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Pacific Assets: why unsustainable oil could hit $5

David Gait, manager of the top-performing Pacific Assets Trust, warns investors about the implications of Tesla’s Powerpack and the frothy state of Asian stock markets.

 
Pacific Assets: why unsustainable oil could hit $5

David Gait, manager of top performing sustainable investment fund Pacific Assets Trust (PAC ), has warned that oil prices could plunge to new lows as a result of the clean energy revolution threatening the end of the internal combustion engine.

Pointing to the dramatic reduction in the cost of solar panels in the past six years and the development of renewable batteries such as Tesla’s (TSLA.O) Powerpack, Gait said oil could tumble to $5 a barrel if an alternative to the fossil fuel became widely available.

This would have huge implications for stock markets, said Gait, who compared today’s energy company shareholders to 19th century investors in the whale industry when confronted with the emergence of paraffin and other oil-based fuels.

‘Whales provided a great source of light and energy for 100 years but in 1860 the discovery of a less smelly alternative saw it collapse 90% very quickly,’ Gait told investors at Pacific Assets annual general meeting yesterday.

Global markets and the world economy are still reeling from the impact of the oil price more than halving from $120 to $57 last year. Crude oil prices have recovered a little to $63 but are struggling to make headway in the face of subdued demand and over supply.

Gait said: ‘It’s much more likely oil will hit $5 than $100 because of the collapsing solar price curve.’

He said the advent of portable energy storage systems, such as Tesla's recently launched Powerpack and Powerwall and their rival Powervault, could herald a new era of carbon-free energy for all countries in the world. Cheap storage systems for solar energy could revolutionise its use - without storage, its supply is volatile and difficult to feed into energy grids.

Gait of Edinburgh-based First State Stewart said he had no idea when that might happen but stressed the importance of reviewing his investment trust’s stakes in companies that could be affected.

With car makers like BMW (BMWG.DE) planning electric powered versions of all their models, Gait said it was time to consider the end of the internal combustion engine.

This meant much more than just avoiding shares in oil majors, the manager explained. For example, the trust has 1.5% invested in Weifu High-Technology Group (000581.SZ), a Chinese company involved in cleaning emissions from trucks. This was a classic sustainable investment, said Gaits, but he added it would struggle in the event of a wholesale switch by motorised transport to battery power.

Gait preferred not to invest in the providers of rechargeable batteries, however, arguing it was not clear which technology would prevail. Instead he chose to back companies that could benefit from a new market in cables connecting devices to the new power sources. He cited Delta Electronics of Thailand (DELTA.BK), PAC's fourth biggest holding, accounting for 3.8% of the fund.

Coca-Cola at $5?

As a long-term investor in well-run companies that contribute to the sustainable development of Asia, Pacific Assets also shuns the shares of companies peddling sugary and unhealthy food and drink, said Gait.

He explained the developing world was suffering from an obesity epidemic as more people adopted Western-style consumption habits.

While there were 25 million US citizens with type 2 diabetes there were 100 million each in China and India. 'The numbers are huge and the prevalence is double for some reason,' the fund manager said.

Ultimately, that was a problem that could see purveyors of sugary foodstuffs hit with punitive taxes or other sanctions by governments.

'If you're a food company and you haven't thought it through you could face very serious sustainability headwinds in future,' he warned.

Gait said it was conceivable that shares in Coca-Cola (KO.N), which trade at around $40, could also hit $5 if there was a backlash against the drink that had made the company world famous.

Pacific Assets' fifth biggest holding is Vitasoy (0345.HK), a Hong Kong-based food conglomerate, whose drinks contain less than half the sugar of Coca-Cola.

Gait praised Vitasoy for also insisting that all the soya beans it used were not genetically modified. Finding non-GMO soya was hard nowadays. 'That really tells says something about what they believe in,' he said.

Asian bubble

Such policies have contributed to PAC's strong performance in recent years. In the 12 months to the end of January it beat rallying Asia markets with total shareholder returns of 37%. This left the portfolio with the best net asset value growth in its sector over one, three and five years. The three-year result also generated a £1.8 million performance fee for First State Stewart.

While that pleases Gait his biggest worry now is what he regards as the unsustainable level of Asia stock markets which have surged on the back of several years of money printing by the world's leading central banks.

He described China's A-share market - which until recently had registered a 150% one-year gain - as a 'casino', where a third of punters' profits from trading stocks disappeared in broker fees and commissions.

Fearful of a bubble, Gait has allowed the level of cash in the fund to rise to an all-time high of 11%. This had built up, he said, after being forced to sell good companies like Hindustan Unilever (HLL.NS) when their share prices reached exorbitant highs of 60 times earnings. Gait said he could not find anywhere to reinvest the money and was waiting for markets to fall and create an opening.

With 30% of the fund in low-yielding India shares, the board of PAC has had to warn that next year's annual dividend may have to be cut. It only held this year's payment by dipping into revenues, said the outgoing chairman David Nichol.

While that was a concern, Nichol reminded investors that PAC was primarily focused on growing their capital and that dividends were ultimately a secondary consideration.

PAC shares have often traded at a premium above the trust's net asset value but the recent issuance of new shares has seen them trade close to NAV.

17 comments so far. Why not have your say?

PaulSh

Jun 26, 2015 at 13:43

There is so much Kool-Aid being drunk these days it's a wonder there isn't a world shortage.

Yes, PV solar is a lot cheaper these days. It's so cheap now that in the UK with the subsidies other electricity customers are forced to pay you, you will just about recoup your initial outlay over the expected life of the installation.

But please don't get me started on the PowerWall. For one thing, it's hugely expensive (currently around $7,000 shipped and installed in the US), and for another it only stores 10kWH per unit, which is only about enough to heat a very small room for a day or cook a couple of decent meals. You'd need your house to be made of PowerWalls if you wanted to live off-grid reliably.

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uncommercial

Jun 26, 2015 at 16:43

Not really. Our house uses about 10 kWH per day, so a single Tesla unit would provide a day's supply. PV needed subsidy to build up volumes, but it is rapidly heading to being a cheap source of energy. There's a way to go, but it's quite right that the writing is on the wall. Given that stock markets price in future expectations, I wouldn't be too sanguine about oil related stocks.

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Tom Mozy

Jun 26, 2015 at 17:19

Coke to $5 a share - if only, id buy the whole company at that price - this guy is nuts.

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Chris Sullivan

Jun 26, 2015 at 17:26

We currently use on average about 10kWH a day 365 days a year to run our 100% electric Nissan Leaf. Out of a 24kWH total battery size.

Our 4kWh peak PV system on the house generates about 3500KWH per annum, i.e. very close to 10kWH/day.

The problem is we cant use enough kWH in summer and use too much in winter. A 10kWH battery would allow us some flexibility in the 2 summer quarters when we generate 2-3 times as much as in the winter quarters but what is needed (by us) is inter-seasonal storage or 150 days worth i.e. 1,500KW storage size to tied us over the winter. (Simplistic I know.)

Anyone coming up with that sort of capacity yet? Maybe we can make a more storable fuel such as hydrogen in the summer and use that to generate in the darker months?

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Hotrod

Jun 26, 2015 at 17:29

I recently fed the details of my house into an online calculator which predicted the potential profit I could make from solar panels after 25 years.

Since a number of houses in my neighbourhood already have them fitted I was surprised to find that the result was zero! In fact the capital investment still hadn't been fully paid back. So it appears that solar is only efficient and competitive if optimum conditions are met.

Gait's presentation style comes across as somewhat unscientific. Just plucking figures out of thin air does not impress me. e.g. It is completely unrealistic to suggest that crude oil would still be produced if its price was $5 a barrel, and follow this with the sweeping statement that electric powered cars could spell the end of the internal combustion engine.

You only have to look on the internet to discover that back-room boffins and cranky professors are still coming up with ingenious designs to refine it and make it even more efficient.

So for me it will be back to the future.

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uncommercial

Jun 26, 2015 at 17:38

Production costs in Saudi Arabia are about $4 to $5 a barrel, Naimi said recently. So the price could get pretty close to $5 and Saudi Arabia would still produce.

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Stephen B.

Jun 26, 2015 at 17:53

As a story for the next 30 years this might be true, but in the next year or two I think the oil price is far more likely to be $100 than $5. He also doesn't seem to have heard of diet coke ... personally I don't really know why anyone drinks the non-diet versions, I don't find the taste significantly better.

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MW

Jun 26, 2015 at 19:12

Solar power will inevitably be the driving energy source for the future: cheap power will allow us to generate purified water,etc. This is all very promising, but how will we move this power without oil-based insulation materials? Only 30% of oil (?) goes to power; that still leaves a lot of reasons to pump oil.

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uncommercial

Jun 26, 2015 at 19:26

Last figure I could find gave the US burning all but 15% of the oil used. I wouldn't rely on diet coke, it's also associated with weight gain and harmful belly fat.

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Michael via mobile

Jun 28, 2015 at 09:43

Have to take this guy with a pinch of salt

Admits hadn't got a clue...could be 50 could be 100 years!!

Gait of Edinburgh-based First State Stewart said he had no idea when that might happen but stressed the importance of reviewing his investment trust’s stakes in companies that could be affected.

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Nigel Harris

Jun 28, 2015 at 11:00

I wish there was a facility to purchase a solar PV system located on or near the equator which could supply my home in the U.K. via the electricity supply grid. That would solve the U.K. seasonal supply issues somewhat.

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richard tomkin

Jun 28, 2015 at 11:50

What better way to promote one's fund than to make grotesque predictions about future prices?By the time they are seen to be groundless,this gentlemen will be well retired!

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Ben Dover

Jun 28, 2015 at 13:13

This article is just crazy hyped-up speculation.

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PaulSh

Jun 29, 2015 at 14:01

I am curious to know how it is that people believe their houses only need 10kWH of energy per day. Perhaps they are forgetting that gas is a fossil fuel and needs to be included in the calculations. Unless of course they are running their own methane plant!

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Geoff Maradona

Jul 01, 2015 at 16:08

@PaulSh,

Great post and good question! What I can tell you is that I happen to know uncommercial personally and yes you're right, he does in fact supply gas to his house by running his own methane plant.

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Geoff Maradona

Jul 01, 2015 at 16:14

@PaulSh

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Geoff Maradona

Jul 01, 2015 at 16:58

@PaulSh

Good post and good question! What I can say is I know uncommercial personally and yes you're right he does indeed run his own methane plant to supply his house with gas.

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