Saturday, June 4, 2011

Not a Nice Story: Our Energy Vision, and How it Translates into a Focus on New Markets

We just uploaded our SlideShare presentation on Energy Risk in Emerging Markets. Included are also a lot of tables and figures from our research that translate into analyses useful for other markets than just the Emerging or Frontier ones.

The Energy Trends and their Investment Impact
It is not necessarily a nice story for those in the Western world or even for China. This is a story that indirectly predicts good times for the LEAST popular Emerging Markets areas (Africa, Middle East and Russia). LEAST popular when looking to behavioral biases that is. Some countries are just more liked than others. China can top the tables in terms of executions year after year, but they remain those nice, friendly smiling nice people that we know from the restaurants in our towns and villages. Russians, Iranians, Arabs? They are the crooks! Not our LMG words, but it is too obvious that this is often how the implicit biases go. Sociologist Hofstede has done a lot of research into cultural and behavioral differences and a lot of other scholars have used his work to analyze these factors even further. See also our SlideShare presentation on the impact of Cultural and Behavioral Biases on our market picking activities in more exotic investment destinations.

Within the Western world these trends could play out well for France. The French are actively playing the nuclear card. Why? Because they are environmental crooks? Of course not! Not because we like it, but because some of us are realistic enough to understand that this will be an essential, necessary market niche that is not just here to stay, but will continue to grow explosively as well (and yep, we are aware of the fact that using the phrase 'grow explosively' is a somewhat careless one). But then again: just like people always translate a few deaths as a result of eating the wrong vegetables into bans on food exports or imports and fear for epidemic terror or crashed airplanes into new safety measures and fear of flying even when a 10-fold number of deaths in car or bike traffic and pedestrians never translates into us reconsidering those means of transportation, we believe that nuclear energy is here to stay with those panics gradually but slowly translating into less effective or outspoken populist sentiment against it. We are just not there yet.
Nuclear Plant in Belleville in France - Big Export Business for France in the Future?

And this means that we should also not forget a Central Asian powerhouse like Kazakhstan or other smaller Frontier Markets with energy or commodity wealth. Kazakhstan was basically Alma Ata (the other big city) and a well-known speedskating stadium (Medeo) some 20 years ago. Economy? Did they have that over there? And compare that with the newly created capital Astana now.

Astana - Newly Created Capital of Kazakhstan 

These trends do also translate into continued tensions in the Middle East. Arab Spring? Westerners liking Democracy there? Doesn't make sense unless it maintains a status quo that will ensure an ongoing majority allocation of oil and gas revenues to Western energy companies and indirectly the countries they represent. We do not believe that this is feasible in a world in which US-NATO political dominance is challenged by Chinese (energy needy), Russians (still powerful and with energy and other resources) and sooner or later also loaded Wealth Funds from the Middle East plus growing richness in Brazil and India. 

These realities will make Africa, MENA and Russia far more interesting investment places than most people tend to think, unless we are willing to start battles to stop it. Unfortunately we are not totally sure if that will be unrealistic (see the Middle Eastern experience), just comfortable that an equalizing balance of power in the world will make it a lesser option than right now or in the past.

What about Renewable Energy?
Note: does this mean that LMG is a non-believer in Renewable Energy? Of course not. What we believe is that Renewable Energy will be a huge growth market, but initially mainly for the West as a kind of fancy, elite choice to opt for things that cater to energy need AND the emotional well-being of the people buying it with them being willing to pay a premium for the latter. 

It is simply impossible for it to be a realistic full alternative for traditional primary energy sources without people willing to pay that premium AND/OR change their lifestyle. But lifestyle change is also an elite choice that one cannot demand from Emerging Countries unless well-off Westerners pay for it directly. And that is where the story ends: no Western country is in the business of providing Developing Nations with much more than they are currently doing and preferably in a form (bibles, blankets, emergency medicine) that cannot help grow the economy in the longer run (so as to maintain market dominance). Result: Renewable Energy is a good product with growth opportunities (in a similar fashion like wellness centres are) with definitely good investment opportunities in Renewable but the bulk of the Energy Market growth will be in Traditional Primary Sources for quite some time to come. 

Adding things up, nuclear is here to stay. Only caveat: that 'HERE" might be more 'THERE' in some countries (Germany probably using France) than in others (FRANCE, RUSSIA, USA) who want a piece of the action.

Windmill Park in New Zealand - Growth Market? Yes! Whole Story? No!

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