Six Degrees Of Change

It’s not just the Joycean waters of The Forty Foot reminding us of a very changed world. The much higher June water temperatures make for alarming headlines but a smaller news item did catch the eye. The private equity founder of EV battery giant, Northvolt, and hydrogen steel producer, H2 Green Steel, is now getting into heat pumps. Harald Mix is launching Aira to sell air-to-air heat pumps on a monthly fee basis directly to consumers who are loving the energy efficiencies of a heater/AC combination. The technology is not new but has massively improved as a highly effective way to relocate heat, outside-to-in or inside-to-out. Not surprisingly, in a Russian gas decoupling world, the attractions of a safer, smaller and electrical option has been a big hit with European consumers. Check out these numbers….


  • Three million heat pumps were sold in Europe in 2022 which was a 38% increase on 2021’s total.


  • In 2022 Germany experienced 53% growth in heat pump adoption; Poland’s growth rate was closer to 100% and Finland leads in units sold per household.


  • The International Energy Agency (IEA) has published a good report showing heat pumps are already cheaper than gas heating + traditional AC in every country except for the UK(!).


This might surprise readers but heat pumps are a rare example of a green technology installation where Europe or the US is actually leading the world. In most cases, China leads the world. As an illustration, the Chinese will install 154 GW of solar capacity this year alone. That’s more than the TOTAL installed capacity of the US. In fact, Beijing’s combined wind and solar ambitions for 2023 are bigger than what the entire world built in 2020. But, perhaps the next statistic will be the one that causes European heads to wobble. For those just getting used to the recent blast of radio ads for Chinese manufactured cars, be aware Europe’s auto industry relationship with China is about to flip. By the end of this year, China will become a net exporter of autos and auto parts to the EU. In fact, China has overtaken Japan as the largest exporter of electric vehicles (EVs) globally. Before we worry for Europe’s established auto manufacturers, let’s consider another surprising data point to emerge this week.

A report in the FT this week points out that back in 2008 the EU economy with a GDP of $16 trillion was ahead of the US’s $14.7 trillion. Fast forward to 2022 and the US economy has grown to $25 trillion while Europe(including UK) crawled to just under $20 trillion. That’s a serious divergence in fortunes and perhaps reflects three key drivers moving in favour of the US; more aggressive use of debt in a 60% heavier debt/GDP expansion, a tech sector 10x bigger and a workforce expanding by 10% vs a sclerotic 1.5%. Equity valuations are more or less telling a similar story with a price/earnings valuation multiple of 13x in Europe at a significant discount to the US universe sitting on 19x.

Goldman Sachs reckon this size of discount is the biggest they’ve seen in more than a decade and arguably the discount has gone too far. Some investors seem to agree. Germany’s DAX index is up 16% year-to-date while the US benchmark Dow Jones Index is up less than 4%. In fact, the benchmark Stoxx50 European index hit a 22 year high in April and one has to consider a European catch-up is long overdue. Unless….you’re a crack team of French AI gurus.

Perhaps the most startling number of the past week was the $115 million raised by French AI startup, Mistral. The founder team of four have a fantastic track record in AI large-language-model building but this is the largest seed funding round in European history. And, it was raised a mere 4 weeks after incorporation with just a deck presentation. No product, no customers, no revenues… problem. Yes, AI is the new shiny bright thing but Warren Buffett has seen it all before and…… he’s buying old elsewhere.

Japan is where Buffett is buying as news broke this week that he has added to his holdings in five Japanese trading companies which have been around since the 1860s. Japan’s Nikkei index of larger public companies has been on a tear and is up almost 30% this year. However, it is the older smaller companies which have tweaked my interest. Yes, Japan has been considered ‘cheap’ for years but if Buffett is buying, and international investors are interested in non-China options to pursue the Asian middle-class explosion then the next two numbers, from Merryn Somerset Webb writing in Bloomberg, are very interesting:


  • 50% of Japan’s publicly quoted companies are valued at below their book value. In other words you can buy the company for less than the value of its assets in the shape of property, equipment, technology, investments and CASH on their balance sheets. In the US, the median company trades at 3.9x book value.


  • 25% of Japan’s publicly quoted companies trade on a price/earnings multiple of between 5 and 10x. And we thought Europe on 13x looked interesting!


Of course, Japan’s markets are more than 40 years into a property crash ‘recovery’ which is a stark reminder of how mad economics can have multi-decade consequences. Mad economics, eh? But faster than you can say ‘lettuce’, I would quickly say the UK will not suffer a similar fate. TrussT me. However, I am concerned, and my final number of the week comes from Chris Johns’ in a recent substack article, ‘Brexit’s Unwanted Birthday Present’. Persistent inflation pressures are forcing bond markets to ‘price in’ an additional FIVE interest rate hikes by the Bank of England (BOE) before the end of the year. And that spells mortgage market trouble, but not yet.

According to an excellent Resolution Foundation report, around half of households have previously fixed their mortgage rates and have yet to see their mortgage payments impacted by BOE action. But, in the next couple of years millions of households will see fixed mortgage arrangements expire and the potential hit to incomes in the poorer and younger cohorts will be a very significant 3-4% annually; now, think of that as a tax hike. Clearly, this mortgage “bomb” could really hurt the housing market and an already fragile UK democracy economy. So, when I look to the UK’s crop of current leaders for economic reassurance, I must confess to Blackadder flashbacks on the 40th anniversary of its first appearance on our TV screens, and a famously withering assessment…..

“The eyes are open, the mouth moves, but Mr Brain has long since departed, hasn’t he Percy?”



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