David Cumming is the immensely experienced, relatively new chief investment officer for equities at Aviva, the perennially disappointing insurance giant. Aviva Investors controls over £350bn of capital, much of it in shares, so when Mr Cumming says he’s serious about global warming, the bosses of the companies in his sights would be well advised to take note.
These include the usual suspects, especially the oil and mining companies. Mr Cumming told the FT that he sees climate change as a “massive disruptor” of capital markets, and while he doesn’t want to end up selling these sorts of shares, by jingo he will unless the managements change their ways with CO2. This is all fine, crowd-pleasing stuff, and may even sell a few more motor insurance policies, and is surely not merely to provide cover for Aviva’s internal problems.
The company has a new helmswoman in charge, and the shares have risen, perhaps more in hope than expectation, that she can somehow get a few knots more out of the slow old boat. Morningstar calculates that the total annualised return from the shares has been 2.15 per cent over the last decade, as the shares have sunk, with the dividend firmly nailed to the mast.
Captain Amanda Blanc has chopped the divi down, and called for more speed, but Aviva is never going to be an America’s Cup contender. The ultimate owners of that £350bn under management might consider themselves fortunate not to have held just Aviva shares, but the performance of the funds has been pretty sluggish too, which begs the question of whether Mr Cumming is really in a position to lecture CEOs on how they should run their businesses. Going green is high fashion, but (so far, at least) low returns.
Co-incidentally, this week has seen results from two of his possible victims, the unloved oil duo of BP and Royal Dutch Shell. At BP, CEO Bernard Looney is making all the right noises to pacify the likes of Mr Cumming, but the market doesn’t believe that he can make anything like his promised 13 per cent return on capital by 2025. As with Mr Cumming, green talk makes him look good, but getting a decent profit on BP’s fashionable projects is another matter entirely. Shareholders are likely to be grateful, rather than resentful, for the black stuff.
Analysing Shell defeats even the best-qualified analysts. On Thursday it reported third-quarter profits $200m short of their consensus $600m forecast, but the shares hardly budged, perhaps reassured that there was not to be a third change to the dividend policy. Unlike BP, Shell is only sipping, rather than drinking, the zero-carbon koolaid, but both companies have have too much debt and fortunes tied to the oil price, whether they like it or not.
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Predicting where that price goes is as hard today as it’s ever been, but its history is full of surprises, and oil will power the world’s economies for many years yet. None of the big companies is looking for it any more, existing discoveries are being abandoned, and alternatives demand subsidies, either overt or covert, to be viable. Meanwhile, no government dares reveal the true financial cost of switching away from fossil fuels to the brave new world of renewables. Perhaps the oilmen should ask Mr Cumming what to do.
Modern Madness Trends
The Bank of England is not softening us up for negative interest rates. It is merely getting its ducks in a row with the clearing banks to ensure that they could cope. Thus this week’s report from the Monetary Policy Committee, essentially opening the door to this strange idea while saying it has no present intention of stepping through it.
The idea of the bank charging you to look after your money is just one of the side-effects of a policy which has seen government debt bought by the Bank (prop: HMG) and close to zero interest rates however long the lending term. It has even spawned a whole new school of economics, in the shape of Modern Monetary Theory, a discipline (if that’s the word) which says government deficits do not cause inflation.
Well, maybe. We are miles away from any useful historic economics guides today, and those of us who thought inflation would follow the bale-out of the banks more than a decade ago have been proved comprehensively wrong. Other, bigger, forces have been at work, in the shape of Chinese manufacturing, globalisation and population dynamics.
All three of these forces served to push the world’s output up while keeping costs down, almost regardless of individual governments’ policies. Now Prof Charles Goodhart, one of a select band of economists to have a law named after him, is arguing that these forces are played out, and we are on the cusp of The Great Demographic Reversal. Along with Manoj Pradham, he told us last week: “Our view of the future is not encouraging, but it is coherent and plausible.”
That the three forces are in retreat is surely not in doubt. There is a growing backlash against China, whose very success is starting to make her products less competitive. Globalisation may not go into reverse, but is no longer seen as an unmitigated good for economic policy. The world’s population is getting older, as average family sizes fall everywhere outside sub-Saharan Africa, driven by the move to cities and the need to educate the offspring. Looking after the elderly is a rapidly-growing, labour-intensive occupation.
This is good news for workers everywhere. There will be more demands on fewer of them, so they will regain some lost bargaining power. Governments will have to pay more, while paying for a growing army of the retired and their healthcare. The newly-empowered workers will be no keener to pay the extra taxes required than we are today, and the path of least resistance will lead to inflation. Well, not this year, given where we are starting from. And as the prof says, this outcome is not (necessarily) encouraging but it is coherent and plausible.
But cheer up!
Another broadside from the Global Warming Foundation at the conventional wisdom that we’re all doomed, choking on our carbon dioxide. Indur Goklany finds that “climate change is having only small, and often benign, impacts. Those from extreme weather events ― hurricanes, tornadoes, floods and droughts ― are, if anything, declining.”
“A recent study showed that the Earth has actually gained more land in coastal areas in the last 30 years than it has lost through sea-level rise. We now know for sure that coral atolls aren’t disappearing and even Bangladesh is gaining more land through siltation than it is losing through rising seas.”