Bedrock’s Newsletter for Friday 24th of January, 2020
24 January 2020


 Friday, 24th of January 2020

“It’s freezing in New York – where the hell is global warming.”

– Donald J. Trump





The great and the good (and various hangers-on) have been meeting in Davos for the past week to mingle, drink champagne, and pontificate about the state of the world. Without an invitation from the World Economic Forum (WEF), punters have had to fork out some CHF 500k to attend the exclusive event in the Swiss ski resort (which has the dual benefits of raising money for the think tank and keeping all the riffraff out). Although skiing might be on the agenda for some, most of the Davos men and women will not have dropped all that cash just to share a chairlift selfie with Donald Trump, Prince Charles or Jamie Dimon. After disembarking from their private jets and checking in to one of the many lavish hotels made available, the coterie of CEOs, celebrities, and ‘world leaders’ in attendance (78% of whom were men in 2019) have been quick to call for action on inequality and climate change – two subjects close to their hearts. With the rise of left-wing and right-wing ‘populist’ parties, elites have become increasingly aware of how globalisation and automation have made us richer, but also more unequal (at least within countries, if not between them). Crucially for those who flocked to Davos a week ago, the inequality and attendant lack of dignity felt by disposed communities is creating a new political dynamic in Western countries that threatens to shake the foundations of capitalism itself. Finding a more balanced approach to economic growth and wealth distribution is now mission critical for those who do not want to see the baby thrown out with the bathwater. The (still ongoing) US-China trade war, which many Davos-types hate, is the canary in the coalmine for a very different kind of beggar-thy-neighbour political economy; one in which saving dying industries, as opposed to investing in new ones, is the government’s highest priority because no effective safety net or alternative well-paid employment exist for workers who lose their jobs. This is not the path to prosperity, but the road to ruin – and one we should avoid.


Rockstar teenage environmental activist Greta Thunberg helped put climate change at the heart of the political debate in Europe last year and her appearance onstage at Davos this week shows that the corporate world has begun to take note. They should. Not only are green politics on the rise and climate change a threat to planetary biodiversity and human communities, but investments in green technology companies look increasingly attractive too. The price of renewable energy has fallen sharply in the past few years and unsubsidised onshore wind and solar projects are now often cheaper than any fossil fuel alternative according to data compiled by the International Renewable Energy Agency in 2018. Indeed, the pace of price decline has been so rapid that new onshore wind and solar photovoltaic power is soon to cost less than the marginal operating cost of existing coal-fired plants! The sustainability revolution will touch most sectors and transform many from shipping to wastewater management. This presents a unique opportunity for investors. For years, green technology companies were ploughing all of their cash into R&D and depended on extensive public support to keep afloat. However, the tide is beginning to turn as these investments pay off, and we see an inflection point approaching fast for many such firms as profits and free cash flows turn positive. Now is the time to invest.


Most likely absent from the Davos runway were any planes from Wuhan. The Chinese city of 10m souls is in lockdown after the emergence of a SARS-like coronavirus at a city wet market early this year. So far, the virus has killed 26 people in China and spread as far afield as the US and Japan, while cases in Europe are likely to emerge in the coming days. Like some apocryphal horror story, stalls at the wet market were offering exotic (but apparently edible) species, from koalas to giant salamanders, for sale and the Chinese authorities are yet to determine which may have been carrying the virus before it leapt to its human hosts. It is not yet clear how successful the containment strategy has been or how many people the virus may yet infect, but the risk that things deteriorate matters for markets. Should transport and the tourism industry be affected in other major cities, Q1 economic aggregates could be impacted. Moreover, the spending spree that normally accompanies the Chinese New Year holiday, beginning tomorrow and lasting until 8 February, may not materialise. This would also likely have a dampening effect on headline prints. Of course, in a tail risk scenario in which the virus spreads widely beyond China, the economic implications could be much more severe. However, that looks unlikely for now – and the markets certainly agree. They are much more focused on the positive data out of Europe where the downward spiral looks like it may have been halted even if the PMIs do not show an economy in rapid recovery.