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Sector falls 20% in two months, with some wind turbine shares weighed down by contracts struck at unfavourable prices

Renewable energy stocks have sold off sharply in recent months, underperforming fossil fuel companies by a distance, as the sector battles the impact of higher interest rates and contracts struck at unfavourable prices.

The S&P Global Clean Energy Index, which is comprised of 100 of the biggest companies in solar, wind power and other renewables-related businesses, has dropped 20.2 per cent over the past two months, putting it on course for its worst annual performance since 2013. The oil and gas-heavy S&P 500 Energy Index, in contrast, has added 6 per cent.

The declines, which come despite tens of billions of dollars in tax credits, subsidies and loans being offered by governments to green energy companies in the US and Europe, highlight how their finances are being squeezed.

Many companies have agreed long-term contracts, fixing the price at which they would sell energy, before developing the projects. They were then hit by a huge rise in costs as global inflation surged, while elevated interest rates have made their high levels of borrowing more expensive to service.

“There’s a dark cloud hanging over green stocks,” said Martin Frandsen, a portfolio manager at Premier Asset Management. 

“Two years ago we got a huge growth in commitments to hit net zero, which translated into a lot of investment opportunities. Then we hit this inflation wave and companies that locked in their [electricity] prices have been left very exposed,” Frandsen said. “The lag effect is hitting now.”

Solar power and wind turbine groups are among the hardest hit stocks. Swedish wind turbine developer Vattenfall in July said its costs had climbed 40 per cent. Korean manufacturer CS Wind is down 28 per cent since the start of August, while US-based wind and solar generator NextEra Energy on Wednesday announced a cut to its three-year growth expectations.

“Tighter monetary policy and higher interest rates obviously affect the financing needed to grow distributions” to shareholders at 12 per cent, said NextEra chief executive John Ketchum. Turbine manufacturer Vestas fell to a €130mn loss in the second quarter.

The threat of less generous tax credits and delays affecting the US manufacturers of turbine foundations have made life even harder for Danish developer Ørsted, whose shares have tumbled about 30 per cent since late August. Analysts at UBS estimate that sensitivity to higher interest rates could cost Ørsted between DKr5bn ($709mn) and DKr10bn ($1.42bn).

Some traders argue that renewable groups’ business models are poorly suited to a high inflation, high interest rate world.

“Most important is that a lot of these companies disappointed in their profitability,” said David Souccar, a portfolio manager at Vontobel Asset Management. “To support rapid growth you need to keep leveraging the balance sheet or issue equity. In a zero-rate environment, this formula worked. In a higher rate environment, it falls apart.”

“The whole value chain is in trouble,” said Renaud Saleur, a former trader at Soros Fund Management who now heads Anaconda Invest and who is shorting wind stocks Ørsted and Vestas. Shorting means betting on a lower share price.

“The contracts signed for offshore [wind] will be heavily lossmaking for a long time until the different governments realise that they need to give $80-$100 per MWh and not $30-$40.”

European solar module manufacturers last month warned that a flood of cheap Chinese alternatives are pricing local companies out of the market. “Big supply-demand imbalances have been building up over the past year or so,” said Fiona Manning, an emerging markets portfolio manager at Premier Miton. 

Yet manufacturers in China, which dominates the solar supply chain, are nursing heavy share price losses of their own, having been caught up in this year’s sell-off in the country’s equity markets. Since January, S&P Global Clean Energy Index constituents Sungrow Power Supply, JA Solar Technology and Risen Energy have fallen about 32 per cent, 33 per cent and 44 per cent respectively.

The median company in the global solar panel manufacturing sector trades at an enterprise value to ebitda (earnings before interest, tax, depreciation and amortisation) multiple of about nine times, according to BloombergNEF. That is down from about 16 times a year ago.

However, Anaconda’s Saleur said he was no longer shorting solar companies and had bought in to some stocks in the sector. “We believe the large part of the value destruction is over,” he said.

Trade in ‘fear gauge’ at high as investors hedge amid fragile markets

Vix trading is headed for a record amid uncertainty over rally and the impact of rising rates on economic growth

Trading in options tied to the Vix volatility index — popularly known as Wall Street’s “fear gauge” — is on course to hit a record volume this year, as cautious investors look to protect themselves from the risk of a sudden stock market reversal.

So far this year, investors have traded an average of 742,000 options tied to the Vix each day, according to exchange operator Cboe, up more than 40 per cent year on year and above the full-year record of 723,000 set in 2017.

The Vix shows expectations of volatility in the S&P 500 over the next month, and the bulk of the increase in trading this year has come from investors buying call options — a type of derivative that would pay off if the index spikes higher.

The jump reflects the growing need for investors to hedge their positions amid a fragile stock market rally. The S&P 500 has risen 12 per cent this year, but gains have been concentrated in a few large tech groups and investors continue to grapple with uncertainty around high interest rates and the impact on economic growth.

Charlie McElligott, an equity derivatives strategist at Nomura, said the rally had forced even sceptical investors to increase their exposure to stocks after a sell-off in 2022, but “the fact of the matter is there are still a number of [risks] outstanding”.

“Now that people have equity exposure back . . . and cash coming off the sidelines, you need to hedge again.”

Vix options have been particularly popular because the index has been unusually low for most of the year, increasing the chance of a large payout if it suddenly jumps. The Vix has a long-term average of around 20, but so far in 2023 it has averaged around 17, and dipped as low as 12.7 earlier in September. Last year the average was almost 26. 

“When the Vix is in the mid or low teens, a doubling or even tripling of volatility from there is a lot easier,” said Mandy Xu, Cboe head of derivatives market intelligence. “When it was at 25, doubling that would take a once-in-a-generation type event.”

The growth in Vix trading this year marks a sharp turnaround after several years of anaemic volume growth and increasing questions over the index’s effectiveness and relevance. 

Although the index tends to rise when stocks fall, the correlation is not as strong if markets grind slowly lower as they did in 2022, which disappointed investors who had relied on it as a hedge against a downturn. Meanwhile, an increasing percentage of investor activity is concentrated in extremely short-term options, which are not captured by the main Vix index.

Several firms that used to play important roles in the Vix space have also collapsed since the last time trading volumes were so high. McElligott cautioned that this could make it harder for the banks that sell Vix options to investors to hedge their own positions, leaving them potentially exposed in a crisis.

Swiss asset manager elevates chief risk officer after board was replaced last week

GAM’s new board has appointed Elmar Zumbuehl as chief executive of the Swiss asset manager, after the previous board stepped down following the blocking by activist investors of a takeover bid by UK rival Liontrust.

Zumbuehl, who has been the firm’s chief risk officer since 2017, replaced previous CEO candidate Randy Freeman, who withdrew from the process due to “unforeseen family circumstances”.

Rock Investment SAS, part of the “NewGAMe” group of activist investors, which includes French telecoms billionaire Xavier Niel, has also increased its funding for the company from SFr20mn ($21.8mn) to SFr100mn.

GAM’s share price has collapsed 86 per cent since March 2021 after it was fined by regulators and lost one of its star fund managers over its involvement in the Greensill scandal. The struggling asset manager reported a SFr22.5mn loss in the first six months of the year, with net outflows hitting SFr2.2bn in the same period, despite a strong investment performance.

GAM’s board agreed to step down last month after the failure of a takeover offer by UK rival Liontrust, which was disrupted by the activist investors, who branded the deal “lopsided”.

The activists launched a tender offer for 17.5 per cent of the company last month, which closes today. The group currently owns 9.6 per cent of GAM.

The new board, which was voted in by shareholders last week, includes Antoine Spillmann, chief executive at Bruellan, part of the activist investor group, as chair. Other appointments include Fabien Pictet, founder of Fabien Pictet & Partners and Carlos Esteve, founder of Banque Heritage. Anthony Maarek, a former partner at Deloitte, and Jeremy Smouha, a founding member of GAM, have also been appointed to the board.

Spillmann said he was “delighted” that Zumbuehl has been appointed chief executive. “[Zumbuehl] has the right blend of experience and operational expertise, as well as an in-depth knowledge of GAM to lead the firm,” he said.

“Under his leadership we look to build on GAM’s heritage and strong investment performance to return GAM to a path of success and growth that will create long-term value for our clients, employees and other stakeholders.”

Zumbuehl said: “[GAM] has a strong international brand, talented teams across the business and exceptional investment performance. I look forward to building on these strengths to put GAM on to a sustained recovery path.” 

German citizen allegedly received confidential information from Perella Weinberg banker

Frankfurt prosecutors have charged a 48-year-old German citizen with insider trading in one of the country’s largest such cases, public prosecutors told the Financial Times, as German authorities seek to crack down on the practice.

The defendant, who allegedly received confidential information about forthcoming M&A deals from a partner at boutique investment bank Perella Weinberg, is accused by prosecutors of having used inside information in 20 different trades between 2017 and 2021.

The defendant, who has been in pre-trial custody since January, is alleged to have made at least €24mn in profits. Some earlier deals, where prosecutors allege he also relied on insider information, fall outside the statute of limitations.

The Perella Weinberg banker, who worked on mergers and acquisitions in its London office, was found dead days after police raided the bank’s premises in the UK and Europe. He had been put on leave by the bank after the raids.

People familiar with the case said the men had been longtime friends and were in regular contact.

The probe, which involved Germany’s financial watchdog BaFin, Frankfurt state prosecutors and federal police, highlights the increased awareness among German authorities of insider trading and market manipulation.

This is the third big insider trading scandal involving a large financial institution in Germany since 2021.

Last year a former Lazard investment banker received a suspended jail sentence after sharing confidential information with a trader.

In 2021, a former senior fund manager at Union Investment was sentenced to three-and-a-half years in jail and ordered to repay almost six times the €8mn in profits he made from insider trading. That case is currently being retried in Frankfurt after Germany’s highest court found procedural flaws.

Insider trading can be punished with up to five years in jail under German law.

Perella Weinberg has become one of the leading M&A advisers in Germany. It has acted on deals including the €29bn acquisition of Deutsche Wohnen by Vonovia in 2021, the €4.5bn takeover of Osram in 2019 and the €59bn asset swap between RWE and Eon in 2018.

After the raids in January, the bank told the Financial Times that it was “assisting in an investigation by German law enforcement authorities”, stressing it was not the subject of the investigation itself and that there was “no suggestion of wrongdoing on the part of the firm.”

Charges were filed in July but have not previously been made public. No date has yet been set for a trial, but people familiar with the case said it was likely to start early next year.

A lawyer for the 48-year old defendant declined to comment.

Retailers placing goods on open display is an everyday miracle that could turn into a perk of the privileged

When young, the writer Susan Sontag used to frequent the Pickwick bookstore in Los Angeles and shoplift works of literature. “Each of my occasional thefts cost me weeks of self-revilement and dread of future humiliation, but what could I do, given my puny allowance?” she later wrote.

That made her a snitch, in the definition laid out in a classic study of retail theft in a Chicago department store in the 1960s. Snitches were amateurs, mostly women who would pilfer purses and accessories from the beautiful displays. Then there were boosters, a much smaller number of professional thieves who were systematic and ruthless.

This is the age of boosters, judging by the complaints of supermarkets, department stores and electronics retailers about an onslaught of theft. The US chain Target said this week that it will close nine stores in cities including New York and San Francisco because “theft and organised retail crime” are becoming a threat to the safety of its staff and customers.

Target is among many retailers warning of a rise in organised theft, including “flash robs” of young thieves threatening staff, and others brazenly exiting with big bags filled with booty. Dame Sharon White, chair of John Lewis, this month called shoplifting an “epidemic” and the Co-op supermarket chain says repeated robberies could lead to some districts being blighted.

Robbery is not an existential threat to all stores. The US National Retail Federation this week estimated that “shrinkage”, including theft by staff and customers, together with stuff getting lost, rose to $112bn last year. But the 1.6 per cent of sales that this represents is only back to pre-pandemic levels, and external theft accounted for only about a third of the total.

The modern-day snitch is still responsible for a lot of shoplifting. Detectives used to complain of women slipping into stores to pick up status-enhancing goods, but necessities are now out of reach for some families. High inflation and poverty lead to temptation: even the NRF says that social challenges “deserve an empathetic solution.”      

Nor are all store closures due to theft. Target, which will still have more than 1,900 US stores left after closing nine, has been hit together with other chains by shoppers cutting back spending as prices have risen. It is convenient to place the blame on shrinkage if you need to shrink anyway.

But it would be idle to pretend there is no problem. Everyone I spoke to about it this week recounted some experience, or knock-on effect, of retail crime. Supermarkets limit the number of trolleys to prevent them being used for theft; clothing stores lock their doors and make customers buzz to be admitted; ever more items are locked in cabinets.

The people who suffer most are retail workers. Even if crime is in line with historic standards, many face greater abuse from angry shoppers in these anxiety-ridden times. Those in the worst affected outlets must endure repeated criminality and sometimes violence; they are not paid enough to compensate for such stress.

The technology is readily available on the internet. One criminal entrepreneur offers “booster bags”, lined with metallic fabric to seal off antitheft tags when goods are inside, shipped from Poland. There are also keys to unlock tags and jammers to block scanners: everything a modern booster could need.

At this level of preparation, shoplifting shades into what stores define as organised retail crime, perpetrated not for consumption but to flog the loot for cash. It also involves the division of labour: the kids rifling stores pass goods along to fences to be sold in bulk online. They get only a small slice of the proceeds in return for joining a Fagin-like criminal enterprise.

This is not exactly Ocean’s Eleven: semi-organised might be a better description. As one NRF study noted, such groups often employ the homeless or addicts as boosters. Indeed, members of drugs gangs moonlight by stealing stuff from stores in their spare time. The greater the urban dysfunction, the bigger the pool of potential recruits.

It is not obvious how to stop it. Stores complain of a lack of police action against crimes that do not individually amount to much. There is some logic to repeatedly raiding the same place if each theft falls below the threshold of a felony. Or perhaps too many people casually believe that shoplifting from chains is a victimless crime.

I don’t know, but one difference between Sontag snitching in the 1940s and gangs boosting through Los Angeles now is that physical retailing is on much shakier ground. There are enough vacant shops in many towns and cities already without retailers constantly being taught that leaving goods on open display is a fool’s game.

True, supermarkets save money by allowing shoppers to fill their own baskets and check themselves out, but being able to browse freely is an everyday miracle, as well as very convenient. Society would lose a lot if that freedom became a perk of the privileged, or those who live in places where stores do not fear being ransacked.

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