CARBON EMISSIONS REVISITED

If we trace global temperature rises over the past century, it is very clear that the abrupt rise since 1980 coincided exactly with China’s rapid industrialization, mainly its coal intensive electricity production. (Figures I and II) 

Nothing that the USA or the “Green” European Union can do will dent this rise in global carbon emissions, unless China dramatically changes direction (and India and other developing nations, also eschew coal, as their major fuel).  So, is China now a great destination for ESG or “Green” investing?    Maybe.

China leads in the number of electric vehicle charging points, something President Bidden emphasized for the USA in last month’s address to Congress.  It also leads the world in solar panel and wind turbine production. 

But the real question, as JP Morgan’s recent Energy Study portrays, is how quickly the alternatives (wind, solar, EVs) can replace the internal combustion engine, and the industrial use of oil and coal.  The number one issue for China, and the world, is the decarbonisation of China’s massive industrial sector, which consumes 4 times more primary energy than its transport sector, and more than USA and Europe’s industrial sector combined.  

In 2020, China built 3 times as much new coal capacity as all other countries combined, equal to one large coal plant per week.  China is also planning to forge ahead with nuclear, as the West retreats from it (the most irrational and absurd decision being the German government’s retreat from nuclear after the 2011 Fukushima plant accident — Germany has no earthquakes and is now, consequently, using far more coal).  We are watching, carefully, what happens to uranium prices, as an indicator of whether other countries may realize the long-term logic of building new nuclear plants.  Another area of interest is Hydrogen. 

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Elon Musk may have started the correction in Bitcoin, by suddenly discovering that bitcoin mining is not environmentally friendly; about half of it is in China and powered by coal.

Mr. Musk might also look at the content of the batteries in his electric vehicles (which are now expected to replace internal combustion engines in the 2030s) – not only Lithium, but 17 “Rare Earths” used in magnets, which mainly emanate from China.

Ford Motor unveiled its new electric F-150 truck this week, and we shall watch with interest to see if US consumers are ready to buy it (at $40,000).

In any case, JP Morgan forecast that demand for oil will continue to grow for another 10 years; so at this point, some oversold oil shares may be a better value than their “green” competitors.

The bursting of the absurd “crypto” bubble (Bitcoin, Ethereum, and Dogecoin, the most absurd of them all) has brought down the Tesla share price from US$900 to US$600, and many high-flying tech stocks, both in the USA and China.  Curiously, the only asset to have gained in this sell-off is gold – the inverse of Bitcoin and interestingly, not its real inflation “brother.” 

Where do we go from here?  The real question is whether inflation is a “transitory” (as the Fed says), or a lasting phenomenon.  Of course, iron ore, copper, lumber and other raw material prices may subside after their rapid rises.  But wage growth and supply shortages may persist.

China’s factory price inflation is running at nearly 7%, and wages have increased sharply as China’s labour force begins to shrink and also to age.  (The recent population census spelled this out clearly:  India, at 1.4 billion, is about to overtake China and has a much younger consumer population also entering the labour force.)

Our investment philosophy has always been about conservation of our investors’ capital, with steady annual growth of 12% to 15%, including dividends.  2020 was an outlier, with an extraordinary surge towards the end of December in Chinese internet and healthcare shares, which then constituted almost 50% of our Asia portfolios.  We have since reduced that to 20%, and added about 25% in Hong Kong banks, trading companies, and property shares.

The recent pronouncement by Beijing indicates strong support for Hong Kong as its international financial centre, with more listings, and easier “Connect” volumes of China investment and wealth management into Hong Kong.  Both property and shares in Hong Kong have held up well (and with the HK$/US$ peg remaining steady, borrowing costs remain very low).

We have also eschewed investment in South East Asia, since the opening up of Singapore, Malaysia, and Thailand has been delayed by further small outbreaks of Covid (possibly emanating from India).

The Indian situation from a medical and humanitarian viewpoint, remains dire.  Yet, paradoxically, from an economic and market viewpoint, the Bombay market and the Rupee remain surprisingly steady.  There has not been very much selling by international investors.  The expectation remains for a strong 2H rebound in economic activity and corporate earnings.  We have 15% invested in India, in blue chip shares, such as Infosys and HDFC Bank.  We anticipate a strong recovery in lending, mortgages, and in real estate activity.

Asia remains the best bet in an uncertain world.  Some of the obvious bubbles, such as crypto, are now bursting; but the long-term growth and value opportunities in the region remain, in our view, compelling.