Markets Weekly podcast – 11 March 2024
Bitcoin update and green ventures
11 March 2024
This week, Damian Payiatakis, our Head of Sustainable & Impact Investing, explores the outlook for early-stage green ventures. He also considers potential investor opportunities and the impact of increased government support in this space. Meanwhile, podcast host Henk Potts discusses record highs in Bitcoin, the UK Spring Budget, the latest developments in China, and interest rates in the eurozone.
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Henk Potts (HP): Hello, it’s Monday, 11th March, and welcome to the Barclays Private Bank Markets Weekly podcast, the recording that will guide you through the turmoil of the global economy and financial markets. My name is Henk Potts, Market Strategist with Barclays Private Bank. Each week, I’ll be joined by guests to discuss both risks and opportunities for investors.
Firstly, I’ll analyse the events that moved the markets and grabbed the headlines over the course of the past week. We’ll then discuss the investment backdrop for early-stage green ventures. And, finally, I’ll conclude by previewing the major events and data releases that are likely to shape the week ahead.
Equity markets struggled a little bit for direction last week, although stocks continued to trade at elevated levels, the data continues to suggest a stabilising of economic conditions, an easing of inflation and, eventually, lower interest rates. Beyond the corporate picture, however, there was plenty of action in cryptocurrencies and commodities to keep traders interested.
In terms of equity market performance, the S&P 500 was down last week, but it was only down three-tenths of 1% and is still up 7.4% year to date. Gold rose for an eighth consecutive session on Friday, extending its rally into a new all-time high and getting close to the $2,200 an ounce mark.
Bitcoin also rose to a record high as regulators approved a crypto ETF, which should pave the way for greater institutional participation and provide some extra protection for investors. One of the big questions that clients have been asking is should they seriously consider cryptocurrency as part of a balanced portfolio.
Well, it may come as no surprise, but we continue to be a little bit cautious, as a currency, appreciate that Bitcoin is not backed by an economy, it’s not been a reliable store of value and has limited use as a medium of exchange. As an investment, Bitcoin doesn’t generate a cashflow and doesn’t pay coupons or dividends. Moreover, of course, investors have to battle with outside volatility, a lack of transparency and security concerns.
Now, our quant guys Nikola and Lukas wrote about cryptocurrencies in the February Market Perspectives, so I urge you to look at that article where they clearly point out that drawdowns, compared to other asset classes, have been way more aggressive and recovery periods have taken much longer. Also, cryptos offer a medium correlation to equities, therefore, don’t really fulfil that role as a portfolio diversifier. Therefore, as I say, we continue to be pretty cautious.
Moving on to the macro environment, where the main focus last week was on the National People’s Congress in China, the UK Spring Budget, the European Central Bank’s interest rate meeting and the US employment report.
Starting with China, where the key targets were revealed. They included a 5% target growth rate for 2024, which, of course, is very similar to what we saw in 2023; a 3% inflation rate; a fiscal deficit of 3% of GDP and surveyed unemployment rate of 5%. The reality is that the policy response continues to be pretty underwhelming from China, as policymakers shy away from the debt-fuelled growth of the past.
So, what’s our outlook for the Chinese economy? Well, we still think that 5% growth target is achievable. The downside risks, however, without a more significant fiscal package, are clearly evident. You’ve got weak base effects that are starting to shine through, manufacturing and construction remains under pressure, SMEs have clearly been struggling and underlying demand remains weak.
Now, the property market continues to be dysfunctional and a sustained rebound in services and consumption looks unlikely, given the path through from negative wealth effects, including declining house prices, elevated levels of household debt and a subdued labour market.
In terms of the investment outlook for Chinese equities, well, actually, they’ve been on a bit of a revival in the past few weeks. If you look at the MSCI China Index, it’s up round about 9% since the middle of January. However, I think it’s important to put that performance in an historical context, as the MSCI China Index still remains 55% below the peak we saw back in February 2021 while global equities, as we’ve talking about this morning, continue to register new highs.
Chinese equites are cheap in absolute and relative terms compared to their global peers. It has to be said that the MSCI China Index trades at a forward-price earnings of around nine times. That’s versus an 11.6-times average for the past 20 years. However, in the absence of a catalyst and unless we see a sustained improvement in the manufacturing cycle, a decline in the US dollar, we don’t think Chinese equities are likely to be rerated soon.
Moving on the UK, where the much-trailed Spring Budget delivered the expected tax cuts, which were partly offset by some long-term revenue raising measures. The main feature was the higher-than-expected two pence reduction in the National Insurance contribution rate, accompanied by the freezing of fuel duty and the extension of childcare benefits. These measures, according to our latest estimates, will add only round about one-tenth of 1% to the level of real GDP over the course of the next two years, less than five-basis points of inflation. So, certainly not a significant gamechanger there.
What we do know is that the Budget made less happy reading for first-class flying, vape smoking and ‘non-dom’ owners with multiple homes. The Chancellor announced the decision to abolish the current non-dom system and replaced it with a residency-based one. These changes could generate as much as £3.9 billion of income per year, though that won’t show up until the latter part of the OBR forecast.
Looking at the latest numbers from the Office for Budget Responsibility, they showed better forecast growth, lower inflation and higher levels of unemployment compared to the projections they were offering back in November. The OBR now sees the UK economy growing at eight-tenths of 1% during the course of this year and then up to 1.9% in 2025, which, actually, still looks pretty optimistic to us given some of the recent weakness. They see CPI averaging 2.2% this year and then just 1.5% in 2025. The OBR do see unemployment rising in the UK. They’ve got it rising from 3.8% in the fourth quarter of this year to 4.5% at the end of next year. Public sector net debt peaking at 93.2% of GDP in 2027 and 2028.
But, overall, I think when you look at the UK economy and its finances, it remains uncertain and, ultimately, I think will be determined by factors including geopolitical developments, the inflation trajectory, the bank rate and, of course, gilt yields, along with migration developments and productivity growth. We remain cautious about the prospects for the UK economy. We see anaemic economic growth during the course of this year. In fact, we’ve pencilled in just one-tenth of 1%.
Elsewhere, as expected, the European Central Bank kept policy rates on hold, but lowered growth and inflation projections. The European Central Bank expects growth of six-tenths of 1% during the course of this year, and then 1.5% in 2025. We see headline inflation at 2.3% this year, then back at that 2% target rate in 2025.
We think there are some clear signs that the Governing Council is becoming more confident that inflation will return to target in a timely and suitable manner, but stopped short of declaring victory. The debate around reducing the restrictive policy has clearly begun, but the timeframe remains questionable, with President Lagarde saying that they need more data, some of which they’ll have in April, and they’ll have more conclusive evidence, I think, by June.
Traders seem to be coalescing around a likely cut in June with markets pricing in a mere 25-basis point reduction at that time. In the US, Friday’s mixed employment report helped to ease concerns that the tight labour market may infringe upon rate cuts. Now, the US economy still created a robust 275,000 jobs in February, but there were downward revisions to January and December’s nonfarm payroll numbers. Average hourly earnings moderated and the unemployment rate rose to 3.9%, so perhaps taking a little bit of pressure off policymakers there.
So, that was the global economy and financial markets last week. In order to discuss the potential opportunity for investors in early-stage companies, to focus on environmental challenges, I’m pleased to be joined by Damian Payiatakis, Head of Sustainable and Impact Investing for Barclays Private Bank and Wealth Management.
Damian, good to have you with us today. We know that 2023 was recorded as the hottest year on record and yet, in one of this month’s Market Perspectives articles, 2023 saw the lowest amount of venture capital raised for green ventures since 2020. So, things are getting worse. Many listeners might be wondering why aren’t we seeing more companies and capital looking to address environmental issues, and should they be considering this sector for their portfolios?
So, I’m interested to hear your perspective, but, before we start, what are we really talking about here? We’ve heard, of course, many different terms. We hear cleantech, we hear climate tech, we hear green tech etc. What’s the difference, if any? Talk us through that part before we go on to what the real opportunities are in this space.
Damian Payiatakis (DP): It’s great to be back, Henk, and you’re right. What to call the categories of ventures addressing environmental challenges can be as confounding as the underlying forms themselves. I mean, we could draw all sorts of Venn diagrams but we’re audio-only, so let me try to quickly clarify two of the categories, climatetech and green tech.
The primary aim in motivating climatetech ventures is really to mitigate climate change or, more specifically, the greenhouse gas emissions or, to some extent, increasingly to adapt to the effects of climate change. However, climate change is not the only environmental predicament that societies or companies face. You know, for example, we can see water stress, water scarcity, most recently in places like Mexico City or India, and I think it may be shocking to some listeners that even the UK is expected to face water stress in the near future.
So, ensuring access to clean water is increasingly an issue both for consumers and industry alike. A venture providing clean-water solutions in emerging markets is not actively trying to mitigate those greenhouse gas emissions that cause climate change. So, as a result, they wouldn’t be classified as climate tech, they’d be classified as cleantech. And so, with cleantech, what we’re really talking about are ventures primarily focused on better use of our planetary resources and on the interaction with the environment.
Of course, there are all sorts of other challenges. Valuing nature and biodiversity is creating a new sphere of nature tech or nature-based solutions as well. And I think even if these aren’t quite synonymous and boundaries can blur between these areas and terms, arguably, that cleantech venture may be a solution to adapt to climate change. And even though it’s not as precise, they’re used a bit interchangeably. I often use just green tech as an umbrella term.
HP: OK. So, let’s go back to the key question, 2023 wasn’t a good year for money flowing into the climatetech market, certainly compared to 2022. Investment into early-stage green ventures fell, I think, somewhere between 12% and 13% depending on how you calculate it. Why would 2024 be different?
DP: Yeah, the drops in total investment were substantial, but we’re still talking about between $30 billion and $50 billion of investment into early-stage ventures. And also, let’s recall, it wasn’t a good year for most early-stage investing. Some analysts concluded that the total market was down nearly 40% last year. So, green tech held up a little bit better than the general VC market, and part of that downturn, as listeners will know, is driven by the macro environment, the higher interest rates, recession expectations, market uncertainty. So, last year was easier for investors to take a bit more of a wait-and-see approach.
I think starting to look at 2024, many of the same headwinds are there, albeit they’re potentially abating. Moreover, what we did was added about four reasons why we’re seeing some individuals and families and family offices investing and could see even more do so next year. And those really are, first, ventures are increasingly at appealing valuations. Secondly, governments are doing even more to stimulate green growth. Next, portfolios may benefit more from private markets exposure. And lastly, we’re seeing families looking at this as an opportunity to build legacy.
HP: Damian, I know the articles cover those four main arguments, but can you outline them in a little bit more detail for us?
DP: Yeah, of course. Let’s start with the appealing valuation point. From that perspective, when we break apart that low investment totals that we saw last year, it was due really to a decrease in the deal size. That was down 28% rather than deal count, which was only down 3%. So, what you’re seeing is the same number of ventures but the pricing going down, and I think most industry players are expecting a continuation of flat or down rounds this year. So, really, it’s a good time to be a buyer.
Secondly, governments haven’t stepped back from the space. In fact, they’re forging ahead. We’re seeing that $369 billion of grants, loans and tax revisions of the US Inflation Reduction Act accelerating the US presence in this space. Companies are moving to the US to take advantage of those and we’re seeing more capital go in on that basis.
Also, you’re seeing other countries respond, either adopting or advancing similar strategies. The EU just passed, and will formally adopt, the Net Zero Industrial Act in April, which really strengthens their net-zero plan and provides more support for European industries in that overall aim to be the first climate-neutral continent by 2050.
And, of course, you know, for those that remember, the UAE consensus coming out of COP 28 may not have done as much as some had hoped, but there are some clear signals from it. You know, you see 118 governments that pledged to triple global capacity for renewable energy and double the amount of the annual rate for global energy efficiency in this decade alone.
HP: OK. So, the first two strategies are providing tailwind for green ventures from a macro perspective, the other two around private market exposure and legacy. They seem a little bit more personal. Is that right?
DP: Yeah, absolutely. But they’re no less relevant for investors. Look, we’re not here to give financial recommendations. Each investor’s circumstances are unique and that’s why we always have the caveats about taking advice. And, undoubtedly, investing in early-stage ventures has notable risks. But, if we look generically at investors’ portfolios, we know they can benefit from more exposure to private markets.
First, if you’re able and comfortable committing to a longer-term time horizon of investment, it means you’re getting compensated for that illiquidity. And as well, because you’re investing in early-stage green ventures, it means generally that there is a longer time until exit. And, quite frankly, that illiquidity can help you stay invested during the ups and downs of the traditional market.
And then, if we look at that fourth factor, legacy. So, I think most people will say they’re long-term investors, but what does that actually mean? If you start to think about framing your investment to something that affects your children or your grandkids’ lives, then all of a sudden investing to improve the world that you will leave them is actually much more appealing, and I think that’s what we’re seeing a lot of families, and even the oldest generation, starting to think about.
And even better, for those that are thinking about how do we ensure that the kids are ready to take over the family investments, these kind of green investments allow a bridge between older and younger generations and families. You’re talking about an intersection between family wealth and the concerns that everybody has.
HP: Well, it certainly sounds like reasonable starting points for investors interested in exploring and investing in green ventures a little bit more thoroughly. Any final thoughts for our listeners, Damian?
DP: Well, I borrow concepts from our Head of Behavioural Finance, Alex Joshi, who many of you will have heard on this podcast or met, or really should. And when looking at the cycle of market emotions, we know people generally feel most comfortable to invest during rising markets, when everything is going up. That feeling of optimism and excitement takes over. However, when it reaches exuberance, that usually precipitates that change in market conditions, which leads to falling markets.
And with green ventures, I think we’ve gone through that initial upcycle and now we’re really in a period of falling markets, or even recovering. But, of course, this is one of the more difficult times for investors to enter the market. So, for those with the confidence in the underlying structural trends that we’ve been talking about, those with the knowledge, skills and experience in terms of entering into private markets, I think it could be an opportune time to be looking at incorporating them in, even if it’s not easy. I mean, I think as, not an investor per se, but as Kermit the frog has aptly noted, it’s not always easy being green.
HP: Well, thank you, Damian, for your insights. Not only into Kermit but also, of course, the world of green ventures, we know that climate challenges are real and they’ll undoubtedly create opportunities for both companies and investors.
Let’s move on to the week ahead, where the focus will be on tomorrow’s US inflation report and Wednesday’s UK PMIs.
In the US, we expect headline CPI to rise 0.47% month on month in February, and the annual rate ticking up to 3.2%. That’s one-tenth higher than what we saw in January. That’s due to higher energy prices and only a marginal easing of core-price pressures.
In the UK, we expect the PMIs will point to an expansion in monthly GDP in January but should offset the effects of industrial action and unseasonable weather. Construction, we think, will continue to contract, albeit by less than we saw in December, while services activity is expected to rebound compared to the previous contraction that we saw.
And with that, I’d like to thank you once again for joining us. I hope that you’ve found this update interesting. We will, of course, be back next week with our next instalment but, for now, may I wish you every success in the trading week ahead.
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