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‘Green bubble’ warnings grow as money pours into renewable stocks



This article is part of the FT’s Runaway Markets series

As the enthusiasm for climate-friendly investing hits fever pitch, analysts warn that investors are pumping cash into anything that looks “green” — sending valuations of eco-friendly companies into the stratosphere and fanning fears of a bubble.

Larry Fink, chief executive of the world’s biggest asset manager, BlackRock, said last month that the market is undergoing a “tectonic shift” towards sustainable investments. Global funds linked to environmental, social and governance principles took in nearly $350bn last year, compared with $165bn in 2019, according to data from Morningstar.

The green portion of that investment has been encouraged by a massive change in consumer demand. BloombergNEF data show that companies, governments and households spent more than $500bn on renewable energy and electric vehicles in 2020. 

With countries committing to cut their greenhouse gas emissions, ESG enthusiasts expect green investments to shoot even higher. But some executives and analysts think sustainability-linked stocks are starting to get overheated. This week, oil group Total’s chief executive warned of “crazy” valuations in the renewable sector, in an interview with the Financial Times.

“I think we’re 100 per cent in a green bubble,” said Gordon Johnson, chief executive of GLJ Research. “Pretty much every solar company I cover, their numbers got worse and the stock, like, tripled . . . This is not normal.”

Line chart of Invesco's solar ETF surged in 2020. Three-year performance, rebased showing Renewable power stocks off to the races

The S&P Global Clean Energy index, which tracks the share price of 30 companies, has almost doubled in value in the past year, giving it a valuation of 41 times its companies’ expected profits, according to Bloomberg data. By contrast, US blue-chip stocks are up about 16 per cent in the past year, and are valued at 23 times forward earnings.

A recent paper by Morgan Stanley found that a basket of “green” stocks saw their PE multiples increase by an average of 24 points over 2020, compared with two points for sector peers.

One example of a dizzying single-stock rally is US-based solar provider SunPower, which saw its share price skyrocket in late 2020 and early 2021, before giving up some gains in February.

Retail investors have piled in to the stock, said Moses Sutton, analyst at Barclays, because it is a well-known brand linked to the energy transition. They have gone up against hedge funds betting that SunPower will struggle to gain market share against larger operators in the solar panel market such as Sunrun and Tesla. “Who’s going to win that battle is a great question,” said Sutton.

Danish power company Orsted, one of the leading players in the offshore wind market, has also soared. It is one of a few large energy companies that clears the bar for strict climate-conscious investors. It has seen its stock price almost triple in three years, despite only modest earnings growth.

Column chart of Flows by category (bn) showing Sustainable equity funds soar in 2020

“There was a period about seven or eight years ago when every fund had Apple,” said Mark Freshney, analyst at Credit Suisse. “And it’s a little bit like that in utilities with Orsted.”

Orsted said it continued to expect “value-creating investment opportunities”, citing US state mandates to build offshore windfarms.

Such stocks have been supported by a flood of money into sustainable funds. Equity funds accounted for more than $230bn of inflows into this segment last year, according to Morningstar. A flurry of green Spacs have also hit the market in search of acquisition targets. 

“Initially we saw a lot of interest around a limited number of [ESG] names that performed pretty well,” said Colin Rusch, analyst at Oppenheimer. “But in the second half of 2019 into last year, we have seen an extremely broad base of investors starting looking across all of the companies leveraged to mitigating climate change.”

Policymakers fed the demand, with Joe Biden pledging to invest trillions in decarbonising the US economy and his Chinese counterpart, Xi Jinping, pledging the country will be carbon neutral by 2060.

Line chart of Forward price/earnings ratio  showing Valuations on clean energy stocks have soared since the pandemic

Sector bulls are unlikely to be deterred by near-term valuations, analysts said. Investors buying into wind companies are not simply valuing their existing assets and those under construction, Credit Suisse’s Freshney said. They are taking the view that Orsted and other leaders in the field will be able to capitalise on the move away from fossil fuels over the next 30 years.

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mate However he warns they may be overlooking substantial risks, such as offshore wind projects being derailed over environmental concerns and the threat of bigger energy companies buying up available seabed rights.

A similar story is playing out in the hydrogen sector where Plug Power, a hydrogen fuel company, has seen its share price rise almost 50 per cent since the beginning of 2021, taking its market value to $25bn.

Runaway Markets

In a series of articles, the FT examines the exuberant start to 2021 across global financial markets. Here is a selection:

Sutton at Barclays thinks Plug Power’s market capitalisation — about 80 times Capital IQ’s estimate for its 2021 revenue — has outrun its intrinsic value, even looking at the most optimistic future scenarios for the hydrogen fuel sector. He compares Plug Power’s position today with Microsoft’s position in 1999: even though Microsoft remained a leader in the tech sector following the dotcom crash, it took more than a decade for its shares to recover.

But the stock’s bulls bet that if the world does shift towards hydrogen fuel for core economic activities such as shipping, big gains are to be had.

“[Plug] has the opportunity to be a very large company on the order of $100bn-plus in market cap.” said Oppenheimer’s Rusch. “And so that’s what people don’t want to miss. They don’t want to miss Tesla again.”

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Chancellor spots break in clouds after Brexit, Covid and battered finances




Rishi Sunak will next week deliver a Budget in the shadow of a pandemic, in the aftermath of Britain’s painful divorce from its biggest trading partner and with its public finances, on his own account, under “enormous strains”.

But the chancellor, in an interview with the Financial Times, insisted he can see a brighter future and that his second Budget since being appointed last February will help to build a “future economy” characterised by nimble vaccine and fintech entrepreneurs.

Sunak supported Brexit and now has to show it can work. He knows he cannot expect much help from the EU, which has shown no appetite for opening its markets to the City of London, but still insisted Brexit is an opportunity.

He said post-Brexit Britain would be an open country. “It’s a place driven by innovation, entrepreneurship, taking the agility we have after leaving the EU and putting that to good ends, whether in vaccines or fintech,” he said.

Sunak’s Budget on Wednesday will attempt to flesh out the government’s “build back better” slogan; Britain’s successful vaccine scientists and scrappy tech start-up twenty-somethings will be the poster children of this new approach.

While big and profitable companies are expected to face a hefty increase in their corporation tax bills — part of Sunak’s drive to restore fiscal discipline — the chancellor will focus on companies for whom a profit is a distant dream.

On Friday he told the FT he would launch a new fast-track visa scheme to help Britain’s fastest-growing companies recruit highly skilled workers, as part of a drive to build an “agile” post-Brexit economy.

He said he wanted to help “scale up” sectors such as fintech to compete for the best global talent. The new visa system, he added, would be “a calling card for what we are about”.

Next week Sunak will publish a report by Lord Jonathan Hill, Britain’s former EU commissioner, on the City of London’s listings regime, to make it more attractive for fast-growing tech companies.

“We want to make sure this is an attractive place for people to raise capital — we’ve always been good at that,” Sunak said. “We want to remain at the cutting edge of that.”

The chancellor confirmed Hill will look at whether London can be a rival to New York as a location for so-called Spacs, the modish blank-cheque vehicles that hunt for companies to buy and take public.

He declined to speculate on what Hill will recommend, but gave a broad hint he supports radical reform. “Do we want to remain a dynamic and competitive place for people to raise capital? Yes we do,” he said.

The loss of some City business, including EU share trading, to Amsterdam has reinforced criticism of the government over its negotiation of a trade deal that focused heavily on fish, but hardly at all on financial services.

Last summer the Treasury filled in hundreds of pages of questionnaires from Brussels about its regulatory plans for the City but Britain is still waiting for a series of “equivalence” rulings that would allow UK firms to trade with the single market. It could be a long wait.

When Emmanuel Macron, French president, was asked this month by the FT if he was in favour of Brussels granting “equivalence” to UK financial services rules, he replied simply: “Not at all. I am completely against.”

Sunak insisted he has not given up and that the Treasury remained “constructive and open” in talks with Brussels. But he added: “We live in a competitive world. It’s not surprising other people are looking after their interests.”

Sitting in his sparse Treasury office, stripped of any clutter, wearing his trademark bright white shirt, Sunak said: “We just need to focus on what we’re in control of. I’m enormously confident about both the future for the City of London and, more broadly, financial services.”

At the age of 40, Sunak is only just a year into the job. “When I got the job I had three weeks to prepare a Budget,” he recalled. “I genuinely thought at the time it would be the hardest thing professionally I would have to do in my life.” But that was before the full-blown pandemic hit the UK.

“That Budget turned out, probably, to be the easiest thing I did in my first year in the job. It has been a tough year, dealing with something that nobody has had to deal with before. There was no playbook. We had to move at speed and scale.”

His critics argue that handing out £280bn of borrowed money to support the economy may not have been that difficult either — Sunak’s approval ratings remain very high — and that the really difficult bit is yet to come: trying to rebuild the economy and the tattered public finances.

Conservative MPs are anxious that Sunak’s innate fiscal conservatism might lead him to make unwelcome raids on the finances of core Tory voters and businesses, just as the economy starts to reopen.

The chancellor is expected to freeze income tax thresholds, pushing people into higher tax bands as their pay rises. Another “stealth” move — freezing the lifetime pensions allowance at just over £1m for the rest of the parliament — was reported in the Times on Friday and not denied by the Treasury.

And all the while Sunak will carry on running up debts into the summer to protect the economy from what he hopes will be the last Covid-19 lockdown. He said he is “proud” of what the support measures have achieved so far.

“I’m going to keep at it,” he said. “Some 750,000 people have lost their jobs and I want to make sure we provide those people with hope and opportunity. Next week’s Budget will do that.”

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‘Digital big bang’ needed if UK fintech to compete, says review




Sweeping policy changes and reform of London’s company listing regime will spark a “digital big bang” for the City and turbocharge the UK’s fintech industry, according to a government-commissioned review.

The report, to be published on Friday, warns that the UK’s leading position in fintech is at risk from growing global competition and regulatory uncertainty caused by Brexit

The review, carried out by former Worldpay chief Ron Kalifa, is one of a series commissioned by the government to help strengthen the UK’s position in finance and technology.

Both sectors are under greater threat from rivals since the UK left the EU in January amid growing global competition to attract and retain the fastest growing tech start-ups. 

Changes to the UK’s listing regime are recommended, such as allowing dual-class share structures to let founders maintain greater control of their companies after IPO. The review also proposes a lower free-float threshold to allow companies to list less of their stock.

Kalifa said the rapid evolution of financial services, from online banking and investment to digital identity and cryptocurrencies, meant that the UK needed to move quickly.

“This is a critical moment. We have to make sure we stay at the forefront of a global industry. We should be setting the standards and the protocols for these emerging solutions.”

John Glen, economic secretary to the Treasury, said more than 70 per cent of digitally active adults in the UK use a fintech service “but we must not rest on our laurels . . . all it takes is a bit of complacency to slip from being a leader of the pack to an also ran”.

He said the government would consider the report’s recommendations in detail. 

The review was welcomed by executives at many of the UK’s largest fintechs and leading financial institutions such as Barclays. Mark Mullen, chief executive of Atom Bank, said the review was “essential to maintain momentum in this key part of our economy and to continue to drive better — and cheaper outcomes for all of us”.

The review also recommended the government create a new visa to allow access to global talent for tech businesses, a move likely to be endorsed by ministers as early as next week’s Budget, according to people familiar with the matter.

Fintechs have been lobbying for a visa scheme since shortly after the 2016 Brexit vote, but the success of remote working since the onset of the coronavirus crisis has reduced its importance for some firms.

Revolut, for example, has ramped up its hiring of fully remote workers in Europe and Asia to reduce costs and widen its potential talent pool, according to chief executive Nik Storonsky.

Charles Delingpole, chief executive of ComplyAdvantage, a regulatory specialist, agreed that fintech was becoming more decentralised. He added that the shift in tone from the government could have as big an impact as specific policy changes. “Whilst none of the policies is in itself a silver bullet . . . the fact that the government recognises the threat to the fintech sector and is publicly acting should definitely help.”

The review also proposed a £1bn privately financed “fintech growth fund” that could be co-ordinated by the government. It identified a £2bn fintech funding gap in the UK, which has meant that many entrepreneurs have in the past preferred to sell rather than continue to build promising companies. It wants to make it easier for UK private pension schemes to invest in fintech firms. 

The report also recommended the establishment of a Centre for Innovation, Finance and Technology, run by the private sector and sponsored by government, to oversee implementation of its recommendations, alongside a digital economy task force to align government efforts.

The review has identified 10 fintech “clusters” in cities around the UK that it says needs to be further developed, with a three-year strategy to support growth and foster specialist capabilities.

Dom Hallas, executive director at the Coalition for a Digital Economy (Coadec), said it was now important that people “follow through and actually implement” the ideas in the review. The sector’s direct contribution to the economy, it is estimated, will reach £13.7bn by 2030.

However, the review also raised questions over the role of the Competition and Markets Authority, saying that the CMA should better balance competition and growth. 

“There is a case for more flexibility in the assessment of mergers and investments for nascent and fast-growing markets such as fintech,” it said. 

“Success brings scale but as some businesses thrive, others inevitably will fail. Some consolidation will therefore be critical in facilitating the growth that UK fintechs need in order to become global champions.”

Charlotte Crosswell, chief executive of Innovate Finance, which helped produce the report, said: “It’s crucial we act on the recommendations in the review to deliver this ambitious strategy that will accelerate the growth of the sector.

“The UK is well positioned to lead this charge but we must act swiftly, decisively and with urgency.”

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Coinbase: digital marketing | Financial Times




Coinbase will be a stock riding a runaway train. The US cryptocurrency platform wants investors to think long term about the prospects for a global “open financial system”. Most will be unable to tear their eyes away from wild, short-term price swings in bitcoin, the world’s largest digital asset. 

This has its benefits. Coinbase, which has filed for a US direct listing, makes most of its money from commissions on crypto trades. Sales more than doubled to $1.3bn last year. The company has swung from a loss to net income of $322m as crypto prices jumped.

But the company has given no detail on the financial impact of the 2018 bitcoin price crash. Will Coinbase’s 2.8m active retail users and 7,000 institutions hang on if there is another protracted price fall? 

Coinbase was valued at $8bn in a 2018 private funding round and $100bn in a recent private share sale, according to Axois. That rise looks remarkably similar to the increase in bitcoin’s price from less than $5,000 to more than $50,000 this year.

The rally is hard to justify. Bitcoin has not become a widely used currency — nor is the US ever likely to countenance that. It offers investors no yield. Volatility remains high. Elon Musk’s tweet this weekend that bitcoin prices “seem high lol” propelled a sharp fall that hit shares in crypto-related companies. Shares in bitcoin miner Riot Blockchain have lost a quarter of their value this week. 

Prospective investors in Coinbase should keep this in mind. Its listing will take cryptocurrencies further towards the financial mainstream. But risk factors are unusually numerous, including the volatility of crypto assets and regulatory enforcement. 

Both threats are widely known. Another risk factor in the listing document deserves more attention. Vaccination campaigns and the reopening of shuttered sectors of the economy is raising yields in safe assets such as Treasuries. Risky trades may become less attractive. Coinbase might be about to go public just as the incentive to trade cryptocurrencies is undermined. 

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