The Symbiotic Path: Renewable Energy and Oil towards a Greener Future
When we talk about energy, it’s not just about power plants and electric grids; it’s also about the choices we make for our planet and the future we’re crafting. Imagine if the energy we use every day could tell a story. The sunlight powering your home might speak of clear skies, while the gasoline in your car might tell tales of deep earth and ancient life.
Renewable Energy: Nature’s Gift
Renewable energy, coming from sources like the sun, wind, and water, is like a gift from nature. We’re learning how to harness these natural forces more efficiently, ensuring we use what’s given to us without harming our planet. This isn’t just a smart choice scientifically and economically; it’s also a kind-hearted nod to the Earth, saying we’re trying to do better and cause less harm. Using wind, solar, and hydro energy gently taps into nature’s cycles, aligning technological advancement with respect for our environment. Embracing renewables isn’t only about the here and now. It’s a promise to future generations that we’re doing our best to leave them a planet where they can thrive.
Oil: A Grounded Reality
On the other side, there’s oil, a resource that’s been central to our development and growth for centuries. It powers our cars, heats our homes, and even helps make everyday products. While we know it’s not perfect (think of the smoke and pollution from cars), it’s something we still need right now as we build towards that brighter, cleaner future. Oil helps us ensure that, as we build more solar panels and wind turbines, our daily lives and various industries can keep moving without interruption. It’s not just about fuel; oil is also a key ingredient in things like plastics and medical equipment, items we use every day and are still figuring out how to make differently and efficiently.
Together on the Path Forward
So, how can renewables and oil work together? It’s about taking a steady, thoughtful walk towards that future where clean energy is king. Until renewables can take over completely, oil can share the energy load, ensuring everyone has access to the power they need when they need it. Money made from oil can be funnelled into research and projects that enhance renewable energy technologies, ensuring that the transition is smooth and sustainable.
In simple terms, the journey to a future powered by clean energy is a shared effort. Imagine renewables and oil like two friends on a journey: one knows the destination (renewables), while the other (oil) carries the backpack, sharing the load until we can find an easier way to travel. It is not a matter of choosing renewables over oil or vice versa, but instead realising a strategic synergy between the two. Recognizing the value in both entities and integrating them strategically can navigate through the intricate path of sustainability, economic development, and energy security. In doing so, we harness the power of unity, combining strengths and mitigating weaknesses, to pave a solid and sustainable path towards a greener, cleaner energy future.
Market Update
Navigating through the intricacies of Q3 2023, US equities displayed a notable weakening. Initially, investors entered the quarter with robust optimism, chiefly spurred by a belief that the Federal Reserve (Fed) had adeptly engineered a soft landing for the economy and that a cessation of policy tightening rates was on the horizon. However, this buoyancy eroded through August and September as the reality of a protracted period of elevated rates took hold, especially following an adjusted Fed “dot plot,” which visualises each policymaker’s forecast for interest rates.
Despite a palpable strength in the US labour market, there were some warning signs, as the Bureau of Labor Statistics reported a rise in the unemployment rate by 0.3 percentage points, landing it at 3.8% in August. This rate was maintained during September, but job numbers increased during this month with 366 000 new nonfarm jobs being recorded. This brings the number of unemployed in the US to 6.36 million. So, while inflation nudged upwards in August, an overarching downward trend persists.
Commentary from Fed policymakers anticipates another rate hike before the year concludes, and the dot plot is now signalling a higher median rate for 2024, sitting at 5.1% as opposed to the previous 4.6%. For those of you wondering what a “dot-plot” is, it is a chart, updated quarterly, that records each Fed official’s projection for the central bank’s key short-term interest rate, i.e. the federal funds rate. The “dots” reflect what each U.S. central banker thinks will be the appropriate midpoint of the fed funds rate at the end of each calendar year.
Energy stocks showcased relative resilience throughout the quarter, becoming a beacon of positivity in a period where numerous sectors experienced depreciations. Conversely, most of the “Magnificent Seven,” which include stalwarts like Apple, Microsoft, Alphabet, Amazon, Tesla, Nvidia, and Meta, witnessed declines, exerting a drag on the broader market. Particularly, the IT sector, alongside real estate and utilities, emerged as some of the weaker arenas during this quarter.
In the Eurozone, Q3 saw a decline in shares, catalysed by apprehensions regarding the detrimental impacts of interest rate hikes on economic growth. In an encouraging development, data at the quarter’s end highlighted a slowdown in Eurozone inflation to a two-year low of 4.3% year-to-year in September, down from 5.2% in August, which might potentially enable the European Central Bank to halt interest rate escalations. Notably, the energy sector bucked the trend of decline, registering gains amidst elevated oil prices and reduced production by some oil-exporting nations.
In contrast, UK equities witnessed an upswing over the quarter. Major UK-quoted diversified energy and basic materials groups outperformed, rebounding from the previous quarter’s slump, partly due to the sterling’s weakness against a robust dollar and a sharp recovery in crude oil prices. Additionally, various domestically-oriented market segments also recuperated following lacklustre performances in Q2, amid indications of rejuvenating UK consumer confidence and aspirations that base interest rates might have crested.
The economic growth outlook for South Africa (SA) has been marginally uplifted to 0.5% year-over-year (y/y) from 0.2% y/y, despite ongoing challenges. The nation contends with significant obstacles including rampant organized crime, insufficiency in electricity, and limited freight capacity, which are impeding more robust economic development.
South Africa’s high criminality score and embedded criminal actors within state mechanisms have also been highlighted in the Global Organized Crime Index 2023. However, the state’s efforts to enlist the private sector’s assistance in tackling issues related to energy, logistics, and crime and corruption in 2023 could potentially foster stronger growth in the future. Projections for next year suggest growth of approximately 1.0% y/y, with a medium-term uplift to 2.0% y/y, though this is dependent on the successful implementation of various objectives.
Furthermore, temporary CPI inflation hikes to around 5.0% y/y until February 2024 are not prompting higher interest rates in SA at the moment, while 2024 is anticipated to experience globally and domestically lower interest rates and inflation.
The country is also grappling with declining fiscal revenue collection and is under threat of economic growth impediments next year due to the potential of increased taxation and uncontrolled expenditures amid corruption concerns. We will find out more when the mid-term budget is released on the 1st of November.
Essentially the South African economy is grappling with multi-faceted challenges, underscored by the South African Reserve Bank’s (SARB) decision to maintain its interest rate at 8.25%, in light of a marginal inflation increase to 4.8% year-on-year in August.
The bank subtly raised its economic growth forecast for 2023 to 0.7%, suggesting a cautious optimism amidst prevailing economic tribulations. Additionally, the South African rand demonstrated subtle resilience, appreciating by about 0.2% against the US dollar, which was concurrently experiencing a 0.1% depreciation against a basket of global currencies. However, since the end of the quarter it has fallen off the cliff a bit.
In parallel, Transnet, the major port and rail operator, is witnessing notable leadership upheavals with the exits of CEO Portia Derby and Transnet Freight Rail CEO Sizakele Mzimela, against a backdrop of significant operational inefficiencies that threaten to slash 5% off the GDP in 2023.
These executive exits and the associated R5.7 billion loss in 2023, a drastic downturn from the R5 billion profit in 2022, signify a tumultuous period for the state-owned enterprise, concurrently with a looming maintenance backlog estimated at R27 billion over the past decade. Moreover, the prolonged search for a new CEO for Eskom, the nation’s primary power utility, amidst an enduring energy crisis and after the abrupt departure of its former CEO Andre de Ruyter, adds another layer of complexity to the nation’s struggles.
De Ruyter’s exit, which followed accusations linking officials to corruption, coupled with the company’s admission that a global search failed to present suitable CEO candidates, amplified the leadership and operational crises in critical state monopolies. These developments at Eskom and Transnet, along with persistent power outages and inhibited rail operations, have exacerbated existing obstacles to exports and stirred further disruptions in the South African economy, potentially elongating the nation’s trajectory towards economic stabilisation and growth. The entwined challenges within South Africa’s fiscal and organisational frameworks herald a complex future, necessitating adept and transparent leadership to navigate through the economic and operational maelstrom.
In summary, in order to weave all these developments together, it’s imperative for investors to have a diversified portfolio to mitigate the risks posed by the short-term volatility in markets. Between the persistent bullish sentiment in certain sectors and the curtailing optimism due to potential policy shifts from the Federal Reserve, the Eurozone’s own financial vicissitudes, and the UK’s economic recoveries and fluctuations, the global financial landscape in the latter part of 2023 presents both intricate challenges and opportunities. Therefore, aligning your investments to a more long-term focus will be pivotal in safeguarding and nurturing financial growth in the ensuing period. When there is volatility in the market, there is opportunity in the market.
The message remains clear, we must focus on the long term. Your ability as investors to cut out the short-term noise is crucial to staying on track to achieve your long term financial goals. At InvestLife we’ve got our eyes peeled on, not just the bumps (and sometimes potholes!) we might hit along the way, but rather your long term future needs. Our playbook? Keeping it calm, steady, and not making jumpy moves based on the flavour of the day in the market.
Investing is as much about nerve as it is about opportunity. And having the nerve often means blocking out the chatter, tying our shoelaces tight, and keeping on track.
InvestLife Advisory
Keeping things Personal
