Investment
Comment
10th February 2023
Good news
The good news of 2023 has been the decline energy prices. Across Europe, the combination of a warm winter (reduced demand for gas) and increased supply from non-Russian sources has resulted in sharply lower wholesale gas prices. Gas in storage across Europe is around 30% higher than typical at this time of year.
UK wholesale gas prices are now at their lowest level since December 2021, i.e., since before the Russian invasion of Ukraine. Gas futures prices are down 44% since the Government set out its plans to support households with energy bills in November’s Autumn Statement.
Gas in storage across Europe is at multiyear highs for this time of year: European Gas Storage (percent full)
Source: Artorius, Bloomberg
European wholesale gas prices have fallen back to pre-invasion levels. Netherlands natural gas is the standard benchmark for gas prices.
Source: Artorius, Bloomberg
In the UK this will eventually feed through into lower energy prices for the UK consumer and business community. Households will benefit from smaller-than-feared rises in energy costs if prices remain at current levels. The increase in the Government’s Energy Price Guarantee (EPG) from £2,500 to £3,000 in April for a typical household means that energy costs will initially rise, despite lower wholesale costs, before falling back to just above £2,200 from October. The good news will also be felt in lower inflation at the end of 2023. However, the cost of energy will still be substantially higher than the £1,339 they typically were in 2021, which will result in continuing cost of living pressures for some in the UK and supressed consumer spending.
In addition, there will be a reduced burden on the UK Public Sector. When announced in November, the cost of government support for households was estimated to be £12.8 billion for 2023-24. This is forecast to fall to around £1.5 billion as lower wholesale prices result in reduced level of subsidies. This is a sharp fall from the estimated £24.8 billion in 2022-23. One could envisage a tax cutting chancellor eyeing up these ‘savings’ in the March Budget. Martin Lewis (MoneySavingExpert) is calling for the Chancellor to act to prevent the rise in household energy costs scheduled for April, to reflect the much lower than expected wholesale energy price.
An eye to the future: company reporting
Over recent months, analyst revisions to next-12-month earnings estimates (number of positive minus negative revisions, divided by the total) have been negative. They turned modestly positive by the end of January, as has been customary in the middle of the last several earnings seasons, but even the mid-season period of reprieve shows less optimism in the past year. However, the guidance for future quarters has been undeniably bleak.
Only three US companies (Roper Technologies, Microchip Technology and Gen Digital) have revised Earnings Per Share higher so far, comprising just 8% of the total and the smallest share of overall guidance since 2010. Revenue guidance, though slightly better than last quarter, is still in the red for the third straight quarter. Five companies, 13% of the total, revised revenue forecasts positively, the second-lowest share of the total since 2020 Q1 -- ahead of only last quarter.
The equity market has rallied over recent weeks as the reduction in inflation pressure has led the bond market to suggest interest rates will be cut in 2023. We suggest that this is unlikely to happen without a sharp slowdown in economic activity, which in turn would be harmful for earnings and equities. As profit margins do fall, this sets a base from which a recovery will be forthcoming, but we don’t think that is yet upon us, and we remain cautious of adding too much risk to portfolios at this juncture.
Gerard Lane
Chief Investment Officer
All expressions of opinion reflect the judgment of Artorius at 10th February 2023 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.