Monthly
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July 2024
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The Swiss National Bank unwaveringly continued to ease its monetary policy in June.
SNB rate-cutting cycle already over?
The Swiss National Bank unwaveringly continued to ease its monetary policy in June. Its second consecutive quarter-point policy rate cut to a present level of 1.25% probably came as yet another surprise to at least half of market observers. The sharp appreciation of the Swiss franc since late May likely played a key role in the SNB’s interest-rate decision. The national bank also lowered its inflation forecast again. It now sees an inflation rate of just 1% for Switzerland at the end of the forecast horizon. In the wake of the latest rate cut, Switzerland’s interest-rate policy can already be deemed neutral and appropriate.
Still too soon for a Europe trade
The bull rally on the global equity market continued in the second quarter. Beneath the surface, though, investors have increasingly weeded out their stock portfolios in recent weeks. US stocks once again ranked among the winners, driven by the technology giants. The uninterrupted rally has recently prompted many analysts to raise their year-end forecasts for the US market. There are more and more arguments making a case for a rotation into European large caps, but a final capitulation by investors seems to be the only thing that’s still missing.
Let’s talk about… inflation
Of the multitude of macroeconomic variables that exist, inflation arguably ranks among the ones most feared. However, it frequently gets misinterpreted, but not just by investors and consumers. Inflation routinely also befuddles central bank officials over and over. But we can’t just simply ignore it because inflation plays a role even with regard to US presidential elections. So, it’s better to know as much about it as possible. In this issue of Monthly Market Monitor, we search for the answers to some frequently asked questions about inflation.
Uranium: An indispensable natural resource
Going unnoticed by the mass of investors, the price of uranium has risen severalfold in recent years. The nuclear renaissance is underpinned by a solid foundation and looks set to continue. Atomic energy is an indispensable part of the green transition and is being viewed with a little more levelheadedness by now through the sustainability lens, even by nuclear power skeptics. Every investor must make his or her own judgment about whether atomic energy really is even the ultimate ESG investment. In the meantime, there is no longer any shortage of ways to invest in nuclear energy.
The European Parliament elections ended with gains for right-wing parties, as expected. The real surprise came shortly afterwards when Emanuel Macron announced the dissolution of France’s parliament. The French president’s risky gamble caught his own political party and the financial markets off guard. The reaction by French stocks (CAC 40 index: –7%) and government bonds (credit spread: +40 basis points) was accordingly touchy in the weeks that followed. However, the biggest political risk posed by the snap elections in France is not a potential lurch to the right. The outlook for France’s already record-high public debt (112% of GDP) and its already tarnished credit rating (S&P: AA–) would be even worse under a coalition government led by the left, which would present the greatest risk of fiscal irresponsibility (including a rollback of pension and labor market reforms and an increase in social spending). France has to hope for a summer fairy tale on July 7.
The recent signs of weakness in US macro data have thus far been viewed as a healthy cooldown by most economic observers.
USA: In a cooling phase
Macro Radar
Taking the pulse of economic activity
The recent signs of weakness in US macro data have thus far been viewed as a healthy cooldown by most economic observers. However, the consensus is often wrong, so at the least, a healthy dose of skepticism is appropriate. For example, the steady decline in job openings is not alarming yet on its own, but if this trend continues, large-scale layoffs could soon lie ahead. The recent upward trend in initial unemployment insurance claims could be an early warning sign in this regard. Another cause for caution is the fact that excess personal savings from the pandemic have been depleted by now, according to most estimates, and consumer confidence could soon begin to wane. In an economy twothirds based on consumer spending, that can make the decisive difference. US Federal Reserve Chairman Jerome Powell hinted in June that the USA’s central bank has its eyes on the lookout for a potential deterioration in the employment market. If one becomes apparent, interest-rate cuts would likely soon be in the offing.
Switzerland: Rate-cutting cycle already over?
The Swiss National Bank unwaveringly continued to ease its monetary policy in June. Its second consecutive quarter-point policy rate cut to a present level of 1.25% probably came as yet another surprise to at least half of market observers. The sharp appreciation of the Swiss franc since late May, which has been driven in large part by the political earthquake in France, likely played a key role in the SNB’s interest-rate decision. The national bank also lowered its inflation forecast again. It
Rollercoaster of interest-rate expectations | Headed
now sees an inflation rate of just 1% for Switzerland at the end of the forecast horizon. In the wake of the latest rate cut, Switzerland’s interest-rate policy can already be deemed neutral and appropriate because economic activity in Switzerland is slowly accelerating. Switzerland’s State Secretariat for Economic Affairs and the KOF Swiss Economic Institute both project GDP growth of +1.2% for the country for 2024, excluding exceptional sporting event effects stemming from the European Football Championship tournament and the Summer Olympic Games (+0.4%). Another SNB rate cut is unlikely to happen going forward unless economic activity in the Eurozone plummets and the European Central Bank drastically cuts interest rates in response to that.
Europe: Double-barreled sentiment damper
Although a scenario of that kind is not the likeliest one to occur, central bank officials in Frankfurt nonetheless have a tough job ahead of them because the upcoming early elections in France create a new element of uncertainty and because Europe’s economic growth engine is still sputtering. The upbeat surprise in purchasing managers’ index readings in May was followed by a disappointment on the downside a month later, particularly in Germany, where manufacturing sentiment took another dive. At the same time, the latest data points on wage negotiations were uncomfortably high, which several ECB Governing Council members are reluctant to ignore. The traditionally consensus-minded ECB therefore is unlikely to implement its next interest-rate cut until September. The Bank of England, meanwhile, has enough evidence by now to join in the global rate-cutting cycle itself and to justify an initial UK rate cut in August. Inflation in the UK pulled back to 2% in May, dropping to the upper edge of the target range for the first time.
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The broad European equity market has only been drifting horizontally since April, at least judging by the blue-chip Euro Stoxx 50 yardstick.
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Equities: Still too soon for a Europe trade
• The bull rally on the global equity market continued in the second quarter. Beneath the surface, though, investors have increasingly weeded out their stock portfolios in recent weeks. US stocks once again ranked among the winners, driven by the technology giants. The uninterrupted rally has recently prompted many analysts to raise their year-end forecasts for the US market. At the same time, market breadth is narrowing by the day. Whereas roughly 90% of all stocks were trading above their 50-day moving average at the start of this year, at the end of June only around half were still above that mark. The combination of bullish sentiment and sagging technical market indicators makes the equity market susceptible to a correction. US stocks thus far have shown themselves to be a safe haven in the face of the lengthy list of geopolitical hotspots at the moment, but the auspices could change as the US presidential election in early November draws nearer. If the markets follow the historical pattern, in the months ahead one could at least expect to see a rise in volatility, which typically goes hand in hand with falling stock prices. The upcoming reporting season for the second quarter could also generate negative momentum, especially if the Magnificent 7 disappoint investors’ high expectations. Asset Allocation Monitor
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• The broad European equity market has only been drifting horizontally since April, at least judging by the blue-chip Euro Stoxx 50 yardstick. But a closer look at the details reveals a surprise: the equal-weighted MSCI index for the Eurozone has intermittently registered new year-to-date highs in recent weeks and is running neck and neck with its US counterpart since the start of 2024. US Big Tech is the sole factor making the difference. There are more and more arguments making a case for a rotation into European large caps. Europe’s growth differential versus the USA is narrowing, the European Central Bank has already pivoted to an easing of monetary policy, and the recovery of the Chinese market is likely to have a positive impact on Europe. A final capitulation by investors seems to be the only thing that’s still missing, though. But the snap elections surprisingly called in France could bring about a capitulation in the weeks ahead.
• The Swiss equity market recently has decoupled from the twists and turns of European politics and the attendant battered sentiment and has been trending upward in spite of the Swiss franc’s sharp appreciation. Its rally of late owes in part to the good performance of defensive sectors such as the pharmaceutical industry. In the bigger picture, though, the Swiss market continues to have catch-up potential because the Swiss Market Index is still a good 5% off its all-time high hit at the end of 2021. The interest-rate pivot by the ECB and the twin rate cuts by the Swiss National Bank re-enhance the attractiveness of defensive stocks that pay high dividends, which figure prominently in the Swiss market. The Swiss equity market’s comeback could thus continue in the near future.
Fixed income: Macron’s gamble
• Emanuel Macron’s gamble has put the polarization of European politics (and the risks associated with that) back on the agenda, causing substantial turmoil on bond markets as a result. After the announcement of snap elections in France and in anticipation of a fierce election battle in time-lapse speed, investors took flight to well-known safe havens in June. Yields on 10-year German Bunds and Swiss Confederation bonds shed 30 basis points. Meanwhile, the yield on 10-year French government bonds climbed to as high as 3.3% at its peak. Consequently, the real fever thermometer – the credit spread versus Germany –widened intermittently to 80 basis points, reaching its highest level since the end of the European sovereign debt crisis at the start of the 2010s. This latest episode illustrated once more the value of diversification in investment-grade bonds.
• Uncertainty about France’s future political course could persist for a while even after the elections on July 7, so investors shouldn’t just reach out and grab French government bonds, despite their increased yields. A certain reassessment of the quality of French bonds definitely seems warranted against the backdrop of France’s beleaguered credit rating and out-of-control public finances. A potential buying opportunity for investors is more likely to arise in peripheral Eurozone bonds, which unjustly have likewise come under pressure at the moment. Spreads here are likely to tighten again in the medium term. A “Frexit” is no longer on tap if the French Right wins a substantial electoral majority. The Rassemblement National has also recently been showing a little less aggressiveness about re-lowering (at great expense) the retirement age in France. Meanwhile, the real worst case for France – a victory by the leftist alliance – is a classic tail risk with a rather low probability of occurrence.
Alternative assets: Volatile oil price
• OPEC(+) in recent quarters had been trying hard to put a floor under the price of crude oil by cutting petroleum production. This strategy of curtailing supply had limited success, however, in part because there was recurring friction between the members of the oil cartel and repeated straying from agreed output quotas. The OPEC ministerial meeting statement at the end of May once again used convoluted wording and, on a second read, turned out to be nothing other than an announcement of a gradual repeal of the production cuts. In reaction to the news, the price of oil plunged 10% in the space of a few days. Although oil prices have recovered in the meantime from this PR disaster, a look at the fundamentals indicates that sustained prices above USD 90 per barrel are unlikely for the time being.
• The price of Bitcoin lost a lot of ground in June. The euphoria following the regulatory approval of Bitcoin ETFs at the start of this year has largely vanished in the meantime. Some hedge funds probably have also lost interest due to the dwindling arbitrage opportunities. A bearish reversal pattern has recently been forming on Bitcoin price charts. A sustained drop below the USD 57,000 level would establish a double top.
Currencies: Swiss franc stays true to itself
• EUR/USD: The EUR/USD exchange rate trended downward in June, but the euro’s losses stayed within bounds in the face of elevated political uncertainty (read: France) and an increased interest-rate disadvantage caused by the ECB’s initial rate cut. The EUR/USD cross is still moving in a tight trading range, and a stronger directional trend in not in sight at the moment. However, if US economic activity continues to slow, the euro could surprise on the upside during the second half of this year.
• GBP/USD: Compared to the euro, the British pound has turned in a distinctly stronger performance year-to-date. But it, too, is likely to get into an interest-rate disadvantage versus the US dollar in the months ahead because an initial rate cut by the Bank of England now seems possible by as soon as August in the wake of the recent pullback in inflation to 2%. However, any slump in sterling is likewise likely to be limited to the lower edge of the current trading range.
• EUR/CHF: The Swiss franc has been benefiting lately from the increased risk aversion on the European financial market. So, as expected, the franc’s (minor) swoon since the start of this year turned out in hindsight to be a correction within a long-term appreciation trend. The SNB used the franc’s regained strength as an opportunity to implement another – and perhaps already final – interest-rate cut. The SNB now probably will largely allow market forces to determine the franc’s exchange rate as long as the trading range between 93 and 99 centimes defined in the first half of this year remains intact.
The price of Bitcoin lost a lot of ground in June.
AI-phoria on equity markets continued apace in June. After Nvidia’s stock price nearly tripled since the start of this year, the chip manufacturer in June temporarily captured the top spot as the world’s most valuable company. Together with Apple and Microsoft, three US Big Tech giants are each worth more than USD 3 trillion by now. However, skepticism among professional investors has been mounting lately in the face of the rally. In the latest fund manager survey conducted by Bank of America, 69% of the respondents said they considered the Magnificent 7 a crowded trade by now. Sentiment and technical market indicators also are increasingly flashing warning signs heralding a correction soon. Institutional investor cash holdings, for instance, have decreased to an allocation of 4% lately, the lowest level in three years. At the same time, short interest in ETFs on the S&P 500 index is currently the lowest it’s been since at least 2018. Although the Nasdaq 100 index is setting new all-time highs, there recently have been more new 52-week lows than highs hit by individual stocks on the tech-heavy Nasdaq exchange. The last time a constellation of this kind was observable was shortly before the Nasdaq 100’s final top in late 2021 and then again before the intermediate correction in April of this year.
Chart in the Spotlight
Correction in sight? | Market breadth leaves a lot to be desired Nasdaq index and new 52-week highs and lows
Theme in Focus
Let’s talk about… Inflation
Of the multitude of macroeconomic variables that exist, inflation arguably ranks among the ones most feared. However, it frequently gets misinterpreted, but not just by investors and consumers. Inflation routinely also befuddles central bank officials over and over. But we can’t just simply ignore it because inflation plays a role even with regard to US presidential elections. So, it’s better to know as much about it as possible. Below we try to answer some frequently asked questions about inflation.
Why is inflation so despised?
Inflation truly is a loathed financial variable. But why actually? After all, as a general rule, inflation decreases the value of debt. Inflation thus should at least delight debtors. Moreover, currencies in theory are really just units of account. If a pizza today costs 20 francs, I need 100 francs to buy five of them. If the same pizza tomorrow costs 30 francs, then I need 150 francs to buy five. But, unfortunately, it isn’t as simple as that because I won’t have 50% more purchasing power tomorrow. Wages tend to rise sluggishly, lagging behind inflation, and that’s the real problem for many consumers. Inflation makes them subjectively feel poorer – and often also renders them objectively poorer in the near term – because it takes a while for paychecks to adjust to the new general price level. Debtors, too, don’t benefit until the moment that they are able make their fixed repayment installments out of a higher nominal income. Robert Shiller described the problem of wage rigidity and its effects back in the 1990s.1
Two new surveys conducted in the United States by Harvard economist Stefanie Stantcheva2 confirm Shiller’s discoveries made at that time. Stantcheva found that (US) consumers’ aversion to inflation stems from the widespread conviction that their wages cannot keep pace with rising prices, that they are left poorer on balance, and that they therefore are forced to adjust their spending behavior (reducing the quality or quantity of the goods they purchase). Stantcheva, however, also uncovered some other interesting findings. She discovered, for example, that when prices rise, people tend to blame the government or businesses for that. Who exactly gets blamed depends on a person’s political mindset. Republicans tend to blame Joe Biden while Democrats are more likely to blame greedy companies. When wages increase, most people do not attribute that to inflation, but instead tend to identify their own on-the-job performance as the reason for the raise. Two-thirds of the survey respondents said they believe that inflation generally indicates a “poor state of the economy.” In reality, though, inflation can in fact be
caused precisely by economic growth and low unemployment. According to Stantcheva’s evaluation of the survey results, the majority of the respondents additionally believe that the wages of people with high incomes rise faster during periods of inflation, exacerbating inequality. A fact check reveals that this actually hasn’t happened, at least not during the post-pandemic years. People across all income brackets report that they feel more stressed by rising prices. Eighty-seven percent of the survey respondents said that’s why they sometimes or frequently are angered by inflation. This probably is the reason why US President Joe Biden and his election campaign team are watching inflation statistics like a hawk right now.
Inflation truly is a loathed financial variable. But why actually?
Sources: Autor, Dube & McGrew, Kaiser Partner Privatbank
Why do (most) central banks have a 2% inflation target?
Thirteen out of 16 central banks in the industrialized nations consider 2% the optimal rate of inflation. The history of this widespread inflation target stretches back more than 30 years. However, in the beginning, in contrast to today, it was not a long-term target. When the Reserve Bank of New Zealand issued a (3.5%) target for the first time in 1990, it was intended more as a short-term benchmark after years of excessive inflati
Contrary to popular belief | No widening wage inequality Evolution of income by income bracket
on. But inflation targeting was soon copied by the Bank of Canada (BoC) in 1991, though not without a good deal of skepticism – at a meeting of the Bank for International Settlements (BIS), the BoC was accused of putting its reputation at stake because it is difficult to abide by such an explicit mandate, the BIS said. The BoC likewise started off with an inflation target of 3.5%, which it then continually lowered to 2% by 1995. In Europe, in turn, the Bank of England in 1992 was the first to issue an inflation target after the UK exited the European Monetary System. Today, a 2% rate of inflation is considered the gold standard, but what exactly makes that number so relevant for monetary policy?
• Prevention of deflation: Deflation brakes economic activity because it prompts consumers to spend less money in expectation of lower prices in the future. In addition, deflation raises the real value of debt, which can lead to higher default rates and financial instability. A moderate 2% inflation target creates a buffer against the risk of deflation.
• Sound growth: (Overly) high inflation necessitates a restrictive monetary policy, which stifles economic growth. Under the highly controversial concept of the Phillips curve, the dual goals of price stability and full employment can best be achieved at a 2% rate of inflation.
• Price stability and stable underlying conditions: (Overly) high inflation erodes purchasing power, devalues savings, and causes uncertainty. Central banks seek price stability and strive to combat the aforementioned adverse effects by aiming for a relatively low inflation rate of 2%. Moreover, studies from the 1990s showed that inflation statistics tend to overstate the actual general price trend. If that’s true, a 2% rate of inflation therefore would be closer to “stable” prices than one would suspect at first glance.
• Expectation formation and credibility: By defining a straightforward inflation target, central banks try to anchor the public’s inflation expectations. If businesses and consumers proceed on the assumption that inflation will stay in the sweet spot at a level of around 2%, they incorporate their expectations into pricing, wage negotiations, and contracts. This leads to more stable economic growth dynamics and ultimately enhances a central bank’s credibility.
• Monetary-policy leeway: An inflation target of 0% would give central banks little room to cut policy rates during phases of weak economic activity. A 2% target, in contrast, enables central banks to stimulate economic activity via lower (or even negative) real interest rates.
As the points above illustrate, the 2% target isn’t an arbitrary figure, but rather is the result of empirical evidence and experience. At a rate of 2%, inflation is neither excessively high enough to harm economic activity nor overly low enough to risk turning into deflation. Last but not least, there is also an international policy consensus on the 2% target, which may very well be in the interest of the central bank community because if everyone is pursuing the same inflation target, central bank officials cannot be so easily accused of acting irresponsibly. Nobel economics laureate Paul Krugman calls that the “great advantage of conventionality.”
Should central banks have reacted more swiftly to the surge in inflation?
Inflation in Switzerland has long since returned to within the Swiss National Bank’s comfort zone, and inflation in the Eurozone has already pulled back enough in recent months so that a 2 now precedes the decimal point again. The European Central Bank probably would gladly like to take credit for this “success” in taming inflation, almost forgetting that it wasn’t all that long ago that the ECB came under sharp criticism for allegedly having raised interest rates far too late. But would the ECB really have been able to prevent inflation from surging to double-digit territory by hiking interest rates sooner and more vigorously? A real-life experiment tracking the evolution of inflation in the Czech Republic and Slovakia over the last three years provides an answer to that question.
Those two small open national economies are highly integrated into European supply chains. They were part of Czechoslovakia until that country’s breakup in 1992. The big difference between them today is that Slovakia has been a member of the Eurozone since 2009 and has thus “outsourced” its monetary policy to the ECB. The Czech Republic, in contrast, continues to have its own central bank (the Czech National Bank (CNB)), its own currency (the Czech koruna), and its own monetary policy. When inflation spiked as a result of the pandemic shock, the CNB reacted quickly and implemented an initial interest-rate hike in June 2021. Over the next 12 months, it raised its policy rate by a total of 675 basis
points. The benchmark lending rate in the Czech Republic thus stood at 7% before the ECB even began to initiate its rate-hiking cycle. The ECB didn’t undertake its first rate hike until July 2022 and subsequently raised its policy rate by a total of just 450 basis points to 4%. Despite those very different monetary-policy approaches, both countries have exhibited astoundingly similar inflation trajectories.
The experiment confirms that inflation in both countries was caused primarily by external supply shocks and was not driven by domestic demand. Conversely, the subsequent disinflation in both countries is mainly attributable to the recovery from the supply-chain and raw-material price shock. Central banks could not influence those external factors through their interest-rate policies. Even though the European Central Bank evidently was way behind the curve in the current interest-rate cycle, an earlier reaction arguably wouldn’t have altered the inflation trajectory at all. Against this backdrop, the partially gruff criticism of central-bank officials in recent years was perhaps a bit overblown in some isolated instances.
Why is inflation in Switzerland so low?
Switzerland in recent years has provided impressive proof validating its reputation as an island of monetary stability and has reaped many an envious stare from abroad because of that. Whereas inflation climbed to a peak of 9.1% in the USA and even exceeded 10% for a time in the Eurozone, it topped out at just 3.5% in Switzerland. Inflation in Switzerland has been back below 2% for already a year now. Yet even the brief and moderate rise in inflation in international comparison caused some bellyaching here and there among the Swiss. Many of them implicitly regard low inflation as almost a law of nature. There are multiple reasons behind the Swiss inflation phenomenon:
• Strong franc: Recent decades have seen the Swiss franc appreciate continually against all of the other major currencies. It is considered one of the few safe havens on the financial market. Switzerland’s steadfast political and economic stability is valued by investors, particularly in turbulent times. The strength of the franc mitigates inflation from imported goods. The Swiss National Bank actively leverages this effect whenever necessary. Between spring 2022 and autumn 2023, the SNB sold CHF 140 billion worth of foreign-currency holdings. This contributed to increasing the external value of the franc and absorbed part of the upward price pressure from abroad.
• Credible central bank: The SNB is held in high esteem on the international capital market, largely as a result of its excellent track record in combating inflation. Its price-stability target range of 0%–2% is more stringently defined than the ones pursued by other central banks. While the US Federal Reserve strives for full employment in addition to keeping
Sources: Bloomberg, Kaiser Partner Privatbank
inflation low and whereas the ECB would like to go one step further by also incorporating sustainability aspects in its monetary policy, the SNB focuses exclusively on price stability. The SNB places a higher priority on keeping inflation under control than other central banks do.
• Sound fiscal policy: A certain culture of stability also prevails in Switzerland’s fiscal policy. The country’s national debt brake ensures that Switzerland’s public debt load, at 39% of GDP, is much lower than the public debt burden in Italy (144%), France (112%), and Germany (67%), for example. The SNB therefore is not under pressure to help out the state by keeping interest rates low or by buying government bonds. There is a broad political consensus in Switzerland on the necessity of maintaining an independent central bank. That reinforces trust in the Swiss franc.
• General wage restraint: The risk of a wage-price spiral tends to be lower in Switzerland than elsewhere. General wage restraint, wage-setting practices that are mostly decentralized in individual companies, a culture of consensus between employers and employees, and constant wage pressure due to high immigration normally ensure that no appreciable second-round effects arise in Switzerland, unlike in other countries.
• Strong competitive pressure: Since Switzerland is surrounded by countries with substantially lower price levels, Swiss companies constantly face fierce competition from abroad. The strong franc compels innovation, high productivity, and cost efficiency. The fierce intensity of competition makes a noteworthy contribution to keeping inflation in Switzerland low.
• Customs protections for agricultural goods: Due to its protectionist agricultural policy, Switzerland imports little food. The prices of agricultural goods that nonetheless do get imported are often adjusted to the domestic price level by applying customs duties. Price fluctuations on global food markets therefore have little effect on food shelf prices in Switzerland.
• Inertial state prices: One-quarter of all consumer prices (e.g. electricity prices) in Switzerland are administered by the state. Although this does not prevent inflation in general, it does smooth out price movements.
• Energy mix and energy efficiency: Switzerland covers a large part of its electricity needs with non-fossil energy sources such as hydropower (62%) and atomic power (29%). Fluctuations on the international energy market (in the natural gas space, for example) therefore do not cause an immediate price shock in Switzerland. Moreover, Switzerland exhibits low energy intensity because it has fewer energy-intensive industries than other countries do and produces with comparatively greater energy efficiency in those sectors.
ESG: Sustainability Corner
Uranium: An indispensable natural resource
Going unnoticed by the mass of investors, the price of uranium has risen severalfold in recent years. The nuclear renaissance is underpinned by a solid foundation and looks set to continue. Atomic energy is an indispensable part of the green transition and is being viewed with a little more levelheadedness by now through the lens of sustainability, even by nuclear power skeptics. Every investor must make his or her own judgment about whether atomic energy really is even the ultimate ESG investment. In the meantime, there is no longer any shortage of ways to invest in nuclear energy.
A little-noted bull market
The global financial market is deep, wide, and overwhelming in its complexity. This leaves room for developments that long go undetected by the mass of investors. In one overlooked niche, the price of uranium has roughly quintupled since 2017. At the start of 2024, the silvery heavy metal climbed to its highest level in 16 years at prices just above the USD 100-per-pound mark. Calling this a (heretofore undiscovered) bull market isn’t an exaggeration for once in this instance. And it’s all the more astounding when one considers that the uranium industry’s ability to survive in the aftermath of the Fukushima catastrophe in early 2011 was more than in doubt. At that time, around a third of all nuclear reactors worldwide were temporarily shut down. A sustained excess supply of uranium caused its price to plummet in the years thereafter by 70%. Adjusted for inflation, the price of uranium today is still well below its all-time high hit in 2007. Nevertheless, one can speak of a “nuclear renaissance” both from a price standpoint and regarding the reputation of atomic energy.
Atomic energy is back in vogue
The demand prospects for uranium have indeed brightened considerably in recent years. The radical change that has taken place here goes hand in hand with a swing in sentiment. Atomic energy is no longer being stigmatized and instead is increasingly being viewed as a vital solution for the transition to a cleaner energy future and for safeguarding national security interests. The latter has topped the list of concerns and priorities in many countries ever since, if not before, Russia’s invasion of Ukraine. And since 2022, even the European Union Taxonomy now classifies some atomic energy activities as sustainable. Many countries have done an about-face on atomic energy in recent years (USA, South Korea, Belgium, Finland), have doubled down on
Sources: Bloomberg, Kaiser Partner Privatbank
their pro-nuclear stance (France, UK, Netherlands), or are contemplating utilizing this technology in the future for the first time (Poland, South Africa, Indonesia, Vietnam). Even Japan has brought its operational nuclear reactors back on line. Germany remains the odd man out – the exception that confirms the rule – in this list of countries.
Atomic energy got an additional boost in December of last year from the United Nations COP28 climate summit in Dubai, where more than 20 countries (including the USA, France, Japan, Canada, and the UK) declared their intention to triple global atomic energy production capacity by 2050. The implication of that declaration, which is even more ambitious than the net-zero scenarios put forth by the International Energy Agency (IEA), is unmistakable: enormous investment in atomic energy is needed in the years ahead. The IEA calculates that it will take USD 125 billion of investment per year from 2026 through 2030 to reach the net-zero target. Against this backdrop, the rally in the price of uranium loses its purported speculative nature and gains a solid foundation. The big question in the meantime is no longer whether atomic energy is to be expanded, but whether that can happen fast enough.
Firm commitment | The nuclear renaissance has begun
Global nuclear power generation in terawatt-hours (TWh)
10 000
8 000
6 000
4 000
0 2 000
Sources: IEA, Kaiser Partner Privatbank
Sources: IEA, Kaiser Partner Privatbank
A series of misunderstandings?
The wind thus has clearly shifted in favor of atomic energy. However, public opinion on this established mainstream source of energy is still divided. Large swaths of the public consider atomic energy just as hazardous as coal, for example. Misinformation and/or a complete lack of communication – but not substantiated facts – about the various aspects of nuclear power technology are the main cause of this poor public perception. Fears about nuclear accidents are indeed understandable, but are exaggerated for the most part. For one thing, nuclear power plant accidents are rare tail-risk events. Moreover, their consequences in terms of injuries and fatalities are overrated. With the exception of Chernobyl, the accidents at Three Mile Island (in 1979) and Fukushima Daiichi (in 2011) caused no casualties and had only minimal radiological effects. A lesser-known fact about Chernobyl is that the nuclear power plant stayed in operation for another 14 years after the accident until political pressure from the European Union forced it to shut down for good in the year 2000. Last but not least, since lessons have been learned from previous mistakes, the risk of a catastrophe is smaller than ever these days. The image of Homer Simpson bumbling as a careless safety inspector at the Springfield nuclear power plant couldn’t be farther from reality. In fact, atomic energy has an excellent safety track record, especially when one factors in air pollution caused by greenhouse gas emissions. Coal poses the greatest hazard in this sense. Atomic energy is the lowest-CO2-emitting form of power generation right behind wind power.
Despite the safety and “cleanliness” of nuclear energy, it has been overshadowed over the last two decades by its green competitors, which have registered extraordinary growth rates, largely on the back of steadfast political support that atomic energy has lacked. But the narrative of hero (wind and solar) and villain (nuclear power) was never really credible or objective because atomic energy actually is superior in multiple respects. It not only is safe and emits minimal CO2, but is also scalable and capable of continuously providing baseload electricity. Moreover, it is highly efficient and boasts by far the highest capacity factor – 93% – among all power-generating technologies. This means that nuclear power plants produce electricity almost continuously close to their maximum output potential.
Another advantage of atomic energy is its comparatively smaller resource requirements. Across its entire life cycle, it requires much less concrete, steel, and other metals per unit of electricity produced than other power-generating technologies do. Whichever way one looks at it, atomic energy is superior overall to all other existing technologies.
Sources: BCA Research, Kaiser Partner Privatbank
Sources: US Energy
(EIA), Kaiser Partner Privatbank
Atomic energy is less resource-intensive | Wind and solar actually aren’t that “green”
requirements in
TWh
Megatrends favoring atomic energy
That’s why more and more pragmatism is creeping into the debate over the ideal energy mix for the future. Geopolitical considerations aren’t the only concerns in play here. China, for example, needs to invest massively in atomic energy also because it has no other way to make a successful transition from coal to wind and solar. And finally, the sheer continued enormous surge in energy needs is also what’s turning atomic energy into a trending topic. The IEA, for instance, estimates that global electricity production will increase by 25% by the end of this decade and will even double by 2050.
Three megatrends are playing a part in stoking the world’s growing hunger for energy: artificial intelligence (AI), electric mobility, and reshoring and nearshoring. In the case of AI, data centers are the main electricity guzzlers. Their demand for energy and the carbon dioxide emissions that data center operations cause will soar in the years ahead. In the year 2030, data centers will likely already account for 13% of the world’s total demand for electricity and 6% of global CO2 emissions. Atomic energy will be urgently needed to cope with this dual problem, in large part also because the big technology companies want to reach pretty ambitious netzero targets.
Decarbonization goals are likewise a driving factor in the electric mobility space – most industrialized countries have enacted bans on internal combustion engine vehicles that are set to phase in during the 2030–2040 period. The IEA estimates that the global electric fleet will swell to 480 million vehicles and make up 30% of the total global vehicle fleet by 2035. Electric light utility vehicles, buses, and heavy trucks will also play a growing role here alongside electric cars. The total energy needs of electric mobility look set to increase by a factor of 17 by then. However, each electric vehicle is only as clean as the energy source used to charge it is. Finally, the buildup of enormous semiconductor chip manufacturing capacity as part of American and European reshoring and nearshoring efforts also requires a permanent stable supply of electricity that is as clean as possible. This makes yet another case for atomic energy, which – unlike wind and solar power – is available day and night.
Structural supply deficit
The increased acceptance of atomic energy is reflected not just by lip service being paid to nuclear power, but also by hard facts. Almost 500 nuclear power plants are currently in different stages of development. The net number of reactors in operation will steadily increase in the years ahead, in part because many nuclear power plants are likely to be kept running for longer than originally envisaged. This means that demand for uranium will likewise increase. The World Nuclear Association projects a 30% rise in demand for uranium by 2030 and a more than doubling of demand by 2040. There is a risk with many natural-resource commodities that high or rising prices quickly lead to a contraction in demand and practically constrain themselves on their own, but this risk is less acute in the case of uranium because demand for it is very inelastic. Although it costs a lot of money to build nuclear reactors, it costs relatively little to operate them. In fact, the cost of ready-to-use fuel rods accounts for just 5% to 10% of a nuclear power plant’s operating expenses.
Sources: BP Statistical Energy Outlook, Kaiser Partner Privatbank
The constantly increasing demand for uranium faces a supply that is hardly growing and is unstable to boot (due in part to geopolitical reasons). The market is in a permanent supply deficit that looks set to continually widen in the years ahead. Uranium stockpiles, which expanded significantly until 2016 in the aftermath of the Fukushima accident, have been gradually drawn down in recent years. However, even today’s return to a significantly elevated uranium price level does not provide enough of an incentive yet to substantially enlarge production. As a result of high cost inflation, the breakeven point for a new greenfield mining project to turn a profit stands at a uranium price of around USD 100 per pound. Sustained high prices above that level would be necessary to mobilize substantial capital for new projects. But even then, it would take 10 to 15 years until new uranium mines and enrichment facilities could go into operation. The upshot of a simple supply-and-demand analysis is straightforward: the uranium bull market is unlikely to come to an end until far in the future at much higher price levels than today.
Play the bull market or stay on the sidelines? Whoever would like to take part in the uranium story has more and more ways to do that these days. Although uranium cannot be stored in a safe deposit box like gold or silver can, one can nonetheless build direct exposure to the heavy metal via futures contracts, though that entails a lot of administrative work and expenses. One alternative that’s easier to put into action is to invest in closed-end funds (e.g. Sprott Physical Uranium Trust) or in companies (Yellow Cake Plc) that buy up uranium on the spot market, warehouse it, and bet on prices rising in the future. Those vehicles have already accumulated almost 90 million pounds of uranium in recent years, which equates to around 50% of annual worldwide demand.
Since one should sell shovels when people go digging for gold, another option is to invest in ETFs (including the Global X Uranium ETF and the VanEck Uranium and Nuclear Technologies UCITS ETF) that cover the entire atomic energy production chain and include shareholdings in mining companies and manufacturers of nuclear power plant components. Thematic ETFs of this kind could get a further boost in the quarters ahead, due in large part to amendments to the EU Taxonomy. Every investor must make his or her own judgment about whether atomic energy is actually even the ultimate ESG investment in light of the challenges posed by the green transition. Regardless of the verdict, though, it can hardly be denied any longer that atomic energy has a key role to play in the decarbonization of our planet. Even nuclear power skeptics therefore are increasingly viewing atomic energy with a little more levelheadedness today through the lens of sustainability.
The growing fleet of nuclear power plants… | …is bound to boost demand for uranium Existing and planned nuclear reactors
Sources: WNA, Kaiser Partner Privatbank ,
Widening supply deficit | Fuel for a rising price of uranium
Supply/demand forecast in millions of pounds
Sources: Alpine Macro, Kaiser Partner Privatbank
Fundamental im Aufwind | Ein nachhaltige Wette? Anlagevehikel für Uran
Sources: Bloomberg, Kaiser Partner Privatbank
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