hard work. I’d like to think it doesn’t exist, so I’ll say no.
Susannah: I’m afraid it does. You get one night in a luxury hotel in Panama, a couple of days learning how to do things like use a machete and weave palm leaves, and then you’re cast away on a desert Island for three days. It does sound like hard work.
And finally, can you go on a wine tasting tour of Lanzarote without leaving your home?
Sarah: That doesn’t sound like it’s a patch on an actual wine tour of Lanzarote, but it does sound like the kind of thing people started doing during lockdowns.
Susannah: Yes, it’s a Zoom tour a company set up after so much travel stopped in 2020. You take a tour online, and they send you a selection of virtual wines to taste during the tour, so you don’t get a holiday, but you do get something nice to drink.
Sarah: I think that although it involves being stuck at home it actually sounds much more like my kind of holiday than the others.
Susannah: I don’t know. One of those cruises sounds quite fun. But before I go and start packing my bags- we need to remind you that Emma and Steve recorded their interview on the 28th October 2021 and the rest of this podcast was recorded on the 1st November 2021, and all information was true at the time of recording.
Sarah: Nothing in this podcast is personal advice – you should seek advice if you’re not sure what’s right for you. Investments rise and fall in value, so you could get back less than you invest. As you’ve heard – tax rules can change, and any benefits depend on individual circumstances.
Susannah: Yes this is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.
Sarah: And this hasn’t been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
Susannah: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.
Sarah: You can see our full non-independent research disclosure on our website for more information. So all that’s left is for me to thank our guests, Steve, Brian, Sophie, Emma and our producer Elizabeth Hotson.
Susannah: Thank you so much for listening. We’ll be back again soon - so if you enjoyed this podcast please do let us know what you think, and do subscribe wherever you get your podcasts so you get a fresh new episode in your inbox as soon as it’s ready. Goodbye.In this episode, Susannah and Sarah discuss the recent Budget announcements, before looking at the prospects for recovery in the travel industry. HL’s Sophie Lund-Yates examines how the turbulence could affect shares of both airline carriers and tourism companies. Plus, travel firm Managing Director, Brian Young gives insight into what it’s been like navigating the uncertainty faced by the sector. HL’s Head of Investment Research, Emma Wall talks to HL Select Fund Manager, Steve Clayton on what he makes of the budget and the outlook for investors.
Susannah: Hello, and welcome to Switch your Money On from Hargreaves Lansdown. I'm Susannah Streeter, I'm the senior investment and markets analyst at Hargreaves Lansdown. And I'm here with Sarah Coles, our personal finance analyst. Sarah, nice to be back with you, although as ever we're still broadcasting from our own broom cupboards and boot rooms.
Sarah: Yes, and mine is freezing now. It's all my own fault really, because I'm still refusing to turn the heating on.
Susannah: I'm sure you're not alone, half the country is probably working in their coats, trying to stay warm without breaking the bank now the cold weather has arrived. It's one impact of the ongoing energy crisis that's having a massive impact across the board. In fact, we're devoting this podcast to the topic, and what it means for consumers, businesses and investors, in an episode we're calling The Power Trip.
Sarah: Yes, the soaring price of energy is putting businesses under pressure, and Sophie Lund Yates, equity analyst here at Hargreaves Lansdown will look at the impact of the rising oil price on listed businesses, and how the oil majors are working to reduce our reliance on fossil fuels.
Sophie: Hi both, yes looking forward to digging into those specifics later on.
Susannah: One key to making alternative energy sources work is effective battery storage, so we'll be talking to the co-founder of Zenobe Energy, which provides battery storage services - Nicholas Beatty. Nicholas, thanks for joining us, it must be strange to be one of the few businesses set to benefit from the current crisis, you must be busier than ever…
Nicholas: Good morning Susannah.
Sarah: and Emma Wall our head of investment research here at Hargreaves Lansdown is going to talk about the fundamentals of investing in energy/commodities & Evy Hambro, manager of the BlackRock World Mining Trust. Plus we'll have our quiz of course - this time looking at some of the more bizarre alternative energy sources. But before we get plugged into the energy crisis, it's worth casting ahead to one of the biggest stories of the next couple of weeks, the Budget. Rishi Sunak will deliver his speech on 27th October - brilliantly timed to destroy my half term holiday plans - and as ever there's a huge amount of speculation about what might be in it.
Susannah: Yes we've seen all sorts of discussion about possible tax rises and spending cuts. Sarah, what sort of things are you worried about making an appearance?
Sarah: There are a handful which would be a real mistake. There's real concern that pensions could be seen as the Chancellor's piggy bank again. There are two allowances to keep an eye on. The lifetime allowance is the maximum your pension can be worth over a lifetime, and the annual allowance is the most you can pay in during the year. They're both set at the level that looks likely to only bother the very wealthiest, but in reality, this neither is a vast sum of money in pension terms, and a change to the lifetime allowance is the kind of retrospective taxation that makes it incredibly difficult to plan for the future. We also don't want to see the dividend tax allowance cut. This has only been around since 2016 and has already been cut from £5,000 to £2,000 in that time. It would be a major blow for investors with portfolios outside their ISAs, and people running their own businesses and paying themselves in dividends. They're already one of the groups who had least help in the crisis, so many of them have already taken a serious dent to their financial resilience. This would be adding insult to injury.
Susannah: And of course, there's always the risk of more tinkering round the edges. The government asked the Office for Tax Simplification to review inheritance tax and capital gains tax. It has also looked into the structure of tax relief on pensions. We're not expecting any announcement of big reforms here in the Budget. In the interim, there is always the temptation to make piecemeal changes to free up a bit of cash here and there, but this kind of fiddling can cause needless complications and unintended consequences.
Sarah: But it's not all bad news. We may also hear the details on the NS&I Green Bonds. We already know these are three-year fixed term bonds, which will support environmental projects. But we may find out the interest rate available, and savers will be keeping their fingers crossed it's going to be a boon for their savings as well as the planet.
Susannah: The green agenda is on the rise, and unsurprisingly so, energy is increasingly in focus as we wrestle first with gas prices and now with the oil price. Along with the labour shortages, port blockages, soaring energy costs are just one of the rising prices slamming businesses from all directions right now. Energy intensive industries have lobbied the government for funding to help them survive without shutdown as winter looms. Consumers are protected to some extent until next spring - even though around 2 million have been switched to higher tariffs already after the collapse of cheaper suppliers.
Sarah: Yes. Including mine, which was really annoying. For everyone else, the energy cap offers protection for now, but a new cap will be set in April, and it looks as though it's going to go up substantially. And in the meantime, unless government steps in businesses will have to keep absorbing higher costs - as they don't benefit from a price cap. So why is this happening? Is a simple case of an imbalance of supply and demand, with demand exceeding supply and pushing prices up, or is it more complicated that this?
Susannah: Yes, fundamentally it is supply and demand with the added complications of Brexit, climate change, and the post pandemic surge in demand particularly from Asia. But it's also very much because gas is seen as a transition fuel - it has almost half the carbon emissions as coal - and so until more renewable fuel sources come online - countries will be stepping on the gas even more. However, because it's a fossil fuel - there has not been much exploration and development of new gas fields. Supply from Russia has dropped as the country has built up its supplies - and in addition - we are feeling the pinch here in the UK in particular because we have less gas storage capacity than in other European countries -
Sarah: And the oil price is being driven up too - pretty much the last thing we need with the stampede for fuel we've seen on the forecourts
Susannah: Yes there was hope that the oil cartel OPEC+ would turn on the taps a bit more to relieve prices - but not just yet - they are sticking with only a bit of an uplift in production in November - and with some power stations now expected to switch from gas to oil given how high gas prices have gone - the expectation is that the oil price could be pushed up even further in the months to come - so it's all come together as a bit of a perfect storm for prices.
Sarah: And it's not just fossil fuels we have to worry about, a lack of windy weather has also caused problems with wind power. Hasn't the lack of wind this summer partly been behind the soaring gas price?
Susannah: It's certainly not helped -and is highlighted a bit of a weak link in the UK transition to renewables - just as we needed energy the most, the wind in the North Sea died down over the summer months usually we are reliant on wind for around a fifth of the UK's energy needs and so it forced the energy markets to scramble for gas reserves to heat homes and power businesses.
Sarah: Battery storage appears to be part of the answer - the technology has a role to play in ensuring homes and businesses can be powered by green energy even when the sun isn't shining, or the wind has stopped blowing. And that's the business our guest on the podcast today is in - let me bring in the co-founder of Zenobe Energy - Nicholas Beatty. Nicholas why are battery solutions so key to the widespread adoption of alternative energy?
Nicholas: Batteries are there to be able to store the energy and be able to release it when its needed. So, you've already pointed out we've had rather less energy generated from the wind this year than we have since 1961. As a consequence of that, we've had a lot of the energy generated at a period where we're not able to use it. So the simplistic answer is frankly, using the batteries we're able to store the energy when it's being produced that can't be used because there's no demand for it, then release it at a time when the demand increases and exceeds the supply from the normal generators.
Susannah: If expanding battery storage capacity is to help relieve this, why isn't this happening more rapidly?
Nicholas: As you can imagine, it's not an easy thing to achieve and there's an enormous amount of costs associated with getting the batteries put into the grid at the right places. As you know, the National Grid has been split into a number of different operations, one of which includes the separation of the transmission system, which is now called the ‘ESO', although it still sits under the National Grid ownership. As a result of that, ESO has been working very hard to see what the right structure for the transmission system should be for the future to meet the requirements, as a lot of this generated capacity has come on. And they are taking some time to put out the tenders that are required to bring much larger batteries onto the system. That has been, I think, one of the major reasons for holding up this process. The capital is available in the market to support large energy developments and large battery developments. But at the moment, we need to be able to see the contracts that are available that can support the investment in this area and there's still quite a lot of debate and crafting of the contracts to meet those requirements and get that capital flow moving.
Susannah: It must be incredible frustrating, knowing that the technology is there, it exists, yet isn't being ramped up.
Nicholas: It is frustrating but you've got to bear in mind that the UK is ahead of pretty much any other country in the world in terms of the regulations that are available to deploy these storage assets, We, for instance have had investment by the two largest generators in Japan, who wanted to invest in a business in the UK, because they wanted to understand what it meant to deploy batteries. And because the UK's so advanced relative to other countries in this regard, we're able to help them understand that and now we're exporting that into Japan. So I wouldn't say it was entirely frustrating because we can see on the horizon there's a lot more opportunities for us to deploy further batteries. And as I said, the ESO is absolutely intent on getting that done and is just finalising a number of major contracts we believe will release the opportunity for independent capital to invest.
Sarah: Can I just take a step back and find out a little about you? So, how did you get into the battery storage business?
Nicholas: I live in Northamptonshire, and in about 2014 I had next door neighbours who were looking to put up a wind farm. The two villages near to where I live were very anti-wind farm, and as a consequence I suggested that an alternative could be to put up some solar farms, which we duly did, and we put up 2 solar farms on 25 acres. And then we put batteries on those farms to improve and optimise the economics and make sure that they operated in a more efficient manner. And those were the first batteries in 2016 in the UK that were co-located alongside the generation of solar farms. From that we went on and established Zenobe and we're now 75 Mega Watts of battery assets and another 100 Mega Watts in-build, one of the largest owners of batteries in the UK.
Susannah: There is still a relatively slow uptake of Electric Vehicles (EVs) despite a surge in September with around 32 thousand new EVs being registered - range anxiety is a worry - what solutions are there?
Nicholas: I think the first is that, if the government provides grants, I know they've been reducing the grant support they've offered which I think is right thing so that more people can partake in those grants and buy or lease EVs. So I think that that's more in the right direction. The technology is definitely developing in terms of the quality of the batteries, getting much more energy-dense than they were 5 or 10 years ago, so smaller batteries can take you further. Also the size of the batteries on the vehicles is increasing, so the range is increasing. And then the final thing is we're seeing quite a major change in the amount of choice the consumer has, as there are a lot of manufacturers that are beginning to release lots of new vehicles. Everything again is going in the right direction, it could be faster, and equally the government is absolutely supporting, with grants, the amount of EV charging that's available around our roads. And again, I think that will address the range anxiety issue.
Sarah: Is it particularly in the infrastructure for charging that you think the government has a role now, or do you think there's other ways they could help?
Nicholas: I think it's in both the infrastructure question which needs to be addressed because that's obviously quite an expensive part of the whole process. But I think also it's giving grants to get the first lot of adopter into EVs. So people can say 'I drive an EV' and talk to their friends and neighbours, etc. I think it will be very like the solar process where the government was very successful in supporting solar in the UK, and once they got that industry established, they were able to turn off the funding and allow the private markets and the consumers to make decisions about what they wanted to do,
Susannah: You've already been helping to try and solve public transport puzzles when it comes to EVs. How have you been involved at Zenobe Energy?
Nicholas: We have a large business which is involved in supporting the major bus operators here in the UK, and now outside the UK in Australia and New Zealand. We've solved 2 problems for them, the first one is being able to design, finance and implement the electrification of their depots. The depots which diesel or hydro buses operate from don't have sufficient electricity so one of our solutions is to be able to provide stationary batteries at the depots which can store the energy in the day when the buses are out on their route, and then release it at night with our software which regulates that process. And that's a much cheaper way than upgrading the electricity supply into those depots, that's been one major area where we've helped the public transport begin to electrify. And the second one is actually where we've helped finance the buses themselves. The buses essentially are two components. One is very expensive, the battery and the other is what we call the chassis, or the rest of the vehicle. So what we've been doing is putting our battery on the bus which as a service to customer, so we take all the technology risk associate with that, we put our telematics and our software on the vehicle which can also talk back to the charging. And through that we're able to optimise not only the charging of the vehicles but also optimise the use of the vehicle during the day, providing data so the operators can make sure the drivers are driving the vehicles in the most efficient manner, and also financing those batteries so the total cost of life of the vehicle is down and equivalent to a diesel vehicle. I think we represent about 30-40% of the UK market, in terms of ownership and support for electric buses. And we're doing that not just with the major operators but also with the local councils.
Susannah: So you've certainly been helping in terms of the sustainable transport infrastructure, but just how sustainable is the battery storage business though? Rare earth minerals are essential components and there are concerns about the mining of some of these materials.
Nicholas: Absolutely. You've got to remember that lithium is a mineral which is very abundant, it's just very expensive to get it into the pure form for the batteries we're talking about. There's a lot of lithium for instance in Chile, actually in China they're quite integrated back into lithium mines around the world, Australia obviously has it as well. But at the moment, we're producing about 850,000 tonnes, we need to substantially increase that output, probably by a factor of 3 times over the next 5 years. So there needs to be significant investment in the mining and the extraction of this material. It's much quicker and easier to build a digger plant where you build the batteries, than it is to build an extraction mine where you get the quality of the raw lithium up to the level which is required for the batteries.
Susannah: Nicholas thanks so much for talking to us
Let's bring in Sophie Lund-Yates about this - gas and oil companies are being massively buoyed by soaring prices. Is there any part of this that's profiteering?
Sophie: Hi Susannah. So it's not really that simple necessarily. Gas prices are set by the market and this is a decentralised market - by that I mean it's price is determined by traditional supply and demand dynamics. Retail suppliers have to pay the market price for those goods, so if they're having to buy at sky high prices then this will filter down to their customers. It's also worth remembering that energy suppliers themselves are subject to government price caps, which are there to protect consumers. The cap is reviewed every 6 months and is influenced by the going price of gas. This won't stop companies putting their prices up in response to gas prices, but it does help prevent prices being inflated above and beyond what is fair. So I'm not sure profiteering is the right way to look at this really.
Susannah: The fluctuations in price are really outside of their control and will fluctuate, so it's important to focus on the longer term strategy shifts when it comes to the low-carbon debate
Sophie: It's really important and depending what your preferences are, it's really crucial to look at the fundamentals of a business, and as you're saying, gas prices are so out of their control, it's important to look at what's going on in the core of the business and the things they can control. And when you're looking at that I think it's wrong to put them all in the same bucket, as it were, particularly when you're looking at the shift to renewable energy. So starting with BP. The main source of their all-important free cash flow, I mean what's left after paying for the running of the company, the money that is left to pay dividends or pay down debt - that is still coming from legacy, old fashioned oil and gas assets. So really BP's shift to focus more on renewables is quite brave, certainly braver than some rivals. Committing future spending to lower carbon products - in the 1st quarter of this year it spent $1.9bn on lower carbon projects, against $1.3bn on oil production and operations. Not just that but the group plans to sell billions more of traditional assets in coming years, with low carbon project spending up tenfold to $5bn by 2030. We're seeing a real effort to change from this company, but it's putting a lot of eggs in that basket so while an admirable set of goals, it increases risk in quite a big way. If the shift to renewables stalls, or is slower than expected, BP will be very exposed
Susannah: So that's BP - what about Shell because it's been making some headlines with contracts it's been signing to potentially develop more solar and wind projects - however is this still small fry?
Sophie: It's less of a clear-cut strategy, and majority of spending is funnelled towards traditional Upstream (exploration for and extraction of crude oil, natural gas and natural gas liquids. It also markets and transports oil and gas, and operates the infrastructure necessary to deliver them to market). So from an investment perspective it's more of a traditional oil & gas option for now - not that it won't pitch itself towards greener options, but for now it's focussing its investment and growth on tried and tested oil & gas
Susannah: Which other companies have you been watching in the renewables space?
Sophie: Vestas. Denmark based, in the business of manufacturing, installing and servicing wind turbines. Biggest money maker = power solutions (just over half of 2020 revenue). 29,000 employees. Good long-term position but important to keep in mind that supply chain problems are likely to cause an issue for the foreseeable future, so could see some volatility
Sarah: Sophie many thanks. Now we can hear from Emma Wall our head of investment research here at Hargreaves Lansdown - she's been talking to - Evy Hambro, manager of the BlackRock World Mining Trust about the big issues facing commodities investors amidst the rising oil price.
Emma: Hi Evy
Evy: Hi Emma, how are you?
Emma: I'm very well thanks, how are you?
Evy: Pretty good
Emma: So a lot going on in commodity markets at the moment. Energy prices, natural resources - what's causing the current rally?
Evy: We've been in a long-term journey here and what we're seeing is some acuteness playing out in today's moves, and some extreme moves based on different commodities and different supply and demand characteristics for each one of them. But I'd say the general theme that we've been seeing that's been kind of driving us to where we've got to is that over the last decade, almost exactly a decade now, we've seen long term trends in resource companies choosing to be much more disciplined in how the way that they allocate capital. And as a result of that, they have made a lower level of reinvestment back into new supply because they've been targeting value over volume, and this long term trend of underinvestment has improved returns for investors in the businesses but what's it's done is it's left us at today's point where we're now seeing very very strong growth in demand and likely to see strong rates of demand for the next couple of decades, based around the required investment for the transition that we're seeing globally for the net-zero economy. And therefore without investment into new supply, commodity markets are likely to remain tight. And what we're seeing in the short term, just recently is where there is some form of disruption like we've seen in natural gas markets, and we're seeing now play out in thermal coal and other areas, that's causing some very large price moves because the markets just are really tight.
Emma: So obviously you don't have a crystal ball, but you've alluded there to the fact that some of these tailwinds are short-lived so what can we expect from prices in the near term?
Evy: We always stray away from trying to be the experts on the short terms because nobody really has the insight to be able to anticipate what's going to happen in the next hour or so on. What we tend to do is look at those long-term trends and we're in a period now of what we are calling 'green-flation'. We're seeing significant inflationary pressures across the world, be it in terms of input costs and wage growth. We're also seeing green-related inflation based on demand pull. The move the build that huge amount of net new infrastructure to get through the carbon transition over the next couple of decades is going to be driving that demand growth, and I think what we're seeing right now is we're going to see well supported commodity prices and as a result, great margins for commodity producers.
Emma: So, I imagine that's creating some investment opportunities. Where's attractive to you at the moment?
Evy: I'd say the whole space looks attractive, just as a generalisation. We've got most companies today trading at multiples well below their historical averages, across the resources space, especially in the mining area. And whether you look at price-to-earnings multiples or many of the other characteristics then you know, you will see a lot of value there. The other factor is that the resource companies after the kind of problems at the end of the China-related cycle, over a decade now, they were carrying huge amounts of debt. And what's happened over this last decade is that companies have significantly de-leveraged themselves, so therefore the risk for investors investing in resource companies today is much lower because they don't have that balance sheet indebted-ness. So the quality of the investment has risen, the capital discipline is much stronger and we've got this incredibly positive tailwind with regarding the demand growth. And therefore commodity prices are driving earnings and companies are choosing to return the surplus cash that they have. And you know, it is growing at a very rapid rate now, they are choosing to return it via dividends and I some cases, share buy backs. So we're seeing opportunities across the space, but most narrowly if you looked at it, it would be the broad mining companies.
Emma: Evy, thank you very much.
Susannah: You're listening to Switch your money on from Hargreaves Lansdown
Sarah: and finally, it's time for the quiz
Susannah: Yes, we've been hearing about some of the exciting innovations happening in the energy world, so I've been digging out some of the more unusual alternative energy sources, and it's up to you to guess which ones are real and which ones are figments of my imagination. So is there a country that runs buses on vodka?
Sarah: I can't see how that would work. It sounds horrendously expensive, that has to be made up
Susannah: No, and it's actually a money-saving option. Alcohol is taxed really heavily in Sweden, so there's a serious smuggling trade. The beer, wine and spirits the authorities confiscate is actually turned into biogas, which runs trucks and buses and even a train. Confiscated alcohol technically has no value, and it used to be poured down the drain, so rather than being expensive, it's actually a really cheap fuel. How about a bus that runs on human waste?
Sarah: I now I've actually heard of that one. It was the number 2 route in Bristol for a while wasn't it. I remember when they took it out of service the headline was that the poo bus had gone down the pan.
Susannah: Yes, it's no longer running, but Bristol still has biogas busses, which run on the methane produced from waste food. All of which sounds lovely. And finally, can you power your smartwatch using your body's heat?
Sarah: I definitely couldn't at the moment. That doesn't sound very likely at all, so I'm going to say no.
Susannah: Well yes you can. At the moment there are only a handful of early devices around, but in time it could become the norm. Although maybe not in your broom cupboard Sarah.
Sarah: Indeed, in fact I think I may need to give in entirely and put the heating on.
Susannah: But before I go and get my jumpers on and my candles out- we need to remind you that this was recorded on 18 October, and all information was true at the time of recording.
Sarah: nothing in this podcast is personal advice - you should seek advice if you're not sure what's right for you. Investments rise and fall in value, so you could get back less than you invest. As you've heard - tax rules can change, and any benefits depend on individual circumstances.
Susannah: yes this is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.
Sarah: And this hasn't been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
Susannah: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.
Sarah: You can see our full non-independent research disclosure on our website for more information. So all that's left is for me to thank our guests, Evy, Nicholas, Sophie, Emma, and our producer Elizabeth Hotson.
Susannah: Thank you so much for listening. We'll be back again soon - so if you enjoyed this podcast please do let us know what you think, and do subscribe wherever you get your podcasts so you get a fresh new episode in your inbox as soon as it's ready. Goodbye.In this episode, Susannah and Sarah discuss the upcoming budget announcements from the Chancellor, before looking at the energy crisis and what this means for consumers, businesses and investors. HL’s Sophie Lund-Yates examines the different approaches to lower carbon energy supply by two of the oil majors. Plus Nicholas Beatty, co-founder of Zenobe Energy, answers questions on the future of battery storage and its role in the switch to renewable energy. HL's Head of Investment Research, Emma Wall is also joined by Evy Hambro, manager of the BlackRock World Mining Trust, on the fundamentals of investing in energy and commodities.
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