By European stock market standards, the size of the SpaceX initial public offering (IPO) will be breathtaking. The company is expected to be valued at between $1.75 trillion and $2 trillion, and given how frothy Wall Street is right now, it would hardly be a surprise if it went to a substantial premium on its first few days of trading. We can all question the valuation. The Starlink business that now provides internet access on flights is a clear money-spinner and it may be able to break into domestic broadband as well, but the plans for a colony on Mars look, to put it politely, a little optimistic. Even so, this is a huge business and a very successful one, and it has created a huge amount of value in a very short period of time.

It is far from alone. Anthropic, the company behind Claude AI, is reported to be planning an IPO in October, with a valuation of $1 trillion or perhaps more. Its rival OpenAI, the company behind ChatGPT, is also expected to list later this year, with a value of close to $1 trillion. There are slightly smaller companies just behind it. Last week, Cerebras, which makes AI chips, made its debut on Nasdaq, and after a first-day premium, saw its value soar to $95 billion. On the US market, incredible amounts of wealth are being created at dizzying speed. Anthropic is only five years old, OpenAI is ten (its profit-making unit only five) and although SpaceX was founded in 2002, it only really got going a decade ago.

The contrast with European stock markets is painful. SpaceX by itself will be worth almost as much as the whole of France's CAC-40 (valued at €2.6 trillion and falling rapidly as the value of LVMH slumps). It will be getting close to the entire value of Britain's FTSE 100, currently valued at £2.4 trillion, and SpaceX and Anthropic combined will certainly be worth more than all of the UK's 100 largest companies put together.

European stock markets need more mavericks like Elon Musk

The reason is clear. Very few new firms are being created. If you exclude mergers, the newest company on the CAC-40 is Eurofins Scientific, which was formed in 1987. Even where there are new companies, the best ones choose to list on Wall Street – the Cambridge-based chip designer ARM, for example, is now worth $220 billion, which would rank it as the third largest in the FTSE 100 if it had decided to list here.

Europe, including the UK, needs to realise how far behind it has fallen and start working out how to turn that around. First, it should radically reduce the taxes on start-ups to encourage more entrepreneurs. Britain has scaled back the break on capital-gains tax that anyone who started a new company used to benefit from, and most of Europe never had any concessions to start with. Instead, there is a constant stream of new wealth taxes and capital-gains taxes, with the Netherlands extraordinarily planning to tax capital gains before they have even been cashed in. No wonder there are far fewer start-ups and hence fewer giants ever emerge.

European stock markets should also roll back restrictions on growth industries such as AI and space. While the US has a booming space industry, Europe has a Space Act; while huge new AI businesses are created on the other side of the Atlantic, Europe is stuck with an AI Act. But there is no point in having a regulator if there isn't an industry to make rules for. There is still little sign that politicians in either Brussels or London realise how much damage has been done by trying to regulate industries before they have even begun.

Finally, Europe should relax the listing rule for entrepreneurs such as Elon Musk who want to keep control of companies. SpaceX will come in for a lot of criticism for allowing Musk so much control over the business and the $1 trillion pay package if he manages to create a thriving human colony on Mars. It doesn't follow Europe's governance rules. But so what? Entrepreneurs are often a little odd, and they are often control freaks, but they also have the drive and ambition to create huge new businesses. Europe could use fewer rules and more mavericks if it is to avoid turning into an investment backwater, with nothing more than a dull collection of very old companies.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

In January 2013, the then-prime minister David Cameron announced that there would be a “very simple” referendum on whether Britain should stay in or get out of the European Union. The result would draw a line under the whole issue for a generation, he said, so that we, and in particular his party, could all stop “banging on” about it. As the tenth anniversary of the Brexit referendum approaches in June of this year, we might all now reflect on just how simple the whole thing proved to be and how joyful it is that everyone has much better things to talk about.

That reflection would at least help us appreciate that God does indeed have a sense of humour. The process of leaving the EU and judging its consequences has turned out to be anything but simple, of course, and the conversation about our membership of the EU has not ended – in fact, in recent months it has all been rather stirred up again.

Prime minister Keir Starmer is exploring a deal that would align Britain with the EU's single market for goods under his EU “reset” plans. He had already signed agreements to align with the bloc's rules on food standards and carbon emissions. The latest plan would force British manufacturers to comply with hundreds of EU regulations, says The Telegraph, without having any say in how they are shaped. It would, in effect, return Britain to something like the “backstop”, the former prime minister Theresa May's attempt to lock Britain into EU rules to avoid a hard border in Ireland. That idea was repeatedly defeated by MPs and ultimately scrapped by Boris Johnson when he became prime minister. The difference is that rejoining the customs union has been ruled out, to avoid breaking manifesto commitments and protect trade deals with India and the US.

The cost to Britain of Brexit

Those on one side of the Brexit wars – and even some of those in the opposing camp – will say that this is all to the good, at least in principle, as very clearly something had to be done. Brexiters at the time of the referendum argued that disentangling from the EU would unlock long-term economic potential as it would free British policymakers from EU red tape and give them more freedom for manoeuvre, as Ryan Bourne, a member at the time of the referendum of Economists for Brexit, said in The Times towards the end of last year. Yet ten years on, “we cannot pretend things have gone well so far” on that score. A review of the data from the National Bureau of Economic Research (NBER) has suggested that GDP per person is 6%-8% lower today than it would have been if Britain had voted to remain in the EU. Business investment is down 15%, and employment and productivity by 3%-4%.

True, the NBER's study has been loudly mocked. It requires us to believe that if only the vote had gone the right way Britain would have grown four times more than Japan and Germany, almost twice as much as France and Italy, and be performing as well as the US. “If you believe that I have a bridge to sell you,” as Andrew Neil put it on X.

But still, “let's not kid ourselves”, says Bourne. The facts show that the UK has grown more slowly than Italy, France and Japan, and the microeconomic, firm-level data are “crystal clear” that Brexit had a “significant, depressive impact”. The NBER study showed that the more exposed to the EU a company was, the more likely it was to cut investment and slow hiring in the wake of the referendum. By 2023, average business investment was 12% lower and productivity within firms 3%-4% weaker. Roughly half of firms listed Brexit as a top source of uncertainty for years after the vote.

Such evidence cannot easily be dismissed, whatever your political inclinations. “Brexit did not cause Britain's growth malaise, but it undoubtedly deepened it,” says Bourne. “Nor did it create our fiscal woes, although it worsened them too. Denial… helps no one.”

Indeed, Brexit was never likely to be a solution to the underlying complaints that provoked it, and “so it has proved”, says Jeremy Warner in The Telegraph. Ten years on, and the economy is in even more of a mess than it was back then. Immigration has “surged”, the public finances are in “a state of ruin”, many public services appear “broken beyond repair”, and voters are “angrier than ever”. This might not be the fault of Brexit as such, but nor did leaving the EU prove to be “the moment of national renewal that its cheerleaders promised”. Nor was it ever likely to be. “Economic salvation seems as far away as ever.”

Edging closer to the EU might be the best way forward

Brexit remains an issue for a reason. The most obvious impact of the decision to leave the EU was on trade. UK exports since 2019 have been much weaker than in other G7 countries, and trade is an important driver of productivity growth, which in turn is the most important factor in improving living standards. Some of that weakness may be a result of Donald Trump's tariffs, but that in itself just goes to show how much the world has changed since the Brexit referendum, as David Smith has pointed out, also in The Times. Tensions with the US and with China show that “dreams of a painless transition to non-EU trade were the wishful thinking of a different age”. The Iran war quickly brought changing global geopolitical realities into even sharper focus and has bolstered the case for closer cooperation with the EU. “It is increasingly clear that as the world continues down this volatile path, our long-term national interest requires closer partnership with our allies in Europe and with the European Union,” as Starmer has said. The opportunity to strengthen security ties and improve economic relations is, says Starmer, “simply too big to ignore”.

That's surely true, but reversing Brexit – or “resetting” relations – will be easier said than done, as The Economist points out. It would, for a start, be impossible to revert to the pre-2016 status quo. Britain would have to reapply for membership and negotiate its conditions, and would be unlikely to secure the opt-outs it had previously. It would not regain its special budget rebate, for example, and might have to agree to join the euro. The EU has also changed significantly in the interim and there is little desire to reopen a painful debate.

Starmer's attempts to find pragmatic ways quietly to edge closer to the EU might be the best way forward. The EU is more open than it was to allowing non-members to cherry-pick bits of the single market and “new forms of partial membership, Swiss-style, may seem more acceptable to the EU as it considers its further expansion eastwards”, says The Economist. Different types of relationship with the EU could emerge from the reopening of debates about Norway and Iceland joining, or from forging closer links with the western Balkans, Moldova and Ukraine, which “might suit Britain better than a hard Brexit”.

“In retrospect, the 2016 referendum may come to be seen not to have permanently settled Britain's place in the European project,” says The Economist. The relationship will keep evolving, sometimes in unpredictable directions. And for the next few years, that is likely to push the two sides closer together, not further apart.”

What David Cameron got right about Brexit

Whatever happens, Cameron was right about one thing. On one level, the issue voted on in the referendum ten years ago was a simple one. Economics is mostly common sense and the issue at stake and the likely consequences should have yielded to some simple logic. Britain was on the doorstep and a member of one of the largest free-trade blocs in the world. Making a decision that would certainly make trade with that bloc more costly and raise barriers would, all else being equal, surely leave Britain worse off.

All else is never quite equal, of course, hence the arguments that Brexit could conceivably give the country more freedom to make better arrangements that would be more conducive to growth. In other words, alongside the fact that Brexit would probably make us worse off there was a judgement to be made about whether Britain's elite and bureaucracy would in the long run prove more effective than the one in Brussels. A relatively simple matter of judgement on both counts, if ones that have had, as we have seen, some rather more complex ramifications.

There is no point relitigating the matter. We are where we are. But in the years since the vote we might draw two lessons from the experience of Brexit. The first is that Britain's historical tendency to “muddle through” rather than plan might not be such a bad one, as Paul Cornish, a professor of strategic studies at the University of Exeter, points out in the Financial Times. As Charles Lindblom put it, “Policy is not made once and for all; it is made and re-made endlessly. Policymaking is a successive approximation to some desired objectives in which what is desired itself continues to change under reconsideration”.

What could be more appropriate, says Cornish, in “a time of seeming chronic volatility and complexity, particularly in matters of national strategy and international security”? Breaking free from the EU and setting out alone as “Global Britain” on the high seas of freedom and opportunity might have seemed like a great plan to some and far superior to all the muddling and compromise of EU membership. Following a raid from the pirates of reality, we're back to the muddling.

“Populists” unwittingly make the case for a stronger Europe

The second lesson is that the EU may be less bad than all the alternatives, as Janan Ganesh puts it, also in the FT. At the time of the referendum, victorious Brexiters were fond of predicting that other countries would soon follow our good example and fall like dominoes out of the EU. A decade on, all of the EU's 27 other dominoes stand and, despite having entered an “era of ardent nationalism”, no one really wants out of the “supranational club”. If anything, nationalist politicians on the continent go out of their way to reassure voters that they have no intention of leaving. Europeans still trust the EU above their national political systems, and support for the euro has grown.

“Few things are stranger about modern politics,” says Ganesh, but the explanation is not hard to find. Nigel Farage, Vladimir Putin and Donald Trump have all unwittingly helped to make the case for a stronger Europe and have “given a multilateral, technocratic and liberal institution a sense of existential purpose that it was starting to lack”. Moreover, the “debasement of our own political elite” post-referendum has “brought the UK closer to the European experience”. As Labour edges closer to the EU, Conservatives may “scream betrayal”, but “voters shrug”. “Through their comportment in office, Brexiters have forfeited the benefit of the doubt.”

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Five years ago there were lots of reports about how the finance industry was going to move from London to Paris, Amsterdam or Frankfurt. In the wake of Britain's departure from the European Union, the City would lose its role as the main hub in the finance industry and all the jobs and tax revenues it created. Deals would have to be made within the bloc, and trades would have to settle under EU rules, so there would be little space for a country outside the EU. The only real question was which major city on the continent would take London's place.

But traders and analysts can forget about freshly baked croissants for breakfast and two-hour lunch breaks. It turns out that the US mega-banks are not moving en masse to Paris after all. Last week, JPMorgan started moving some of its staff in Paris back to London. Its chief executive, Jamie Dimon, warned back in 2021 that the bank might well move all its European operations out of the City. Instead, it has been steadily increasing its headcount and building the biggest tower in Canary Wharf to house them all. Its plans to make Paris the centre of operations appear to have been quietly wound down.

It is not hard to understand why. President Emmanuel Macron's promises to carve out a special regime for global bankers have come to nothing. The “temporary” tax surcharge on anyone earning more than €250,000 a year – not much for a star banker at JPMorgan – has been extended for another year. With the government paralysed and a huge deficit to fix, France will have to put up taxes again.

Meanwhile, Amsterdam is about to become a no-go zone for investors. The Dutch city mounted a challenge to London that was every bit as serious as the one from Paris. With its long traditions in finance and a powerful stock market, it attracted a series of high-profile listings, including giants such as Universal Music. But now the Netherlands is planning to extend the capital gains tax at 36% even to unrealised gains. In effect, if your investments go up in value by 10% over the course of the year, you will have to pay a big chunk of that in tax, even if you have not yet cashed them in.

Even worse, you won't be able to claim any kind of refund or allowance if those same investments fall by 10% the following year. In effect, the state will confiscate 10% of your winnings, but it won't share in any of the losses. It will be the most punishing system of capital-gains taxation anywhere in the developed world. It is impossible to see how Amsterdam can survive as any sort of financial or business centre under that regime. As for Frankfurt, there is absolutely no sign of any banks moving to the city and the German economy remains stagnant despite the huge rise in government spending to try and get it growing again.

How the City of London can reclaim the crown

Add it all up, and this is the perfect moment for London to reclaim its place as Europe's main financial hub. There have been modest moves in the right direction. Some of the listing rules have been relaxed, the cap on bankers' bonuses has been lifted and a new junior market in “unquoted companies” has been created. We are promised more reforms in the King's speech later this month. It is a start, even if only a very modest one.

But there are also obstacles: higher income taxes, the ending of non-dom status for finance staff moving from abroad, some of the highest inheritance taxes in the world, and now a higher rate of tax on interest and dividend payments as well. It may well get worse in the next Budget. None of that will do anything to persuade any more bankers to move to this side of the Channel.

The government should be doing a lot more to help. It could introduce a new version of the non-dom regime, perhaps modelled on Italy's flat-rate tax scheme that has helped create a boom in Milan. It could turn the stock exchange into a genuinely light-touch regulatory centre for new listings. Finance remains one of the world's largest industries and one in which Britain has huge residual strengths. Brexit has not damaged it nearly as much as everyone predicted. But the City will have to work a lot harder if it is to reclaim its crown.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

What is stopping the UK from investing? It's a mixture of three main factors, according to Henry MacLeod, co-head of digital distribution at BlackRock.

In this episode of MoneyWeek Talks, Kalpana Fitzpatrick speaks to Henry about the state of investing in the UK, how we can debunk myths about risk, and whether AI can help you become a better investor.

Watch the full episode on our YouTube channel or on any podcast platform.

About the podcast

MoneyWeek Talks is a podcast that helps you unlock the secrets to financial success. Editors Kalpana Fitzpatrick and Andrew Van Sickle are joined by influential guests – from CEOs and entrepreneurs to economists and policymakers – to share their top tips on managing money, investing wisely and building wealth.

Subscribe to the MoneyWeek Talks podcast and get ready to make it, keep it and spend it with confidence.

Europe has lagged behind the US for years now, but what would it take for the continent to recover?

Daniel Avigad, manager of the TM Lansdowne European Special Situations fund, speaks to MoneyWeek's Andrew Van Sickle about opportunities in European equities, solving the continent's growth problem, and the consequences of populism.

You can watch the episode on our YouTube channel or subscribe to MoneyWeek Talks on any podcast platform.

About the podcast

MoneyWeek Talks is a podcast that helps you unlock the secrets to financial success. Editors Kalpana Fitzpatrick and Andrew Van Sickle are joined by influential guests – from CEOs and entrepreneurs to economists and policymakers – to share their top tips on managing money, investing wisely and building wealth.

Subscribe to the MoneyWeek Talks podcast and get ready to make it, keep it and spend it with confidence.

Sustainable dividend growth is often a hallmark of quality and capital discipline in a business. Companies that consistently return cash while reinvesting for future growth tend to benefit from durable competitive advantages, strong balance sheets and resilient cash flows. The sustainability of dividends is therefore a core pillar of our investment process.

As active, bottom-up investors, we target attractively valued firms offering structural growth and the ability to compound dividends over a three-to five-year horizon. To find them, we seek companies with robust business models, effective capital allocation and financial strength, which enable them to reinvest at attractive returns while steadily increasing payouts. Long-term wealth creation comes from businesses that can profitably reinvest cash flows over time. The following stocks illustrate our philosophy.

Three European stocks to consider for your portfolio

ASML (Amsterdam: ASML) is the world's leading supplier of photolithography systems to the semiconductor industry. It serves 17 of the top 20 chip manufacturers and is the sole provider of extreme ultraviolet (EUV) lithography systems: technology essential for manufacturing the most advanced semiconductors. This unique positioning effectively grants ASML a monopoly in EUV, underpinning significant pricing power and structural growth.

As AI, cloud computing and the proliferation of software accelerate digitalisation and the demand for increasingly complex chips, ASML offers impressive long-term growth prospects. Gross margins exceed 50% and free cash flow-conversion is strong.

Combined with formidable technological barriers to entry, these characteristics define a high-quality franchise capable of compounding value over the long term. The dividend has grown steadily over many years and would yield around 30% based on our entry price. Compounding companies are not confined to the technology sector. In healthcare, Roche (Zurich: ROG) is a global leader with top-tier positions in oncology, immunology, neuroscience, virology and diagnostics. Despite industry headwinds including patent expiries and the post-Covid normalisation in pharma's revenues, Roche has shown it can sustain profit growth. This resilience reflects its diversified portfolio, innovative pipeline and rigorous risk management. Recent clinical successes in areas such as breast cancer and multiple sclerosis have bolstered its long-term growth prospects.

Disciplined capital allocation is key to Roche's strategy. It consistently leads the industry in research and development spending, prioritising long-term innovation while generating attractive returns on investment. This has supported its progressive dividend policy, with payouts rising for more than 30 consecutive years.

Sanpaolo (Milan: ISP) is Italy's largest banking group. The European banking sector is structurally stronger than at any time since the financial crisis. Capital ratios are far higher and risk exposure on balance sheets has declined; cost structures have improved and net-interest income has climbed sustainably. Yet valuations still reflect legacy concerns. Intesa stands out for its diversified business mix, strong profitability and disciplined risk management. It is well capitalised and operationally efficient, underpinned by a stable retail-deposit base. While earnings growth may moderate as rates normalise, the bank's conservative leverage and limited reliance on capital markets continue to bode well. Intesa's attractive dividend yield and resilience under stress make it a compelling long-term investment.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

The European Commission unveiled its long-awaited “Buy European” rules on Wednesday – aimed at boosting domestic production and competitiveness in key strategic sectors in the face of intense international pressure and the changing geopolitical environment.

The “Industrial Accelerator Act” sets out new rules under which EU governments must prioritise European production in public contracts across defence, digital and industrial sectors. It does this by setting minimum targets for European-made parts that specific strategic and/or energy-intensive products must include to benefit from government subsidies or procurement contracts.

The sectors affected include everything from renewables, batteries and cars to aluminium and cement. Electric-vehicle makers must ensure 70% of components are EU-made, for example. There will be conditions for foreign direct investors to transfer intellectual property and employ local workers. The end result – if the policy is enacted and works as intended – will be a redirection of the bloc's €2 trillion worth of public procurement towards its own industries and firms.

‘Buy European’ – will it work?

The ‘Buy European’ strategy is part of Europe's response to what French president Emmanuel Macron described last month as a “geopolitical and geo-economic state of emergency”. If the continent does not invest in its economy and lift barriers to growth more quickly, it will be “swept aside” by US technology and imports from China, he said. Addressing the root causes of Europe's relative economic decline has become increasingly urgent since the Covid pandemic and soaring energy prices following Russia's invasion of Ukraine laid bare the continent's vulnerability to supply shocks.

And promoting home-grown industry will help protect the EU's €2.58 trillion manufacturing industry in the face of high energy prices, cheap imports from China and elsewhere in Asia. Donald Trump's volatile trade agenda, anti-European rhetoric and hostile threats to cut off trade with Spain over its opposition to war on Iran have made the question more pressing. It is time, says Stéphane Séjourné, the EU's executive vice-president for prosperity and industrial strategy, for Europe to stand up for itself.

Is the whole of the EU behind this ‘buy European’ idea?

There have been disagreements. France was the prime driving force behind the new rules. Germany took a lot of convincing – along with the Netherlands and Sweden, among others – arguing for an approach more inclusive of key trading partners (including the UK). Even this week, the haggling went right up to the wire. Now the final agreed text will be subject to approval by the 27 EU states and the European parliament before becoming law – and there may well be plenty of wrangling to come.

Will it work?

It will be difficult, says Pierre Briançon on Breakingviews. The new rules are an attempt to “deal with the paradox that the bloc's ambitious green industrial policy risks shrinking its manufacturing base”. Given Donald Trump's aggressive America First agenda and that China subsidises its industry to the tune of 4% of annual GDP, the EU has good reason to shore up its manufacturing base.

But the “buy local” idea is also fraught with risks. Unless non-EU members such as the UK and Norway are included, the plans risk turning into a series of hostile trade measures against close partners. It's also important for the EU not to shore up “lost causes”, such as the solar-panel industry that long ago became dominated by China.

And the rules will need to be “implemented and tested with pragmatism”, and open to revision if the results are underwhelming, or if the impact is that European cars (for example) get more expensive and exports suffer. “Brussels will need to act with flexibility and subtlety – two qualities seldom associated with the bloc's enforcement police.”

What else should Europe do?

European “independence” encompasses everything from defence to financial markets. On defence, Macron made a historic offer this week to station French nuclear assets in Germany and several other European countries, as well as inviting them to take part in joint nuclear exercises and support missions.

It's the most important revision to France's nuclear doctrine in a generation – a welcome step towards the same commitment Europe's other nuclear power, the UK, already extends to Nato members.

On financial markets, the French president echoes the recommendations of Mario Draghi's 2024 report on European competitiveness, calling for common European bonds – drawing in part on Europeans' high savings rate – to boost investment in defence and security, green technology and AI.

Why is that so important?

Because without them Europe is “working backwards”, says the Spanish business minister Carlos Cuerpo in the FT. “We are debating defence, security budgets, industrial policy, digital sovereignty and energy grids without the one thing that would make them all affordable: a collective form of credit that the world trusts.”

Nor could there be a better time to create Europe's answer to US Treasuries. With US leadership and stability under question, global portfolios are diversifying rapidly and investors are looking for high-quality, liquid safe assets. Since 2025, the euro has appreciated 15% against the US dollar. But “we are getting a stronger currency without the strategic dividends it should deliver: cheaper financing, deeper liquidity and greater financial stability”.

To do this will require a broader financial infrastructure, including the creation of futures and derivatives markets that allow institutional investors to hedge. And it will require iron discipline and determination on the part of politicians. The changed world has made this an existential question for Europe.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Donald Trump’s attempt to hammer out a truce between Russia and Ukraine remains in the balance, but defence shares are already slipping at the prospect of the three years of bitter fighting finally coming to an end. It is not hard to understand why. Defence has been one of the few stars in a generally dismal European economy, with shares soaring on expectations that governments across the continent would spend a lot of money in the years ahead on rebuilding their armed forces.

The big German defence contractors were the stand-out performers on the back of the huge increases in borrowing and spending, much of it directed to the military. Rheinmetall shares were up 170% over the last year, before the latest sell off. Yet with the European Union also planning a €150 billion common defence fund, all the continent’s major companies were expected to get a lot of lucrative contracts. So Italy’s Leonardo had doubled, while France’s Thales was up by more than 70%. Even environmental, social and governance (ESG) funds were starting to invest in the sector.

A ceasefire in Ukraine could change all of that very quickly. Trump is pushing hard for a deal and it will prove hard for Ukraine to hold out against that. The war has reached what looks like a stalemate, with huge losses on both sides. Sure, it would be better if Ukraine could achieve a victory and Vladimir Putin were removed from power in Russia. But there does not seem to be much chance of that happening. An end to fighting would save a lot of lives and might be the best option available. And so investors are right to reassess.

If there is a peace deal, governments across Western Europe may very quickly go back to spending more money on welfare, or trying to bring their deficits under control and keep the bond markets happy. If there is no security emergency on their doorsteps, it will be hard to persuade voters to keep spending money on defence that could be spent on healthcare, social security or infrastructure instead. That is what they did after the Cold War ended, and it is very easy to think that the same thing will happen again. If it does, the defence giants may find their order books starting to dry up very quickly.

Peace in Ukraine would not end the need to rearm

Even so, there are two reasons why this is not the most likely outcome. To start with, any peace deal will almost certainly include some security guarantees for Ukraine. It is not likely to be allowed to join Nato, but there may well be a peacekeeping force that is drawn from Europe, as well as help for restoring its own armed forces so it can defend itself from further attacks. All of that will mean that money has to be spent on kit for the soldiers who will be keeping an eye on the new border between Russia and its neighbour.

Next, and more importantly, if the Ukraine war is settled, at least for now, then the US will inevitably accelerate its withdrawal from Europe. This had already started under previous presidents, but Trump has made it very clear that the US does not intend carry on paying for the defence of the continent. Trump wants all the major countries to commit to spending 3% or more of their GDP on their armed forces, while the US turns its attention elsewhere. The war in Ukraine has kept America engaged in Europe for the past three years, but without that emergency, it will focus instead on the far larger contest with China for the dominant role in the Pacific. The result? Europe will have to carry on paying much more for its own defence. It won’t have any other choice. Russia will remain a hostile, threatening opponent, and with less support from America, Europe will have to remain in a high state of alert.

European governments, including of course the UK, might want to cut spending – there will be plenty of demand for more spending elsewhere. If the peace holds between Russia and Ukraine, it will be very tempting to make savings. But in reality, that won’t be possible. Military spending will have to keep rising – and that means the boom in defence shares will carry on for many more years to come.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

It is not just the London Stock Exchange that has been suffering a relentless decline. It is happening right across Europe’s main bourses. There was a 15% decline in initial public offerings (IPOs) across the continent in the first half of this year compared with 2024, according to accountants EY. Measured by revenues raised, the decline was 50%. The bulk of the IPO market is now in the US, China, India and the emerging stock markets in the Gulf. Europe is falling behind. Just as in London, firms have been leaving the markets, or have been taken over, and very few new companies have been coming through to replace them.

German chancellor Friedrich Merz has a solution. “We need a kind of European stock exchange so that successful companies such as biotech firms from Germany do not have to go to the New York Stock Exchange,” he told the German parliament last week. “Our companies need a sufficiently broad and deep capital market so that they can finance themselves better and, above all, faster.” Instead of separate exchanges in Paris, Frankfurt, Milan and Madrid, a single unified bourse could list all of the continent’s major companies, offering a scale and depth to match New York.

A single, unified exchange would be a lot simpler for investors, especially from North America and Asia. It would have access to a lot more capital, which might mean valuations were higher. True, with Euronext, which links the Netherlands, France, Italy and Portugal, we already have that. But a pan-European exchange would go a lot further. The London Stock Exchange, which has already dropped out of the top 20 for global listings and has seen a relentless decline in the number of companies traded, would almost certainly join. It is in bad enough shape already, and if a new European exchange were formed, it would be even more irrelevant than it is already if it were not part of it.

Would a single European stock market fix anything?

The catch is that this is just the same old, tired formula of more integration that has dominated policy-making in all the major European countries for the last 30 years. It hardly begins to address the major issues facing every European stock market. Firstly, the whole of Europe has imposed far too many rules and regulations on listed companies. In the City, there are an endless series of governance codes to comply with, including diversity quotas for boards and restrictions on executives’ pay, but it is just as bad across the EU. Companies with more than 500 employees have to comply with rules on sustainability and supply chains that typically run to hundreds of pages. Each one might be well intentioned in itself, but taken together, they add to the cost and complexity of listing a company.

Secondly, crushing taxes and rules across the continent mean there are few new growing companies. The US has an estimated 700 tech unicorns, as start-up companies with a value of more than $1 billion are known, compared with fewer than 200 in the EU, despite the fact that it has a significantly larger population. Companies such as OpenAI and SpaceX have valuations that already run into the hundreds of billions, far larger than anything that is coming out of Europe. In short, Europe does not have nearly enough new companies, the ones that it does create don’t grow quickly enough, and even the handful that do emerge don’t find listing their shares very attractive.

It is hard to see how a single European stock market will do anything to fix any of that. It won’t mean that the listing requirements are less of a burden. In fact, given all the compromises that will be required to make it happen, and all the extra powers that are likely to be handed over to EU officials to regulate it, it will probably make them worse. And it won’t do anything to lighten the taxes or the regulatory overload that now makes it so much harder to start a business in Europe than it is in the US, the Gulf, or much of Asia. All it does is double down on the failed centralising strategy of the last 30 years. It would be far better to have national bourses competing to offer the most attractive forum for listing a company. Having a single stock market won’t make any difference.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

As autumn gets underway, many will start thinking about where to travel in the new year. January may bring resolutions, but October is often when we start planning.

And so it begins. Twenty tabs open. You go down a rabbit hole of when is the best time to book flights, how to get airport lounge access for less, and how much to tip in different parts of the world. A luxury cruise may sound appealing, but so does lounging by the pool in a high-end hotel.

The decisions go on, the spreadsheets grow bigger, but the question remains: where should you go on holiday next year? We take a look at the trends for travel in 2026.

Where to travel in 2026

Travel group Expedia has just released its Unpack ’26: The Trends in Travel report, revealing where different trends are taking holidaymakers. The data has been compiled based on increases in flight and accommodation searches for travel on 1 January to 31 December 2025 versus the same period in 2024.

Not all these destinations are the typical go-tos, with more visitors seeking under-the-radar coastlines and higher altitude hideaways.

We’ve compiled all the results and delve further into each destination below.

Source: Expedia

1. Big Sky, Montana, US

Being close to Yellowstone National Park is only part of the attraction. What brings travellers to this unincorporated community in Montana is – as the name suggests – a vast blue sky and mountains, as well as lots of skiing. While it’s a bucket-list destination for many Americans who enjoy winter skiing, it makes for a great place for Brits who have made more than a few visits to the Alps and are after a new holiday hotspot. Another thing not to miss is luxury fly fishing, a unique experience for anyone who wants to try their hand at angling.

2. Okinawa, Japan

With more than 150 islands to its name, Okinawa is set apart from the rest of Japan not just geographically, but also culturally. There is plenty to keep you entertained; you can lounge on white-sand crescent moon-shaped beaches, whale-watch on a cruise, visit World War II sites and feudal castles, and, if you time it right, even attend the Naha Great Tug-of-War Festival. If you’re lucky, you may be able to catch cherry blossoms blooming in the early months of the year.

3. Sardinia, Italy

This Mediterranean island offers a retreat away from the bustling mainland. It’s packed with fishing villages where you can get around on a Vespa, a rich Roman history that explains why there are Gothic cathedrals in the capital city of Cagliari, and another quick history lesson will tell you why some Sardinians speak Catalan. To the north of the island, in Costa Smeralda, you will find luxury yachts and high-end properties occupied by the rich and famous.

4. Phu Quoc, Vietnam

It’s widely agreed among Vietnamese people that the best fish sauce comes from Phu Quoc – after all, that’s where it originated. Its palm-fringed beaches and forested hills have now become an attractive holiday destination for people across the globe, who come for eco-retreats, seafood dishes, and blue-green waters. It’s also worth arranging for a pepper farm tour, as the island is known for the spice.

5. Savoie, France

France’s Savoie region is nestled in the heart of the French Alps, making it a haven for those who love winter activities. At the foot of the mountains, you will find two turquoise lakes where you can take part in water sports such as canoeing, canyoning, paddleboarding and more. You can also visit a 12th-century tomb site, walk around charming villages, and hike in the unspoilt nature.

6. Fort Walton Beach, Florida, US

Often overshadowed by Florida’s more famous beaches in the south, Fort Walton Beach in North Florida is an inviting destination with powdery white sand and striking turquoise waters. It’s an ideal location for those who love the outdoors – you can spot dolphins in the wild, sample fresh local seafood, browse the flea markets, go for wildlife trails either by foot or on a bike, and explore 12,000 years of Florida’s indigenous past at one of the many museums.

7. Ucluelet, Canada

Tucked away on the edge of Vancouver Island, Ucluelet is where holidaymakers go to unwind and relax. It offers sweeping views of the Pacific Ocean and one of Canada’s mildest winters, as it rarely snows. A highlight of your visit is likely to be storm watching, made possible by the area’s year-round coastal weather. Outdoor enthusiasts can also fish for giant chinook salmon and halibut, hike through lush rainforests and alongside rugged coastlines, or explore centuries-old cedar groves.

8. Cotswolds, UK

Cotswolds is often best known for its honey-coloured cottages and rolling hills. But beyond the postcard charm, you’ll find walking trails, lively market towns, arts and crafts festivals, and historic estates that offer the best of heritage and comfort. It makes for an ideal luxury staycation for Brits, as visitors can enjoy the small villages, meadows and ancient woodlands. Don’t forget to sample English wine, local cheeses and meats.

Read more about MoneyWeek’s recent visit to The Lakes by Yoo, a luxury lakeside holiday rental in the Cotswolds.

9. San Miguel de Allende, Mexico

This small city captures a wealth of Mexico’s aesthetics in a single location: baroque churches, cobbled lanes and bougainvillaea on every wall. Despite being a popular destination due to its thriving art scene, the town has still retained its striking neo-Gothic towers, old Spanish colonial buildings, and open-air markets. You can get Mexican mole (a type of sauce), Mezcal, and a near-perfect climate to enjoy your days off.

10. Hobart, Australia

Tasmania’s capital city is brimming with history, architecture and world-famous art. Once a British penal colony, it’s now famous for its local produce, a thriving wine scene, and historic theatres that have been graced by famous names such as Laurence Olivier and Hugo Weaving. You can spend time learning about the culture of Tasmania’s indigenous people, board a vintage ferry and cruise down a scenic river, or hike Mount Wellington for a sunset to remember.

Whether you’re dreaming of diving into turquoise waters or want to soak in the sun with a cocktail in hand, escaping to an island is a holiday that’s hard to beat.

If you’re planning where to travel in summer 2026, there are hundreds of thousands of archipelagos around the globe. So, how do you decide which makes for the perfect getaway?

We reveal the top island destinations of the year and explore what sets them apart from the rest.

Top islands to visit in 2026

Price comparison site TravelSupermarket looked at the most popular island destinations in the world. The data is based on all island holiday searches via TravelSupermarket between May and September 2026, compared to the same period the year before.

We reveal the islands below.

1. Gozo

Gozo is the most popular island destination for Brits this year, with interest in visits to the tiny Mediterranean island spiking by 1,703% year-on-year. Behind the surge in popularity is the release of Ridley Scott’s Gladiator II, starring Paul Mescal, Pedro Pascal and Denzel Washington, which was filmed at nearby Fort Ricasoli in Malta. You can expect crystal-clear waters and 300 days of sunshine. Visit the ancient Cittadella, or the Ġgantija Archaeological Park, a prehistoric monument dating back over 5,500 years.

2. Sri Lanka

Sri Lanka has had a turbulent few years due to an unstable economy and significant political changes, but the island nation is experiencing a dramatic surge in visitors from all over the world, especially Britain. Chris Webber, head of holidays and deals at TravelSupermarket, explains the phenomenon: “The exchange rate is favourable, meaning while it's a long-haul flight, the on-the-ground costs are remarkably low. We're seeing pent-up demand being released as travellers rediscover what has always been one of the world's most beautiful tropical destinations.” With endless beaches for surfing, prehistoric ruins – including a fifth-century rock fortress – and a delectable cuisine, it’s not hard to see why Sri Lanka is gaining so much attention.

MoneyWeek visits: An odyssey through Sri Lanka's ruins, jungle and fabulous food

3. Zante, Greece

The Greek island is popular for its nightlife and coastal views. Some of the most popular landmarks include the blue caves in Agios Nikolaos, the 17th-century Venetian fortress, used by the British as their garrison in the early 1800s, and the Navagio Shipwreck Beach, one of the most photographed beaches in the world.

4. Mauritius

Mauritius is famed for its turquoise waters and powder-white beaches. Holidaymakers flock to this island country in the Indian Ocean for its luxury resorts, thrilling water sports and wildlife encounters. Beyond the coastline, Mauritius offers lush mountain landscapes, vibrant markets and a melting pot of culinary heritage influenced by Africa, India, China and Europe. You can visit the basaltic monolith on Le Morne Brabant, wander through the Seven Colored Earths in Chamarel, or see the optical illusion of an underwater waterfall off the southwest coast of the Le Morne Peninsula.

MoneyWeek visits: Soak up the authenticity of Mauritius at the Shangri-La Le Touessrok.

5. Fuerteventura, Spain

The second largest of Spain’s Canary Islands, Fuerteventura appeals to a number of holidaymakers looking for a relaxed atmosphere, white-sand beaches and reliable sunshine. It’s a popular destination for water sports like surfing, waterskiing and kayaking, but you can also do camel safaris, visit the Lobos Island nature reserve, explore the historic town of Betancuria, and see the ‘popcorn’ sand at Playa del Bajo de la Burra.

6. Kos, Greece

Kos is a sunny Dodecanese island in Greece, known for its extensive sandy beaches and a vibrant nightlife. It has a rich history as the birthplace of Hippocrates. You can visit the 15th-century Neratzia Castle, the third-century Agora, soak in the thermal springs at Empros Therme, or enjoy fresh seafood with an Italian twist.

7. Mykonos, Greece

Greece has thousands of islands, but Mykonos is one of the most popular destinations for holidaymakers. Located in the heart of the Cyclades group, it offers a vibrant mix of stunning landscapes and famous beach clubs, all while being steeped in rich history. You can walk through the maze-like Chora town of Amorgos Island, visit 16th-century windmills or take a boat trip to nearby Delos Island.

MoneyWeek visits: Engage in a sunset ritual at Cali on the Greek island of Mykonos.

8. Antigua

This Caribbean island is popular for having 365 beaches – one for every day of the year. It is the larger of the two main islands in Antigua and Barbuda, giving you more to cover, from the white sands of Halfmoon Bay or Galley Bay Beach, where you can see sea turtle hatchlings. Beyond the beaches, Antigua is great for adventures like zip lining, hiking or fruit-spotting – Antigua’s Black pineapple is one of the world’s rarest pineapple varieties.

MoneyWeek visits: The Hut, Little Jumby is an exclusive private-island beach club only a short hop from Antigua

Is the US economy pulling ahead of Europe?

Yes. Twenty years ago, the US economy and Europe's were broadly comparable in terms of size and share of global GDP, and in 2008, the economy of the EU was in fact slightly larger when measured in current US dollars. Since the global financial crisis, however, a substantial gap has emerged. By 2024, US GDP had reached about $29.2 trillion (or around 27.5% of global GDP), while the euro area stood at about $16.4 trillion (14.7%) and the UK at $4 trillion. US outperformance is not an illusion – and has gathered pace this decade since the Covid pandemic.

What’s happening in Europe?

The boss of ABB, one of Europe's biggest engineering groups, with headquarters in Switzerland and a market capitalisation of around $200 billion, this week warned that Europe is heading towards a “mass unemployment” crisis unless politicians take urgent action aimed at boosting competitiveness. CEO Morten Wierod attacked policymakers in Brussels and national capitals for their lack of urgency in implementing the reforms recommended by Mario Draghi almost two years ago. Draghi's landmark report on European productivity and competitiveness highlighted the widening gap with the US economy. But only 10% of his 383 proposals have so far been acted upon. Other business leaders have made similar pleas in recent months.

Where does the US economy stand now?

America's outperformance began decades ago, and in the 2020s it has become “vast” and sustained, says The Economist. Recent IMF forecasts show US growth continuing to outstrip other big Western economies to 2030 and beyond. That's despite strong headwinds. Under Donald Trump, the US has become less attractive to high-skilled migrants who boost its dynamism; more vulnerable to a bond-market crisis as its debts mount and more tolerant of corruption. The Economist suggests that overall the self-harming “MAGA tax” – high tariffs, zero net migration and all-encompassing uncertainty over policy – shaved around three-quarters of a percentage point off the rise in GDP in 2025. It was closer to 2% than 3% – yet still far higher than the EU or UK.

What did the US do right?

The explanation lies in a range of natural advantages and long-run trends. The US has both continental scale and one single market and language, vast natural resources and the fiscal space that comes from issuing the world's reserve currency. While Europe's fragmented federalism holds it back, America's system means that businesses faced with unfriendly policies in one state can up sticks for another far more easily. America's shale revolution and liquefied natural-gas exports have reshaped global energy markets and driven US outperformance. Meanwhile, Europe has been hit harder by successive shocks – the financial crisis, the pandemic, the energy crisis. It struggles with its incomplete single market and remains fragmented by multiple languages, competing national interests, and different tax and legal systems.

Comparing the US and European economies

Underpinning the EU-European divergence is the growing difference between the two economies in terms of their industrial composition. The booming US technology sector has no European equivalent, and the gap is likely to widen in the age of AI. By contrast, Europe is strong in industries that have increasingly faced tough Chinese competition. The US has benefited from higher productivity, more business-friendly policies and deeper capital markets.

Is Europe really so far behind?

Economists have debated for years whether the US lead is unduly flattered by the ways in which it is measured. For example, in the mid-2000s, the US dollar was dramatically overvalued against the euro and has since fallen back, meaning that when measured in constant current dollars, the divergence appears greater than it “really” is. Others point to America's growing population and the fact that it's getting younger compared with Europe. The latest iteration of these debates is a friendly but pointed exchange of blogs and papers in recent weeks between US Nobel laureate Paul Krugman and three European economists, including the French 2025 Nobel laureate Philippe Aghion and the LSE's Luis Garciano. Krugman, drawing on recent analysis and charts by Seth Ackerman, argues that using headline GDP figures to measure the divergence is misleading and that Europe is doing better than most economists think.

Why is Europe struggling?

Broadly, Krugman's point is that when measured using GDP at purchasing power parity (PPP) – that is, correcting for domestic inflation and relative price differences – the two blocs are pretty much where they were 20 years ago (and Europe has pulled ahead when it comes to all kinds of social indicators, including life expectancy). Yes, the US dominates in rapid technological progress, but this progress is passed on to everyone in the form of lower prices and doesn't just raise US GDP. The three European economists counter that Krugman is being far too kind to Europe – and therefore unhelpful, by diminishing the need for radical reform. PPP is useful for comparing purchasing power across countries at a specific point in time, but a sequence of current-PPP comparisons does not make a credible measure of real growth.

Can Europe catch up?

The US lead in technology and innovation is “not helping America and Europe in the same way: it has led to higher US wages and profits, and the gap is widening each year”, say Aghion and his colleagues on Project Syndicate. It should not be controversial, they say, to agree that Europe is falling behind, and to obscure this reality means failing to address the causes. In short, Europe might not be so far behind as some think. But nor will it catch up unless it tackles its economic failings.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Aluminium alloys are employed in aircraft production, cooking utensils, marine applications, drink cans and construction. The metal is vital to renewable energy, while electric-vehicle (EV) manufacturers use it to make lighter cars, prolonging battery life. 

Aluminium usage in European cars increased by 18% between 2019 and 2022, says automotive consultancy Ducker Carlisle. 

Aluminium is classified by the US and the EU as a “critical mineral”. In 2020, the World Bank described aluminium as a “high-impact” metal in all existing and potential green-energy technologies. Yet “you wouldn’t know it from the perilous state of primary metal production on both sides of the Atlantic”, says Reuters. So what has been the problem? 

“High energy costs, particularly in Europe, have caused multiple smelters to close or curtail output,” says Andy Home on Reuters. “Western European primary aluminium production has been sliding since 2017, but Russia’s invasion of Ukraine and the resulting spike in energy prices have accelerated the downtrend.” Carbon emissions have been another issue.

Meanwhile, US primary metal output has fallen since 2019, says the United States Geological Survey (USGS). Two out of the country’s seven domestic smelters have been mothballed, while another three are operating at reduced levels. 

Global demand for aluminium will rise nearly 40% by 2030, more than for any other metal, forecasts the World Bank. 

An aluminium stock to buy 

Alcoa operates the world’s largest third-party alumina (aluminium oxide) business, and its portfolio of seven refineries has a highly competitive cost position and the industry’s lowest average carbon-intensity footprint. 

The group’s aluminium division includes smelting, casting, and energy assets. Alcoa is also a leading producer of primary aluminium products and patented cast alloys. 

Half-year results in 2023 showed a $333m net loss versus a $1bn profit for the equivalent period last year, while the shares have fallen by almost two-thirds since March 2022. Analysts expect a current-year loss. 

But the balance sheet remains sound, while 2024 estimates put Alcoa on a forward price/earnings (p/e) ratio of 17, dropping to just over ten in 2025. 

It may feel counter-intuitive to buy a share that has done so badly of late. But the time to invest in stocks such as Alcoa is while they are out of favour. When aluminium recovers, so will profits, together with the stock. The recovery could be just as rapid as the drop.

A vital metal for the green transition 

Now to zinc. It’s the 23rd most abundant element on Earth. “Zinc is necessary to modern living,” says the USGS, “and in tonnage produced, stands fourth among all metals in world production – exceeded only by iron, aluminium and copper.” 

Like aluminium, though, zinc has struggled. The price has dropped by 45% from its April 2022 peak as a potential supply surplus looms in 2023. 

And so has the price of another key metal for the green transition, nickel.

“We forecast nickel prices to remain under pressure in the short term as a surplus in the global market builds and a slowing global economy mutes stainless-steel demand,” says Dutch banking group ING. 

“Prices should, however, remain at elevated levels… due to nickel’s role in global energy transition. [Its] appeal to investors as a key green metal will support higher prices in the longer term.” 

The global nickel market is projected to grow at a CAGR of 7.3% between 2023 and 2028, says industry watcher Fortune Business Insights. Nickel supply, by contrast, is expected to increase less rapidly. 

Data analysis firm Fitch Solutions expects global nickel mine production to grow by an annual average rate of 5.1% over the medium term (between 2022 and 2026), before averaging 1.9% between 2027 and 2031.

How to invest in this key theme? 

So how to play zinc and nickel? Glencore (LSE: GLEN), worth £55bn, is one of the world’s major miners. It produces and markets a wide range of metals and minerals, such as copper, cobalt, zinc, nickel and ferro-alloys. It extracts and processes zinc in Australia, Canada, South America and Kazakhstan, with smelting and refining operations worldwide. 

In addition, Glencore produces some of the world’s purest nickel in Canada, Australia, Norway and New Caledonia.

Yet as base metal prices have dropped, so have Glencore’s shares. They have lost 23% since January. And the 2023 half-year results revealed a 62% year-on-year plunge in net income to $4.6bn. 

Yet the balance sheet is strong, and while forecasts put the shares on a 2024 p/e of 18, that figure doesn’t factor in a base-metal price recovery. The yield is a huge 9%, although if profits remain under pressure the dividend is likely to be reduced, at least for a while. 

There is, then, a strong long-term recovery case for investing in aluminium, zinc and nickel while they are out of favour. We just need to be patient.

Join us at the MoneyWeek Summit on 29.09.2023 at etc.venues St Paul's, London.

Tickets are on sale at www.moneyweeksummit.com

MoneyWeek subscribers receive a 25% discount.

Our investment process in the GAM UK Equity Income Fund is focused on stocks of all sizes. The fund aims to provide income and capital growth through investment in predominantly British stocks with an emphasis on cash-generative companies. We meet managers and conduct on-site visits in order to hunt out cheap companies that have been overlooked by the wider UK equity market. 

Our investment process follows four main stages. Firstly, we do cash-flow analysis to gauge which companies have a high cash-flow yield. The second stage, which involves an assessment of the firm’s sector, entails detailed analysis of environmental and social governance (ESG) and also prevents distressed companies from entering the portfolio. The third stage is a management review. This is pivotal, as it enables us to sit down with management teams. Finally, at the fourth stage, we undertake a timing analysis – determining when the stocks should enter our portfolio.

Stronger sterling helps smaller stocks

Global investors have shunned UK equities since the Brexit vote in 2016 – no wonder, given the UK’s well-documented weak growth, low productivity and soaring inflation. Still, we think small and mid-caps should be performing better than they are and the tide is now shifting in favour of British equities. 

Sterling took a beating following the EU referendum vote, and again in 2022 following Kwasi Kwarteng’s Budget, when it almost hit parity with the dollar. It has since strengthened, yet this is not being reflected in the share prices of the more domestically oriented companies. Although it has since stabilised, the ongoing weakness of the pound, despite higher interest rates, has made it cheaper for UK companies to import goods with production costs priced in dollars.

This is why we are willing to have 50% of the fund exposed to that size of company: the narrative is excessively pessimistic. As a result, more domestically oriented companies are broadly trading on six to eight times earnings.

We have just sold Shoe Zone (Aim: SHOE), a small company that sells shoes on the high street at an average price of £10, to cash in on the 50% return we made on that investment. The company buys its products in Asia and ships them to the UK. It has benefited from rising margins as the price of containers, denominated in dollars, has rapidly declined.

Lucrative lippie 

Another example is cosmetics company Warpaint London (Aim: W7L), whose target market is 18- to 24-year-olds. The stock is a value proposition, as lipsticks are sold for as little as £3. Sales of Warpaint London’s products at retailers such as Tesco, Boots and Superdrug have helped the company record a significant improvement in its business, and the shares have risen against the book price in the fund. 

One more stock to keep on your radar is Strix (Aim: KETL), a kettle and water filtration company. In addition to making the Tommee Tippee baby bottle filter and coffee machines, the firm recently acquired Billi, a hot water-system manufacturer. Although the kettle market has struggled with customers running down stock levels, these are now building up again. Ultimately, Strix will benefit from growing demand from households for water filtration.

Join us at the MoneyWeek Summit on 29.09.2023 at etc.venues St Paul's, London.

Tickets are on sale at www.moneyweeksummit.com

MoneyWeek subscribers receive a 25% discount.

Another month, another set of painful UK inflation statistics that were worse than analysts had predicted. The consensus view of economists polled by Reuters had been that inflation would fall a little in May to 8.4%. Instead, when the latest Consumer Price Index (CPI) figure was published last week, it showed the UK’s ominously sticky inflation rate was unchanged on the previous month at 8.7%. Even more worrying was the latest figure on “core” inflation, which strips out volatile components that the Bank of England can’t do much to influence, principally food and energy costs. For the second month in a row, core inflation rose unexpectedly in May – from 6.8% to 7.1%, the highest rate for more than 30 years. Analysts had expected no change. There were crumbs of comfort, but only crumbs. Food-price inflation was 18.3%, marginally lower than 19.2% the previous month. And a lower rise in the cost of goods leaving factories (of 2.9%, from 5.2% previously) could be a sign of easing pressures at the top of the supply chain. 

 Is UK inflation an outlier? 

Not completely. Ten European Union countries (mostly in Eastern Europe and the Baltics) currently have higher CPI inflation rates, and among the larger EU economies, Italy’s is only a bit lower (it was 8% in May, and has eased to 6.7% in June, according to figures released this week). But judged alongside similar big economies, Britain is absolutely an outlier. It has the highest rate of the G7 economies, and the highest rate in western Europe. In the US, inflation fell from 5% in April to 4.1% in May – less than half the UK rate. In the eurozone as a whole, it eased from 7.0% to 6.1%. When it comes to core inflation, too, Britain is the exception in still seeing a rise. In the US and the eurozone, that metric has been easing, down to 5.3% in May in both places.

What’s going on? 

The basic problem is that the UK has “endured the worst of both worlds”, says Ruth Gregory in a Capital Economics research note. It has suffered a big energy shock, like the rest of Europe, and also labour shortages (even worse than those in the US). When it comes to wholesale energy prices, the leap since the pandemic, made worse by the war in Ukraine, affected the eurozone and the UK far more than the US. Most European governments intervened in markets to help households and businesses weather the storm – and several capped prices earlier and by more than in the UK. Meanwhile, the UK regulator’s unusual price-capping mechanism means that recent falls in wholesale prices have taken longer to feed into consumer bills. Changes come in big chunks, rather than smoothly and steadily. Some economists think that once the impact of energy prices drops out of the year- on-year figures – over the next couple of months – overall inflation will fall sharply and reconverge with other big economies.

What about labour markets? 

One of the reasons core inflation is rising in the UK (but no longer in the US or eurozone) is that its labour market is tighter, and higher wage growth is supporting higher CPI inflation, especially in services. According to data from Refinitiv, annual wage growth has risen to 7.2% in the UK, and 5.2% in the eurozone. In the US, it peaked at 5.7% and has since eased to 5.2%. That means wages are still rising more slowly than the headline inflation rate: they are falling marginally in real terms, making talk of a “wage-price spiral” premature. But UK workers have more leverage to negotiate higher rises than in similar big economies, due to the “bigger and more persistent shortfall in the supply of labour” post-pandemic, says Gregory. Part of that is due to Brexit and part is due to long NHS waiting lists, which are contributing to inactivity due to long-term sickness. 

Are UK policymakers to blame? 

It’s ever clearer that the answer is yes, says The Economist. Core inflation has proved stubborn in many countries, and across the rich world many governments have added fuel to the fire by running budget deficits of a scale typically seen during deep slumps. But Britain’s problem is especially acute – not just thanks to the weaker supply side on labour, but also to overly loose fiscal and monetary policy. On the former, the UK stands out for the generosity of its support during Covid and the energy crisis. Combining the two (using data from the IMF and the Bruegel think tank), Britain heavily outspent its peers: 23.1% of national income, compared with 13.3% in France, for example. On monetary policy it is clear that, with hindsight, the Bank of England’s tightening cycle – from historic lows of 0.1% – was begun too late (in late 2021) and was too cautious. The insistence of the Bank’s governor, Andrew Bailey, that inflation would prove transitory proved wide of the mark, raising doubts about the Bank’s credibility and modelling – and limiting its policy options.  

Where will inflation go from here? 

A key moment will be the July CPI figures released in late August; the first to factor in lower consumer energy prices from July. The likelihood is that we are currently at “peak panic”, says Jeremy Warner in The Telegraph. Yes, inflation is proving stickier than most other big economies, but it will fall sharply soon and should be back close to target by the middle of next year. “It will be greatly helped in this regard by a resurgent pound, one of the consequences of higher interest rates.” This rapid slowdown in inflation will probably be accompanied by a recession, but one that’s “more of the long shallow variety than the deep contractions of the financial crisis and the pandemic. In this regard, we’ll be in much the same boat as the rest of Europe”. Capital Economics predicts UK inflation will remain higher than the US and eurozone until the third quarter of 2024, by which time the rate will be under 3% in all three places. This will, however, “require a recession”, and the upside risk to interest rates “is greater in the UK than elsewhere”. 

Gross Domestic Product (GDP) is an important measure of the economic health of a country. It represents the total value of goods and services produced within a country's borders during a specific time period.

GDP is most often used for discussing individual countries, but may also be calculated for regions (eg, southeast Asia), trading blocs (eg, the European Union), or areas within a country.

GDP is used to gauge the size and growth of a country's economy, as well as its overall health. It is an essential tool for policymakers, investors, and businesses to understand the economic landscape and make informed decisions. A GDP growth indicates a strong economy, while falling GDP can signal a recession or economic downturn.

Therefore, it is crucial to monitor GDP to ensure the stability and growth of a country's economy.

How is GDP calculated?

GDP is calculated in three ways. The production or output approach is the sum of all the value added through producing goods and providing services (ie, the market value of what’s produced minus the costs of producing it). The income approach is the sum of all the income earned by companies and individuals from offering the same goods and services. The expenditure approach is the sum of everything spent on finished goods and services. In theory, all three should produce exactly the same result, but the difficulties of collecting data means that they may not.

Expenditure is normally the most useful way to analyse what makes up GDP. The equation is GDP (represented by a Y) = consumption (C) + investment (I) + government spending (G) + exports (X) – imports (M). As the last two terms make clear, GDP is based only on what’s produced within the borders of a country. If you’re looking at how much is produced by businesses owned by residents of the country – whether production takes place at home or elsewhere in the world – the equivalent statistic is gross national product (GNP) or gross national income (GNI).

Larger countries can have a bigger GDP than smaller ones and still be poorer in terms of living standards, so we often look at GDP per capita (GDP divided by population). In addition, comparing GDP calculated at market exchange rates – known as nominal GDP – may not reflect differences in the cost of goods and services between countries. So we also look at GDP per capita at purchasing power parity (PPP), which adjusts the exchange rate to account for differences in living costs.

See Tim Bennett's video tutorial: What is GDP?

Some interesting developments in the murky world of geopolitics to report on this week.

The currency wars are getting hot and it’s looking increasingly likely that the world is going to start moving away from the US dollar as a reserve currency – gold or bitcoin are the front runners to replace it.

The US dollar is running out of road

Writing on her Substack, US economist Pippa Malgrem, who was special assistant for economic policy to US President George Bush and a former member of the president’s working group on financial markets, argues that WWIII has already started.

“We are in a hot war in cold places: space, cyberspace, underwater, and high places, including the Arctic, and the Himalayas, and in proxy conflicts in places the media give a cold shoulder to like Africa” (not to mention the Pacific). A cold war in hot places then, as well as a hot war in cold places.

One cold place Malgrem doesn’t mention is the hot war that is currency. It’s heating up again.

This week, with the aim of limiting Russia’s ability to finance its war in Ukraine, the G7 nations, the European Union and Australia set a price cap of $60 a barrel on Russian crude oil. This follows the EU’s embargo on Russian crude imports by sea, with similar pledges from the US, the UK, Canada and Japan.

As you would expect, Russia has said it will not abide by such price caps, even if it has to cut production.

Meanwhile, the world’s largest oil importer, China, seems to be slowly opening back up. Cities are easing Covid-19-related restrictions in the wake of recent protests, and it seems the country is set to further relax curbs as soon as today.

I think it’s fair to say that if China had not locked down, its oil demand would have been a lot higher – and so the oil price would have gone a lot higher. The same goes for metals and most other commodities.

And then we have another part of the puzzle. Russia’s President Vladimir Putin did his best bitcoin maximalist impression last week, as he called for an international, independent, blockchain-based settlement network (spoiler alert: it already exists: it’s called bitcoin).

“The technology of digital currencies and blockchains can be used to create a new system of international settlements that will be much more convenient, absolutely safe for its users and, most importantly, will not depend on banks or interference by third countries,” he said. “I am confident that something like this will certainly be created and will develop because nobody likes the dictate of monopolists, which is harming all parties, including the monopolists themselves.”

Here’s the link to bitcoin.org, Vladimir, in case you have self-googled and are now reading this.

Where is this all going?

I have a few ideas. So does analyst Zoltan Pozsar, Credit Suisse’s answer to Led Zeppelin.

The new global reserve currency: bitcoin or gold?

“The oil market is tight,” Pozsar says. The oil price is lower than it might otherwise be not just because of China lockdowns, but because of the US release of its strategic reserves (SPR), as well as from OECD countries. But Saudi Arabia is now low on spare capacity and the SPR is finite. “Recent releases have brought reserves down to levels we haven’t been at since the 1980s. The 400 million barrels left in it isn’t much: it could help police prices for a year if we released 1 million barrels per day (mbpd), half a year if we released 2 mbpd, and about four months if we released 3 mbpd”.

Short of a sudden new surge in supply (where from?) or a sudden reduction in demand, it would seem then that the oil price is going higher.

Russian crude already sells at a $30 discount relative to Brent, which currently sits at $83, he observes, with China and India the main buyers. “In the case of India, it is widely understood that Indian refiners are turning some of the imported oil into diesel for re-export. Buying Russian crude at $60 per barrel (pb) and selling diesel at $140pb makes for a nice crack spread, the petroleum market’s equivalent of 100 bps of spread in the land of OIS-OIS cross-currency bases. India and China thus serve as matched-book commodity traders (instead of Glencore or Trafigura), the former dealing in oil and the latter in LNG, keeping commodities in circulation.”

But Russia may be happy to sell to India or China at that discount – it won’t however cap prices to sell to Europe on point of principle.

Meanwhile, the US needs to replenish the SPR, especially if it wants to control domestic oil prices. “Gone are the days when the US Deputy National Security Advisor warned India and other countries of sanctions if they bought Russian crude oil. The change in tune could be one backdoor mechanism to refill the SPR, and given the $30 dollar discount to Brent that India is paying for Russian oil, this would be below President Biden’s $75 target.”

But if Russian oil is exported for the purpose of replenishing the US SPR, Putin’s not going to like that either. What to do then?

Only accept payments in gold, says Pozsar, not dollars or rupees.

Sound a bit fantastic? “No it is not”, says Pozsar. “Look at the tit-for-tat measures so far: you invade Ukraine, I freeze your FX reserves; you freeze my FX reserves, I make you pay for gas in roubles; the West boycotts my Urals, I’ll ship it east...

...the West caps the price of Urals, let them, but I’ll make them pay in gold. And if some countries re-export Urals to the West, I’ll make them pay in gold too.”

Anticipating geo-politics from my desk in southeast London is probably not wise. The pub is a better location for such pontification. But we have long since argued that the re-financialisation of gold is the most powerful weapon there is in the currency wars and the Eurasian move towards de-dollarisation.

The problem with gold is settlement. You can’t send it over the internet. You have to use banks or gold dealers. If only there was a form of money that you could transfer over the internet from A to B that eliminated the need for trusted third parties …

Oh! There is …

Eurozone inflation jumped to a record high of 10.7% in October, outpacing analysts’ projections for an increase of 10.2% for the month. We explain what this means for your finances.

Like the UK, the EU is suffering from high energy and food prices following Russia’s invasion of Ukraine earlier in the year, which are pushing up prices of goods and services across the board.

Inflation in the UK hit 10.1% in September, rising back into double digits after a slight dip to 9.9% in August.

UK inflation figures for October have not yet been published. Nevertheless, they are widely expected to show inflation accelerating again following the increase in the energy price cap.

What is the European Central Bank doing to control Eurozone inflation?

Double-digit inflation is putting a lot of pressure on the European Central Bank (ECB) to continue increasing interest rates.

Here in the UK, the Bank of England has been acting aggressively to raise rates in an attempt to drive down inflation. However, across the Channel, the ECB is having to be more cautious.

The EU is in an incredibly precarious economic position and the central bank is wary of going too far too fast.

But despite these concerns, the ECB has raised its leading interest rate from below 0 to 1.5%. It is expected the bank will unveil another 0.75% hike in December, taking the base rate to 2.25%.

Some analysts believe this could tip the Eurozone into a recession. A recession in the EU would ultimately be bad news for the UK economy as lower demand will have an impact on imports and exports.

A recession may also hurt the value of the euro. This may make it cheaper for holidaymakers and importers, which could be a silver lining.

Will Eurozone inflation have an impact on UK inflation?

Higher inflation in the Eurozone is hardly good news for investors and consumers here in the UK.

It could be seen as a sign of things to come as higher energy and food prices are responsible for most of the increase.

Energy prices across the Eurozone rose by 41.9% in October, from 40.7% the previous month. Meanwhile, the prices of food, alcohol and tobacco rose by 13.1%, up from 11.8% in September,

More worryingly, core inflation, which excludes volatile energy and food prices, rose 5%, up from 4.8% in September. This number suggests that inflation is becoming more entrenched in the economy and is going to become much harder to contain.

What does higher Eurozone inflation mean for you?

Higher Eurozone inflation will ultimately lead to higher interest rates in the rest of Europe. Rising prices may also force the Bank of England to go further with its planned rate rises.

This will be good news for savers who will be earning more money on their cash. However, it will be bad news for borrowers as higher interest rates will increase the cost of borrowing.

If interest rates settle at a higher level here in the UK than in the Eurozone, the pound could strengthen in value against the euro.

That means holidaymakers may be able to get more for their money when travelling to the EU.

A stronger pound may also help reduce inflation here in the UK.

Unfortunately, rising prices across the EU may not mean much for most people in the UK, but it is going to have an effect here.

The EU is the UK’s biggest trading partner and higher prices will feed into exports from the region. That might mean higher prices for consumers here in the UK. With wages already lagging behind inflation, it seems negative real wage growth is going to continue.

Remember to get your tickets for the MoneyWeek Wealth Summit hosted by Merryn Somerset Webb, on 25 November 2022! – we’ve got some brilliant speakers lined up and, given everything that’s going on, we’ll have an awful lot to talk about.

Book your place now at moneyweekwealthsummit.co.uk

“You can’t buck the market”, Mrs Thatcher used to say. But her disciple, Liz Truss, has approved plans to do just that.

Admittedly, popular pressure and the media gave her little choice and the UK is only following most European countries, but hopes that this will end well may prove mistaken.

Tom Murley, a 30 year veteran of the renewable energy sector who founded that arm of Hg Capital and served on the board and investment committee, has profound doubts about the energy price guarantee based on the fiasco of his experience in Spain.

“The UK and Western Europe face an energy crisis; not so much of supply but one of price after decades of low costs,” he says. Truss’s £100bn solution, capping energy bills for up to two years, is not the answer. It does not solve the underlying problems of the energy sector – habitual underinvestment in UK energy supply and ever-changing UK energy policy. On top of this, this borrow-today-and-pay-tomorrow scheme has been tried before, and failed.

Spain’s failed energy price cap

In the early 2000s, Spain embarked on an ambitious renewable energy policy when renewable electricity was significantly more expensive than fossil fuels, which is no longer the case. Under that policy, Spain was to pass on the increased cost of renewables to all of its consumers. However, because the pace of renewables expansion was quicker than planned and successive governments were reluctant to pass on rate increases during election cycles, the consumer increases never happened. As a result electricity suppliers collected from customers less than it cost to run the system. This became known as the tariff deficit.

Between 2002 and 2007 the deficit was at manageable levels, so the suppliers agreed to wait for collection out of future price increases. However, as the tariff deficit widened they became nervous, so the Spanish government issued bonds backed by the future credit of the electricity system and a promise of tariff increases, with the proceeds paid to suppliers.

From 2008-2013, however, the tariff deficit exploded, reaching €30bn. The 2008 financial crisis and Spain’s deteriorating credit position (necessitating a bailout from the European Central Bank) made the issuance of more bonds impossible and tariff increases remained politically unpalatable. As the tariff deficit grew, the rating agencies began to question if the suppliers would ever be paid, and threatened a downgrade to junk bond status.

Not wanting to pass the cost on to voters, Spain opted to retroactively slash the rates paid to renewable energy providers by 30%-100%, effectively impairing over €100bn of equity invested in Spanish renewables based on Spain’s long-term promises. This cut the deficit and amounts due were paid, stabilising the system’s finances. The simple lesson from Spain is that systems which charge consumers well below the full cost of energy for an extended period (the Spanish tariff deficit was 3% of Spanish GDP) are not sustainable and doomed to failure. If the UK spends £100bn-£150bn on such a programme, it would amount to 3.1%-4.7% of 2021 GDP.

Truss’s plan contains too many unknowns

The UK is proposing to borrow the cost of the scheme, but is this the best or the fairest way to spend such a huge amount of money? Will the scale of it push up the cost of borrowing not just for the government but for the whole economy? How will it make the economy more efficient or productive?

As Murley says, “there is much about the current energy crisis that we do not know. How long will it last? When will new or resumed supply of gas come onstream and alleviate the price increases? Truss’s solution could end up looking like Spain – an already large problem that mushrooms into an economic disaster, resulting in a massive price hike after two years.”

The government does promise to allow UK gas production to be stepped up, to remove the blocks on fracking and to encourage new energy infrastructure, including nuclear, renewables and grid connections but planning and environmental objections could slow this down. It has ruled out a windfall tax on the sector (for now?), preferring to switch the generators now earning enormous profits onto lower priced, longer term contracts.

Reforming the electricity market is highly desirable and, it seems, universally accepted by the generators. But it will be complex and take time. With the massive profits that are currently being earned, the generators have an incentive to spin out the process.

There are some saving graces to the government’s proposal. The price cap of £2,500 should be high enough to encourage increased output and discourage consumption. Reducing the inflation peak by 5% will save on the cost of indexing inflation-linked bonds (though not in real terms) and may help reverse the upward spiral of inflation.

The best hope for the government is that energy prices fall quickly enough to make the price cap redundant long before the two years are up. The cost would therefore be far below that budgeted for. Their worst fear is that prices stay high, market reform takes too long to implement and the scheme becomes unaffordable. If so, windfall taxes will be back on the agenda.

Moscow’s “indefinite shutdown of Nord Stream 1”, Russia’s main gas connection to Germany, “was supposed to be the Kremlin’s big weapon that would send the wholesale price to new stratospheric levels”, say Ben Hall, Valentina Romei and Sam Fleming in the Financial Times. So far it hasn’t worked. Although they remain historically elevated, European wholesale gas and German electricity prices have instead fallen by 40% and 34% respectively since spiking late last month.

Russia’s share of EU gas imports has fallen from 40% to just 9% since the war began. With German storage tanks 88% full, “confidence is growing in…capitals that Europe can get through the winter without severe economic and social dislocation or energy rationing”.

The energy crisis is forcing a reform of Europe’s electricity market

On Wednesday European Commission president Ursula von der Leyen outlined sweeping plans to reform the continent’s electricity market. Gas is the marginal fuel for European power generation and thus drives electricity prices. This means non-gas electricity producers such as nuclear power and renewables can earn huge revenues while their production costs are now far below market prices. The plan is to cap these revenues, while she is also pushing for a windfall tax of 33% on the profits generated by energy companies.

No wonder that governments want to raise revenue: “Added together, Europe and the United Kingdom have so far promised to spend more than €500bn ($500bn) to subsidise bills” in response to soaring prices, say Lauren Kent and Anna Cooban for CNN. The scale of the crisis means that proposals like a windfall tax that were considered “crazy in June” are now mainstream, Václav Bartuška, the Czech special envoy for energy security, told The Wall Street Journal.

Energy derivatives and European stocks are feeling the strain too

There are also signs of strain in the energy-derivatives market, says Gillian Tett in the Financial Times. European utility firms are facing crippling margin calls on contracts they had taken out to hedge against price falls. Soaring prices have created “massive paper losses” on these contracts, forcing some governments to step in. Up to €1.5trn may be needed as collateral, with the Finnish energy minister talking of “the energy sector’s version of [the] Lehman Brothers” meltdown. “Designing an electricity market is hard. The juice cannot yet be stored at scale, and has to be delivered at the exact moment it is needed,” says The Economist. European governments are trying to find a way to protect consumers while preserving the incentive for electricity producers to generate – and for consumers to lower the thermostat.

The energy furore is rattling investors further. European stocks have been slipping since mid-August amid fears of recession; last week the European Central Bank raised interest rates by three-quarters of a percentage point. “Bank of America’s monthly fund-manager survey showed global investors are the most underweight on European equities ever,” says Cormac Mullen on Bloomberg. The Euro Stoxx 600’s July lows may be “tested again soon”.

Soaring natural gas prices have been one of 2022’s big headline grabbers. However, those with longer memories will recall when producers could hardly give their output away. So, what’s the deal with its renaissance and is now a good time to invest in natural gas?

Is it time to invest in natural gas?

Natural gas – which is colourless, odourless and the cleanest burning fossil fuel – developed underground millions of years ago.

Its usefulness is magnified by converting it into liquefied natural gas (LNG), a liquid form of the gas that equates to about 1/600th of the volume of natural gas making it easier to store and transport.

And because there are so many different ways the fuel can be produced, stored and transported, there are plenty of options available to invest in natural gas.

For many years before 2020, global natural gas values had been depressed by plentiful supply. Yet from April 2020 until August this year, they rose almost 7.5 times. In February 2021, UK gas was trading at 38p per therm (a measure of gas consumption). In August this year, the price reached 537p per therm!

The initial catalyst for these price explosions was the easing of Covid-19 restrictions. As people returned to work, energy demand surged while supply was slow to respond. With natural gas accounting for about a quarter of global electricity generation, its price began to soar. Then Russia invaded Ukraine on 24 February.

The world’s most important fuel

Prior to the invasion, Russia had supplied 40% of the EU’s gas, says the BBC.

Russia has now cut supplies to Europe by shutting the key 745-mile Nord Stream 1 natural gas pipeline – from near St Petersburg to north-eastern Germany – for the second time in recent months.

Despite this development, natural gas prices – in particular in Europe – have dropped back in September. Russian pipelines now account for just 9% of EU gas imports, according to European Commission president Ursula von der Leyen. And the Commission is trying to cap the price of Russian natural gas exports to Europe. For those looking to invest in natural gas, this potential cap could be the biggest risk to investment performance.

Meanwhile, “today’s record prices and supply disruptions are damaging the reputation of natural gas as a reliable and affordable energy source, casting uncertainty on its prospects particularly in developing countries”, says the 2022 third-quarter Gas Market Report by the International Energy Agency (IEA).

Over time and with sufficient political willpower – admittedly not guaranteed with the EU – Europe will wean itself off Russian gas. The IEA’s base case anticipates Russian pipeline gas exports to the EU declining by more than 55% between 2021 and 2025.

“Global gas consumption is forecast to contract slightly in 2022, with limited growth over the next three years… well short of the exceptional jump in demand seen in 2021”, says the IEA. “The Asia Pacific region and the industrial sector are the main engines of growth, accounting for 50% and 60% of the growth to 2025 respectively, although both are subject to downward risks from high prices and potentially lower economic growth.”

In other words, natural gas prices may have passed their near-term peak, even if they later hit new highs.

So, those looking to invest in natural gas need to exercise caution. Rather than buying into direct, mainly price-determined, natural gas and oil suppliers, it may be better to plump for shares in companies that could make much more money if overall demand for gas remains firm.

How to invest in natural gas

Nasdaq-listed Golar (Nasdaq: GLNG) – market cap $3bn – designs, builds, owns and operates marine infrastructure for the liquefaction and regasification of LNG.

As at 11 August 2022 the firm had two FLNGs (Floating LNG vessels that recover, liquefy, store and transfer LNG from subsea wells). Golar also owns 31% of gas carrier Cool Co, into which it transferred eight modern LNG tankers in January 2022, and 6% of LNG supplier New Fortress Energy.

Global demand for LNG tankers is set to remain strong in coming years as the EU and other nations grapple for gas supplies. The flipside is the size of the world LNG tanker order book, which stands at 38% of the current operational fleet (though shipbuilding capacity constraints mean that some of these ships may never be delivered).

So there are risks in buying Golar, though these have been cut by this year’s balance sheet restructuring. Net of debt, the company now has cash plus listed securities totalling $500m and expects Ebitda (earnings before tax, depreciation and amortisation) from its FLNG assets to grow by three to four times between last year and 2024.

On forward price/earnings multiples of 13 to the end of December 2023 falling to 12.4 for the following year, according to average analyst forecasts compiled by MarketWatch, the stock offers a cheap way to invest in natural gas and potential upside in the LNG sector.

Recession is “just round the corner” in the eurozone, says Jack Allen-Reynolds of Capital Economics. Weakening business surveys, higher gas prices and tighter monetary policy herald a tough second half.

The Euro Stoxx 50 index of euro-area blue chips has fallen 13% this year. European shares are out of favour with global money managers, says Michael Msika on Bloomberg. Allocations to euro-area equities have hit their lowest level since June 2012. Analysts at UBS think that European stocks are heading for their worst year since 2008.

Bavarian bargains

Still, a rally this summer has left some wondering whether the worst of the sell-off is over. The Euro Stoxx 50 has gained 11% since a low in early July. France’s CAC 40 has outperformed, says Bastien Bouchaud in Les Echos. With Italy facing political turmoil, Germany curbing gas use and the Spanish government hiking taxes, Paris appears a haven of relative “tranquillity”. Luxury fashion houses are raking in cash, with Hermès’ stock up more than 30% this summer. German exports are focused on China and Eastern Europe, while French firms have a more diversified set of clients, says Frederik Ducrozet of Pictet Wealth Management.

With French stocks trading on a cyclically adjusted price/earnings (CAPE) ratio of 20.8 at the start of this quarter, however, the Paris bourse is getting as pricey as one of Hermès’ Birkin handbags. Value hunters should instead consider Germany’s battered industrial base. On a CAPE of 13.9, German stocks are now slightly cheaper than their British counterparts.

At those levels “you’re not paying for good news”, says Matt Burdett of Thornburg Investment Management. Recession risks are arguably priced in. Europe hosts plenty of excellent multinational businesses that will continue to make money overseas even if the local economy slumps.

The trailing price/earnings (p/e) ratio of eurozone equities “has plunged to just under ten, from a peak of over 25 a year ago”, say Claus Vistesen and Melanie Debono of Pantheon Macroeconomics. The region’s stocks “are trading at multiples close to the nadirs during the financial and sovereign debt crises, which were good times to invest in eurozone stocks”. While cheap stocks tend to mean better long-term returns, don’t bet the house on a quick turnaround: a recessionary hit to corporate earnings – which could fall 20% over the next 12 months – is likely to prove “a drag on equity performance” for the rest of 2022 before a rebound next year.

European value shares look especially appealing, says Ben Arnold of Schroders. They “are… trading on lower [p/e ratios] than they were five years ago”, a rarity in developed markets after years of easy money. “Europe is one of the most overlooked ... markets in the world. Perhaps not for long.”

“The only function of economic forecasting is to make astrology look respectable,” said JK Galbraith. Predictions about stockmarkets, earnings or macroeconomic trends can be safely ignored, especially if you are a picky Virgo like me. That is why we haven’t been too fazed by the Bank of England’s forecast of a 15-month recession. Its record is no better than any other forecaster’s, to put it charitably. A year ago it thought inflation would peak at 4%. Now it thinks inflation is heading for 13%. It was too gloomy about the impact on GDP of the Brexit vote and failed to predict the 2008 financial crisis. All official forecasters did.

The US Federal Reserve said in January 2008, when the credit crunch was spreading fast, that the US would expand by up to 2% in 2008 and up to 2.7% in 2009. But GDP shrank by 0.3% in 2008 and 2.8% in 2009. Andy Haldane, the former chief economist at the Bank, compared economists’ failure to predict the crisis with Michael Fish missing the 1987 storm.

The bigger picture is that the stagflationary hurricane is well and truly here, regardless of whether the economy ends up shrinking for several months or not. The Bank, like its counterparts elsewhere, has been caught on the hop by inflation. Now it will try to subdue it by hiking interest rates, and talk has turned to what measures could alleviate the pain and bolster growth – state payments to help with energy bills and tax cuts, principally.

Overlooking the key ingredient

The fuss over the downturn and fiscal stimuli misses a key point, however. The measures being discussed relate to the demand side of the economy, but it is improving the supply side that will do the most good over the longer term. The last time we escaped stagflation, in fact, reforms to improve the productive capacity of the economy, such as privatising state behemoths and taming trade unions, helped pave the way for a lasting recovery. Those reforms helped bolster productivity, and we urgently need to do that again. “Productivity isn’t everything, but in the long-run it is almost everything,” as economist Paul Krugman put it.

The more effectively an economy uses its workforce and capital, the richer it will get. But Britain’s productivity growth is abysmal, as Neil Shearing of Capital Economics points out. Average output per hour worked rose by just 0.7% a year in the ten years before Covid-19, a far cry from the 1.7% average in the five years to 2008 and the 2.8% seen in the 1980s. Productivity growth hasn’t been this low since the start of the industrial revolution, says David Smith of the Sunday Times.

According to The National Institute of Economic and Social Research, if productivity had grown by an annual 2% in the past decade, the average worker would now be £5,000 better off.

So what’s the problem? What isn’t? It’s a toxic cocktail of shabby infrastructure, low business investment, poor skills, and over-centralisation (which implies less scope for a region’s institutions to galvanise growth and innovation, among other things). There is no way of cutting this Gordian knot, but you have to start somewhere, and it would have been helpful to hear from the Tory leadership candidates how they might approach it. Liz Truss may present a plan when she wins. But don’t hold your breath – and perhaps top up your gold.

Come and see Merryn at her Edinburgh Fringe show at Panmure House (once home to Adam Smith), which runs from 25 to 28 August. Guests include MoneyWeek favourites Russell Napier, James Ferguson and Edward Chancellor. Book your tickets here. All proceeds go to the upkeep of Panmure House.

MoneyWeek has been around long enough to see several big trends recur. Most of them have been fascinating to cover. But one key theme of the past decade fills me with dread, because it was like watching a slow-motion car crash: the euro crisis. It may now be making a comeback.

The launch of the euro coincided with the start of a global upswing, so the currency’s intrinsic flaws were overlooked. Everyone was getting used to the conversion rates (an irksome 13.76 schillings to one euro in Austria). Because the eurozone encompassed most EU members it was trumpeted as a giant leap forward for European integration.

A sub-optimal currency area

Many analysts, however, pointed out that there had never been a successful single currency without a single government, and that the euro was far from what economists call an optimal currency area. The basic idea is that groups of structurally similar economies, who often tend to experience similar business cycles, are best suited to sharing a currency. A similar approach to money management helps too, as it pre-empts fights about any joint budgets and potential debt issuance.

Benelux, Germany and Austria would arguably be an optimal currency zone: wealthy manufacturing-based economies with a shared instinct for sound money. What we got instead, of course, was northern Europe plus the inflation-prone south’s less healthy balance sheets. The prospect of sharing a currency with people who can’t budget, and would probably need a bailout at some stage, unnerved many northern Europeans, but such objections were steamrollered by the integrationist tide.

When the financial tide went out after the crisis, investors’ fears over the sustainability of the southern countries’ debt duly proved justified and bond yields soared. Since bond yields are implied long-term interest rates, that exacerbated countries’ solvency problems.

In the absence of a central fiscal authority to send money to poorer parts of the currency area to temper the impact of a downturn, only painful reforms and a clampdown on prices and wages would restore competitiveness and fuel confidence in stricken states’ ability to grow out of debt.

Cue endless wrangling between the European authorities and southern governments, and a cascade of market panic attacks focused on different countries until ten years ago this week Mario Draghi promised to do “whatever it takes” to keep southern bond yields low. The prospect of the European Central Bank hoovering up enough bonds to keep the yields down kept the wolf from the door, and a similar mechanism, the Transmission Protection Instrument, was launched last week, again against a backdrop of turmoil in Italy.

The wolf is still there, however. There is still ample scope for market panics and political clashes between Brussels and the member states, while the EU’s construction of a fiscal union (with an incipient banking union and a Covid-19-induced recovery facility allowing the EU to borrow collectively) is proceeding at the speed of a hungover giant sloth. More broadly, the eurozone is still stuck with a structure that acts as a deflationary straitjacket for much of the south, a recipe for recession and rancour. Until there is a European government or the euro is dismantled, the eternal crisis can only be managed or fudged – never resolved.

In days gone by, when the vast majority of savers used their entire pension fund to buy an annuity income at the point of retirement, planning to mitigate the risk of a last-minute collapse in the value of the fund was routine. That’s not necessarily the case today because the assumption is that most people prefer to generate retirement income through an income-drawdown plan, where the pension fund remains invested.

That assumption is not unreasonable. Income drawdown plans are now more popular than annuities. However, thousands of savers still buy annuities each year – and with annuity rates up by a fifth this year, that number looks set to rise. Even those who opt for drawdown plans early in retirement often purchase an annuity later on.

Moreover, this year’s volatility has been a reminder of the havoc stockmarkets can wreak on savers’ plans. US shares fell 20% during the first six months of the year; parts of the UK market suffered similar setbacks. If you began the year largely invested in equities and with plans to retire this summer based on an annuity purchase, the corrections will have come as quite a shock.

The traditional way to head off risk is to begin shifting your pension fund saving out of equities well ahead of retirement. Many pension providers offer “lifestyle” investment strategies that automatically begin to move your money out of equities around ten years before your target retirement date. You then continue down this “glide path” until you have little or no exposure to equities – typically five years out from retirement.

Consider all your options

There are some problems with this approach. First, most lifestyle plans depend heavily on fixed-income assets. But in the current environment, where interest rates are expected to continue rising, a shift out of equities into bonds may be a case of jumping out of the fire and into the frying pan.

Furthermore, many savers who take out lifestyle plans set a retirement date when they first begin saving and then forget all about the arrangement. Their retirement date may change later on, but the plan proceeds on the basis of the original target. That may expose savers to too much risk if they now plan to retire earlier – or too little if they now expect to cash in their pension fund later.

For these reasons, a more bespoke approach to managing risk in the run-up to retirement makes sense. If an annuity is likely to figure in your retirement plans, it is a good idea to lock in some of the gains you’ve made on your pension savings, but there are many ways to do that in practice.

Shifting from equities to bonds feels too crude. A wide range of asset classes and investment strategies now offer good risk-management potential. For instance, infrastructure assets provide good inflation-proofing features and real estate has a role to play for many savers too. Multi-asset funds, including the “flexible” investment trusts that can invest across asset classes, may be a good option for many.

Also keep in mind that the choice between purchasing an annuity and income drawdown does not have to be a case of choosing either one or the other. There’s nothing to stop you using some of your pension fund to buy an annuity while investing the rest in a drawdown plan. That could be a good compromise, but you’ll need to think differently about each pot of savings ahead of time. If in doubt, take independent financial advice on pension saving. Even experienced investors struggle with managing risk effectively – and trying to maximise the value of your fund for a set point in time can be challenging.

The eurozone is fighting “fires on all fronts”, says Mehreen Khan in The Times. Squabbling in Italy’s governing coalition has left the bloc’s third-biggest economy heading for “a summer of political paralysis”, with the future of prime minister Mario Draghi in doubt.

Between record energy prices, the threat of Russian gas being switched off and the prospect of recession in Germany, policymakers in Brussels and Frankfurt already had enough to deal with.

European governments have begun to work under the assumption that Russian energy will be cut off entirely this year, say Ewa Krukowska and John Ainger on Bloomberg. The European Commission is reportedly preparing a plan for “a voluntary 15% cut in natural gas use by member states starting next month” to conserve stocks for winter. The Commission thinks a Russian gas cut-off and a harsh winter could wipe 1.5% off EU GDP.

Germany has reduced its dependence on Russian gas from 55% to 35% since the invasion of Ukraine, says Philip Oltermann in The Guardian, but that still leaves it heavily exposed to Putin’s whims. For now, politicians hope to spare households from rationing while imposing restrictions on industry, which accounts for roughly one-third of gas use. Yet the chemical and pharmaceutical industries are warning of unintended “domino effects” from more supply-chain disruption.

“The good news is that the EU’s tanks are now almost 60% full”, more than this time last year, Leslie Palti-Guzman of data firm Leviaton told The Economist. Europe has also become a major importer of liquefied natural gas (LNG), with imports up 70% year on year in the first quarter. “To the chagrin of greens” European governments are also granting waivers for “filthy coal” plants to “crank out more power”.

“This is very worrying,” says George Saravelos of Deutsche Bank. Last month Russia reduced Nordstream 1 gas flows to Germany by 60% as part of Moscow’s ongoing dispute with Europe. “While the immediate availability of gas in Germany is not an issue, the energy market is starting to price a risk of a complete disruption to gas supplies for winter.” That would mean energy rationing and almost certain recession in Europe’s biggest economy.

“Russian supplies to the European Union are down more than 40% from last year,” says Craig Mellow in Barron’s. That has sent European gas prices up 70% in three weeks. Prices for 2023 delivery of electricity have followed, tripling since the start of the year. EU gas storage is 57% full – more than this time last year – and Europe has “energetically scoured the world for non-Russian gas” in recent months.

Still, “Germany and other EU economies could face natural-gas rationing as early as October if Russia maintains its current squeeze”, according to Jonathan Stern of the Oxford Institute for Energy Studies. While governments will protect residential users, “a broad range of manufacturers may face energy quotas”.

France has begun to prepare for “a total disruption of Russian gas supply”, say Vincent Collen and Sharon Wajsbrot in Les Echos. A draft law would give ministers the power to override market forces and issue direct orders to gas-fired power plants, taking France one step closer to “a war economy”.

Natural gas prices have risen by 700% in Europe since the start of 2021, say Gerson Freitas, Stephen Stapczynski and Anna Shiryaevskaya on Bloomberg. Once a “sleepy commodity”, natural gas now “rivals oil as the fuel that shapes geopolitics” and dictates the economic fortunes of nations.

SEE ALSO:

Why energy prices are so high right now

The transition to renewable energy is easier said than done

Get ready for the coming oil glut

European Central Bank (ECB) president Christine Lagarde was a synchronised swimmer as a teenager, says Jill Treanor in The Sunday Times. Now, she is “struggling to keep her head above water” as the eurozone’s periphery feels the pressure from tighter monetary policy and Italian and Spanish bond yields soar to eight-year highs.

Last week, the spread between German and Italian ten-year government bond yields spiked to 250 basis points (2.5%). That is well short of the 500-plus basis points that it reached at the height of the 2011-2012 eurozone debt crisis, but it was enough to force the ECB’s governing council to assemble for an emergency meeting in Frankfurt.

The central bankers unveiled a new “anti-fragmentation tool”. The suggestion that the ECB will act to keep spreads down “buys time”, Silvia Merler of Algebris Investments tells the Financial Times. But with details still scarce, it “does not take them out of the corner yet”.

Italy’s debt challenge

Italy – whose €2.759trn stock of debt is worth almost 150% of GDP – is the key concern, says Jérôme Gautheret in Le Monde. A debt crisis in the eurozone’s third-largest economy would pose an existential risk to the single currency.

The spike in yields leaves the Italian treasury paying interest rates of roughly 4%. For now Rome is maintaining the confidence of markets, thanks to the leadership of its prime minister, Mario Draghi, Lagarde’s predecessor at the ECB. Yet his “grand coalition” government “is showing increasingly obvious signs of running out of steam” ahead of elections due next year. “The personal aura of ‘Super Mario’ may no longer be of great help in protecting Italy from market storms.”

Comparisons with the eurozone debt crisis are overdone, say Martin Arnold and Amy Kazmin in the Financial Times. Things have changed over the past decade. Italy stands to receive €200bn in grants and cheap loans from the EU’s post-pandemic recovery fund. That will provide an economic boost worth 12.5% of GDP over five years. That help is tied to structural reforms that might drag Italy out of its long economic stagnation. The ECB also has a clearer plan for how to fight eurozone break-up risks – something it sorely lacked in 2011.

Still, the ECB’s recent behaviour doesn’t inspire much confidence, says Jeremy Warner in The Daily Telegraph. Why it is still persisting with asset purchases and negative interest rates when inflation is at 8% “is anyone’s guess”. Perhaps it is because while other central banks can just balance between the twin threats of inflation and stagnation, the ECB must also try to hold the euro together. “Europe’s monetary union is a bit like a bumblebee; aerodynamically it shouldn’t fly, yet somehow it does. For how much longer must again be in doubt.”

The European Commission has announced new rules covering mobile phones and several other kinds of consumer electronics goods that mean products sold in the EU will have to be fitted with a standard USB type-C charging port.

The new rule (assuming it is signed off by the European Parliament and European Council) will take effect from the autumn of 2024 and will initially apply to “small and medium-sized portable electronics”, including tablets, headphones and headsets, handheld videogame consoles, e-readers and portable speakers, as well as mobile phones.

Laptop computers will also be included, but manufacturers are being given longer to make the necessary changes: 40 months from when the changes get approved, which is expected to be this autumn.

What’s the idea?

The changes mean that in future consumers will only need a single, separately sold charger to power all kinds of products from all the different manufacturers – saving them money and hassle and cutting waste.

The idea, according to the EU, is to “make products in the EU more sustainable, to reduce electronic waste, and make consumers’ lives easier”. The EU calculates that the measure will save consumers “up to €250m a year on unnecessary charger purchases” and eliminate 11,000 tonnes of waste per year.

The biggest loser is Apple; the US giant already uses USB-C charging on its laptops and a handful of iPad models, but its iPhones and less expensive tablets use its proprietary Lightning ports and chargers, which will no longer be acceptable in the EU.

What will Apple do?

When the plan was first floated last September, Apple claimed that regulation mandating just one type of connector would “stifle innovation” and harm consumers. In practice, though, it will have to comply – and work out whether it’s worth making separate models for the EU and non-EU markets.

“I think the most likely outcome here is that Apple will shift the iPhone to USB-C globally rather than manufacture two slightly different designs,” Aaron Perzanowski, law professor at Case Western Reserve University, told The Washington Post. “If that’s right, it’s another powerful illustration of the Brussels effect, and one that has broader implications,” he said.

What is the “Brussels effect”?

It’s the term coined by Anu Bradford, an American professor of international trade law, to describe the way in which the EU has quietly become a global regulatory superpower – with rules governing everything from timber production in Indonesia to internet privacy in Latin America.

The EU manages to wield disproportionate global influence by making access to its market of roughly 450 million consumers conditional on compliance with its standards – which are typically more stringent than other jurisdictions, and aimed at facilitating interoperability and free trade across the 27-nation bloc.

Companies adopt the standards as the price of selling into the huge EU market, and then often choose to impose them across their global businesses to save on the costs of running two or more compliance regimes. Sometimes, though not always, these rules are then codified by non-EU governments or international organisations.

For example?

Bradford’s 2020 book, The Brussels Effect, traces the phenomenon back to the early 2000s and the chemicals regulation regime known as Reach. Other major areas are food safety and environmental stewardship. But the biggest recent example was in the field of data privacy and regulation, where the EU’s GDPR rules have been widely adopted around the world.

Tech giants such as Facebook and Google have adapted their business models to suit the new standards stemming from the EU Digital Market Act, drastically cutting their options for monetising consumer data, says economist Renaud Foucart on The Conversation. “Companies are not obliged to apply EU law globally, they often simply find it easier to do so.”

What sectors are next?

In the field of technology, the EU’s explicit mission is to “protect EU values and counter external dependencies and threats from artificial intelligence and hacking” by dominating standards. But the Brussels effect also extends to more mundane and tangible fields such as clothes and furniture.

Last month, for example, EU regulators announced proposals for new textiles regulations that would have a massive impact on the global industry by, in effect, declaring war on the “fast fashion” culture of cheap, throwaway garments. The EU Strategy for Sustainable and Circular Textiles would force companies selling in the EU to comply with rules governing everything from how long a garment lasts, to how much recycled yarn it contains.

Will this “effect” last?

The EU’s regulatory dominance is a relatively recent affair, says The Economist, and there are reasons to doubt its permanence.

First, its share of the global economy is likely to fall in the coming decades, cutting the world’s incentive to follow Europe’s rules. Second, in some contexts, technological innovations – such as 3D printing – could cut the costs of abiding by both European and other standards. Moreover, in some areas, “high standards may become a curse, rather than a virtue”. For example, in the AI field, companies under sketchier regulatory regimes “may build an insurmountable lead via unethical experimentation”.

One day the Brussels effect may be replaced by the Beijing effect, but the shift looks some way off. “Countries are increasingly forced to pick a sphere of influence. When the other choices are an erratic America and an undemocratic China, the EU has something to offer.”

Last week the government announced that it was yet again choosing to delay the introduction of post-Brexit checks on EU food and animal imports into the UK over fears that such checks would disrupt supply chains and add to rising inflation. It would be “wrong to impose new administrative burdens and risk disruption at ports” at a time of higher costs due to the war in Ukraine and rising energy prices, it said. The checks have been delayed until at least the end of 2023, and may now never happen at all.

The move means that UK agricultural and food exporters will now face an unenviable “triple whammy”, says the BBC’s economics editor Faisal Islam – namely “marathon length haulage queues in Kent, dozens of pages of red tape for sales in Europe, and no equivalent restrictions on competition from abroad for the UK market”.

But the move is good news for UK importers such as wholesalers and supermarkets. “One-way free trade is enormously beneficial,” insists the minister for Brexit opportunities, Jacob Rees-Mogg.

Exactly what checks are we talking about?

The new regulations due to come into force in two months’ time were (a) a new rule requiring sanitary and phytosanitary (SPS) checks on EU imports to be carried out at a border control post, rather than at their destination; (b) a requirement for safety and security declarations on EU imports; (c) a requirement for further health certification and SPS checks for EU imports; and (d) a range of prohibitions and restrictions on the import of chilled meats from the EU.

Checks on meat were due to start on 1 July and on dairy on 1 September, with all remaining goods including fish and composite foods to be checked from 1 November. The starting date for checks on live animals had not yet been announced. Now, though, none of this will happen – saving British businesses “up to £1bn in annual costs”, the government claims.

Is this “taking back control”?

Not exactly. It amounts to outsourcing responsibility to the EU for maintaining high standards for the goods and animals entering the UK – so it’s similar, in practice, to the arrangements before Brexit. That’s been the direction of travel ever since the UK finally left the bloc at the end of January 2020 – in what government critics would see as failing to “take back control”, but which supporters would see as a pragmatic response to the pandemic.

In June 2020, the government pushed back by six months its plans for a post-Brexit regime of import checks, scheduled to start from January 2021, due to fears that the pandemic had compounded the threat of border chaos. In March 2021, it then pushed them back again to January 2022, saying it wanted to help importing businesses recover from the pandemic. Then in September 2021 it delayed the checks yet again to mid-2022, in response to supply-chain worries.

So this is the fourth delay?

Yes, but this one looks very much like a permanent shift in policy – and could well mean that wide-ranging and laborious physical checks on food imports from the EU might never be introduced at all. Instead, the government says it is “accelerating our transformative programme to digitise Britain’s borders, harnessing new technologies and data to reduce friction and costs for businesses and consumers”.

More details on are due in a “target operating model” to be published this autumn, with the end of 2023 – some three years since the end of the Brexit transition period – the brought-forward target date for the introduction of a new import controls regime. This high-tech solution will apply to all imports, not just those from the EU, and according to the government’s spin it will “deliver on our promise to create the world’s best border on our shores”.

So is this good news?

It got a broadly positive welcome from trade groups such as the Food and Drink Federation, which welcomed the new clarity around the government’s intentions. But port operators are furious, having just spent more than £100m on border control posts in readiness for the July deadline that they now fear will be “highly bespoke white elephants”. Operators are now reportedly considering legal action for compensation from a government that has already chipped in (or wasted) a further £200m in subsidising the same unused infrastructure.

Farmers are furious, too, at the continued advantage the UK is handing to its EU competitors. The National Farmers’ Union president, Minette Batters, said import controls were crucial “to the nation’s biosecurity, animal health and food safety”. And she called the government’s decision “astounding” and “unacceptable” – a blow to all British food producers obliged to “meet stringent controls to export their own products abroad, all while being left at a continued competitive disadvantage to our EU competitors”.

James Russell of the British Veterinary Association said the decision “flies in the face” of ministers’ commitment to protect animal and human health.

What are the politics of this?

Privately, ministers plan to use the move to put pressure on the EU to reform the Northern Ireland Protocol, says Oliver Wright in The Times. The government’s argument is that if the UK is not imposing food checks on goods entering from the EU, then “there is little justification for a hardline approach to the border in the Irish Sea”.

Meanwhile, the wider post-Brexit collapse in UK trade remains the great elephant in the room of British politics, says David Smith in The Sunday Times. The volume of exports of goods and services last year was the lowest since 2014, while exports of goods have collapsed to levels last seen in 2010, when the “economy was recovering, bleary-eyed, from the financial crisis”.

UK exports fell last year to 15.7% below the pre-pandemic levels (at the end of 2019), while France’s exports grew by 9.2% and Germany’s were up 9.9%.

Brussels has proposed a phased-in ban on all Russian oil imports as EU member states seek to reach agreement on a sixth package of sanctions following the invasion of Ukraine. European Commission president Ursula von der Leyen said the ban would be implemented in an “orderly fashion”, halting crude within six months and refined products by the end of the year. She also proposed that Sberbank, Russia’s biggest bank, along with the Credit Bank of Moscow and the Russian Agricultural Bank, be disconnected from the international banking payment system Swift and that three Russian state-owned broadcasters should be banned for amplifying Putin’s “lies and propaganda”.

A significant U-turn

The oil embargo follows a significant U-turn by Germany and Robert Habeck, the German economy minister, has warned that EU consumers should brace for a “big economic hit”, says Guy Chazan in the Financial Times. Habeck said that while Germany had made “great progress” in finding alternatives to Russian oil and coal, other countries needed more time.

They do, says Stanley Reed in The New York Times. For the EU, “cutting itself off from Russian oil will be a herculean task that may risk sowing division”. In total, roughly 25% of Europe’s crude comes from Russia, but there are wide variations in degrees of reliance. Finland, Bulgaria, Hungary and Slovakia depend on Russia for more than 75% of their oil.

As a general rule, landlocked countries closer to Russia are “more entangled in its energy web” while more distant countries such as Spain, Portugal and France import less. The measures require the backing of all 27 EU member states, and although Hungary and Slovakia, which are particularly reliant on Russian oil, will have until the end of 2023 to comply with the ban, in a sign of continued resistance, Hungarian government spokesman Zoltan Kovacs said Budapest had seen “no plan or guarantees” on ways to manage the transition, say Eleni Varvitsioti and Sam Fleming in the Financial Times.

Unintended consequences

The other issue is whether the ban will work. Although it will “tighten the noose” on Russia’s economy, oil prices are already at their highest since 2014 as a result of the invasion and the ban could push prices even higher, “inadvertently generating yet more income” for Vladimir Putin. Brent crude oil climbed 2.5% on Wednesday to a high of $107.58 a barrel on the back of the announcement. It’s a very real concern, agrees Stanley Reed. Rystad Energy forecasts that the Russian government’s total income from oil is likely to be up 45% this year to $180bn. Russia is “finding homes” for its oil in India and, to a lesser extent, Turkey, by offering steep discounts. China’s independent refiners have also been buying oil “discreetly” to avoid scrutiny and US sanctions, adds Gordon Smith in the Financial Times.

The embargo will work, Matt Smith, an oil analyst at Kpler, tells Business Insider’s Phil Rosen. Russia’s economy was already set to contract by more than 10% this year, and an EU embargo is likely to send the economy “spiralling into a depression”. European oil export revenues accounted for 11% of Russia’s GDP in 2021 compared with roughly 2.5% for gas, according to the Rhodium Group. Without European buyers, Russia will need to find a home for about 2.5 million barrels a day. Even if China and India buy more, it is “highly, highly unlikely” they could make up the difference, says Smith, due to logistics and simple lack of demand. And in the end, “every single dollar a country is paying for Russian oil is funding the war”.

SEE ALSO:

Russia ups the ante on Europe's gas supplies

Why Europe could be heading for a "nuclear renaissance" with energy prices at record highs

How to beat rising energy prices

There have been plenty of headlines recently about suring energy bills and the looming energy crisis in Europe.

Certainly, this crisis is coming. After weeks of running at 20% the Nord Stream 1 pipeline that delivers Russian gas to Europe will soon be shut down, at least temporarily. Russia has offered to pump more gas through the new Nord Stream 2 pipeline, but European leaders view accepting these terms as a humiliation after they attempted to impose sanctions following the Russian invasion of Ukraine in February.

Unless something changes soon, Europe will not have enough gas this winter.

The growing threat of energy rationing

The threat of energy shortages in Europe is ominous. The Germans are already discussing rationing. If such rationing does take place expect production in Europe to slow and inflation to get further out of control.

Hopefully the Europeans can sort this out before it is too late. But if they cannot, it is worth thinking about how shortages and high energy costs will affect us in the United Kingdom and what we can do to protect ourselves against the coming crisis.

Back in June, British Gas owner Centrica signed a deal with the Norwegian company Equinor. And the United Kingdom has never really relied on Russian gas. Nevertheless, the situation in Europe has become so bad that Britain may experience gas shortages in the coming months.

And even if we do not suffer actual shortages, prices have spiralled out of control. Auxilione, an energy consultant, has published projections of the energy-price cap in the United Kingdom, and they make for bleak reading. Last winter the price cap was set just above £1,000.

Over the summer this rose to close to £2,000. However, many of us have yet to notice this on our energy bills because no one has had the heating on during this sweltering summer. Cornwall Insight is projecting that the price cap will rise to more than £3,500 this winter and will then eclipse £7,200 in 2023.

Will people take to the streets over high energy bills?

This means that the energy bill for the average household will rise from around £80 a month in 2021 to about £290 a month this winter and then to approximately £600 a month in 2023. That is a very scary prospect for many of us. The average British household cannot afford a tripling of their winter energy bill.

For this reason many analysts and politicians think that there may be political instability. The German foreign minister, Annalena Baerbock, even alluded to “popular uprisings” in Europe last month. Shocking stuff. So what can we do this winter to try to insulate ourselves from these price hikes? Well, first and foremost, actual insulation is not a bad idea.

For most of us, refitting our entire house in the coming weeks is not possible.

But it could make sense to buy heavier curtains and a few draught stoppers to put at the bottom of the doors inside your home. Moving large pieces of furniture away from radiators to stop them absorbing heat allows hot air to circulate more efficiently in the room potentially lowering energy bills.

Gas will be very expensive this summer, but that does not mean that other energy sources will be. If you have a fireplace or a stove, this could give you an edge. You can currently buy a pallet of smokeless coal for under £500, which should be enough to last the winter.

A pallet of fire log briquettes goes for £400. If you do not live in a smoke-controlled area, you could take the Irish option and buy a half-tonne of peat briquettes on eBay for just shy of £570. If you are going to light a fire, it is worth considering shutting off the rest of the house as the evening wears on and the temperature drops.

Make the room with the fireplace the centre of your home this winter if it is not already. It might even be a good opportunity to spend some time with the whole family – make the children put down their phones and play a board game together.

Infrared heaters are an alternative

For those who live in the cities or in apartments and do not have fireplaces, the situation is more difficult.

Increasing insulation and occupying a single room in the evening still makes sense, but it is difficult to access an alternative energy source. It may be worth buying a high-quality electric heater, provided the electricity it uses costs less than the central heating.

Infrared heaters, like the ones that are common in pub gardens, are highly energy-efficient, although they work by projecting heat in a single direction rather than heating up the whole room.

In a worst-case scenario, you could consider stocking up on large candles of the sort you see in churches. Lighting a few of these in a medium-sized room can generate a surprising amount of heat. Note too that if we do see shortages and outages, these candles could come in doubly handy.

All of this is pretty gloomy and many of us would prefer not to think about it. But unless something changes with the situation in Europe very soon, we will be facing extremely high energy prices this winter. It is better to face this situation realistically and plan in advance rather than being hit by energy bills you cannot afford.

Doing so will also put less pressure on the grid and ease the burden on those who, for whatever reason, must consume gas this winter no matter what the price.

EU leaders met this week to discuss measures to tackle the energy crisis and soaring prices of gas and oil, including a proposal from the European Commission of a bloc-wide windfall tax on energy companies’ soaring profits. In recent months four EU countries – Spain, Italy, Romania and Bulgaria – have already introduced their own windfall taxes.

In the US, Democrats have introduced legislation that would dramatically increase taxes on the “war-fuelled profits” of the largest oil companies (those producing or importing at least 300,000 barrels of oil per day). If the legislation is passed (which is far from certain), the oil majors would pay a per-barrel tax equal to half the difference between the current price of a barrel and the average price from the years 2015 to 2019.

The funds would be used to provide quarterly energy rebates to poorer and middle-income households. Here, Labour has called for a windfall tax, but the chancellor, Rishi Sunak, is firmly against.

What’s the case in favour of a windfall tax?

Windfall taxes have a “bad name for good reasons”, says Chris Giles in the FT. For businesses to flourish, a country needs a predictable tax regime. However, the oil-price spike driven by Russia’s invasion of Ukraine is one of those rare occasions when a one-off windfall tax on North Sea oil and gas extraction would be both “efficient and fair”.

Under the current tax regime governing North Sea oil and gas – set in 2016 in an era of persistently low energy prices – profits are taxed at 40%. In practice though, as the National Audit Office has pointed out, the government often gives more to oil and gas companies in tax relief (on things like decommissioning North Sea oil platforms) than it gets in taxes. BP, for example, got overall refunds every year from 2015-2020 – the same BP whose boss Bernard Looney recently hailed the market conditions that had made his firm into “literally a cash machine”.

Given the exceptional times, the Conservatives should go beyond Labour’s demand for a ten point rise, says Giles, and return to the 62% level imposed by George Osborne when prices were last this high, back in 2011.

What’s the argument against?

The core argument against windfall taxes on energy firms – that they deter future investment and compound uncertainty – has lost a bit of potency given that the world is trying to phase out the burning of fossil fuels and capital investment has already slumped, says The Economist. But they are still wrong-headed for lots of reasons.

The energy industry buys and sells power using long-term contracts, making the link between current prices and tomorrow’s profits “fuzzy” and taxing them complex. Meanwhile, prices can fall as quickly as they rise – as in 2015, 2016 and 2020, for example, when globally listed energy firms posted operating losses. If oil producers are obliged to bear the burden of low prices on their own, but “find chunks of their profits seized when prices rise”, they become unviable.

That’s bad for everyone, because it means the certainty and vast investments needed to fund future innovation – in all forms of energy generation, not just hydrocarbons – disappear. In a nutshell, “hiving off the rewards that are on offer for supplying energy during today’s shortage will only make the next supply crunch – even a predictable one – all the worse”.

So windfall taxes are wrong in principle?

Some interesting voices think not. This week, John Browne, chief executive of BP for 12 years until 2007, argued that a windfall tax was “justifiable” given prolonged high prices – and highlighted that natural resources are typically extracted under conditional licences granted by nation states.

“Most nations want to keep people interested in what they’re doing, so they can’t just say we’ll tax 100% because they’ll stop working,” says Browne. “But it’s always a fine balance between how much do you let the rent owner have and how much do you take for the nation.”

When the price level becomes “outrageous and stays there, I think it’s not unreasonable to expect the nation to take a bigger portion of the rent”, Browne argues. And last week, the former Tory minister David Willetts urged that the policy option of windfall taxes on energy “should not belong to Labour alone”.

What are the politics?

Rishi Sunak remains opposed to such a levy. Instead, North Sea energy companies reportedly believe they have a “tacit agreement” with the government that if they step up investment in oil and gas fields they will be spared a windfall tax.

In the UK, the best known windfall tax in recent fiscal history was New Labour’s 1997 one-off tax (raising £5.2bn, and trailed in their landslide-winning manifesto) on privatised utilities that had been sold too cheaply (they argued) under the Conservatives. The rationale was the state sell-off had underpriced the businesses and left them too loosely regulated, allowing them to rake in undeserved and excessive profits.

What about a Tory precedent?

There’s another, more surprising precedent for a “moralistic” windfall tax, says Jon Yeomans in The Sunday Times. In the depths of recession and high unemployment in 1981, Margaret Thatcher’s first administration imposed a 2.5% levy on bank deposits to raise about £400m from the giant profits banks were making from high interest rates (of up to 15%).

“Naturally, the banks strongly opposed this”, Thatcher wrote later. “But the fact remained that they had made their large profits as a result of our policy of high interest rates, rather than because of increased efficiency or better service.”

It was acceptable in the 1980s. But in the 2020s, a Tory windfall tax is still looking unlikely.

SEE ALSO

Is the oil market heading for a supply glut?

Russia is a poor country. Its GDP is just 10% that of the European Union, and there is much speculation about how its low levels of economic activity are translating into the various logistical failures of its war with Ukraine. So you’d think that deglobalising Russia using sanctions wouldn’t really matter. Poor Russians aren’t big consumers and the world’s factories aren’t in Russia.

The problem here is twofold. First, we have clearly been mispricing the things Russia is rich in – metals, grains and fossil fuels. These may have all been so cheap for so long that we have taken them for granted. But without them none of us has much of an economy at all. Who is richer, the countries that control the building blocks of modern life, or those that need those building blocks to run their seemingly superior economies? And if those countries are no longer economically linked, how much poorer will we all be?

The story of the post-Soviet era has been one of constant economic integration – from the opening of the (now-closed) first McDonald’s in Moscow in 1990 to the expansion of the EU and the admission of China to the World Trade Organisation. It’s had its downsides (such as the shift in the balance of power from labour to capital, and the hollowing out of UK manufacturing). But overall it is hard to argue that it hasn’t felt pretty good.

The concerns were already there

Well, it’s over. There was already concern brewing pre-Covid-19 as firms – worried about their environmental, social and governance (ESG) profiles – wanted more transparency over supply lines. That got much worse during the pandemic as it became clear that the “just in time” supply line was horribly vulnerable. This war takes all this another step forward (or backwards) – the world may soon be made up of two blocs. Where it had been just manufacturers wondering about whether to make things closer to home, we now have governments everywhere realising that they shouldn’t – can’t – rely on other countries for energy, food, or, for that matter, peace.

The result? There will now be a sharp shift on the part of governments to boost defence spending and to work towards both food and energy security (public opinion has already shifted towards both nuclear and fracking in the UK). There is protectionism and inefficiency ahead – and you are going to notice it.

That’s partly because your taxes will rise (defence is not cheap) and partly because inflation will stay high (food and energy security are no longer cheap either). The latter might not stay at 8%-9%, but it won’t return to reliably knocking around 1%-2% either. Pre-war we liked to think inflation wouldn’t be all bad – more “boomflation” than “stagflation”. We aren’t so sure any more, particularly given data from the Office for National Statistics suggesting that 35% of UK households already spend more than they have in disposable income.

Either way, it’s going to be tough for markets. Costs are rising. That will push margins down. Rates are likely to rise – central banks can’t ignore inflation over 6%. That will push valuations down. There isn’t much positive to say, I’m afraid. But there are still opportunities for the proactive: defence stocks, energy as a hedge, pet care, and commodity-rich emerging markets.

What sanctions have been imposed?

Over the course of last weekend, the G7 bloc ex-Japan (France, Germany, Italy, Britain, Canada, the US and the European Union) imposed tough sanctions in four areas that they had previously held back from – a sign that Russia’s invasion of Ukraine has already changed the West’s strategic calculus.

First, they removed selected Russian banks from Swift, the global banking system that facilitates financial flows and trade.

Second, they announced a freeze on foreign assets of Vladimir Putin, his inner circle and their families. Those targeted included the veteran foreign minister Sergei Lavrov, the rest of the Russian security council, and 11 more named officials. Putin’s wealth is famously obscure, and the move may have limited effect in practice. Targeting a head of state in this way is highly unusual and has symbolic value: Putin joins a select club of murderous kleptocrats alongside Kim Jong-un, Alexander Lukashenko of Belarus and Bashar al-Assad of Syria.

Third, they announced limited sanctions against a number of oligarchs, such as limiting the sale of so-called golden passports to wealthy Russians. Fourth, and most important, were the unexpected and game-changing sanctions on Russia’s central bank.

Why’s that so significant?

Because the sanctions are aimed at blocking Russia’s access to its own $630bn (£473bn) reserves of foreign currency. Until that move, many commentators were predicting that those carefully built-up strategic reserves would cushion the impact of economic sanctions and let it ride out the crisis. Now they are not so sure, since almost half those reserves are in the form of “electronic debt” held by Western central banks.

“The most recent measures targeting the Central Bank of Russia have completely changed the picture,” reckon JPMorgan analysts. “Russia’s large current-account surplus could have accommodated large capital outflows, but with accompanying CBR and Swift sanctions, on top of the existing restrictions, it is likely that Russia’s export earnings will be disrupted, and capital outflows will likely be immediate.”

The upshot is that some economists are now predicting a double-digit contraction in GDP – and the lesson is clear, says David Frum in The Atlantic: “Do not fight with countries whose currencies you use as a reserve currency to maintain your own.”

Will the sanctions work?

There are no guarantees that the pain inflicted on Russia by sanctions aimed at isolating and hurting it economically will change its policies or government. Yet there’s no doubt that serious economic pain will be inflicted – slowing growth, limiting Russia’s ability to develop and produce advanced military equipment, and potentially causing Putin to alter his domestic calculus – or foreign policies – if discontent rises and the Ukraine war proves unsustainable.

The Kremlin has prepared for this moment, but could do so only up to point. Since 2016, the Russian central bank has diversified its foreign reserves, cutting exposure to western Europe and the US, and increasing holdings in Japan, China, and monetary gold. Ten years ago, 90% of Russia’s foreign exchange and gold reserves involved Western counterparties or issuers, according to Sven Behrendt, of GeoEconomica, a German political risk consultancy.

Now, he reckons that’s true of less than 45% of an estimated $622bn reserves. That’s a big shift, but it hasn’t been enough to insulate the Russian state from the financial fallout this week – which included a 30% collapse in the rouble, and such a global exodus from Russian assets that Moscow ordered the suspension of all trading in stocks and derivatives.

How else has Russia responded?

It more than doubled its key interest rate to 20% on Monday and introduced capital controls, while the central bank’s governor said sanctions had stopped it selling foreign currency to prop up the rouble. It also closed down the stock exchange and derivatives trading, rather than accept what could be a historic rout (Barings analysts this week wrote down the value of Russian shares to zero).

The state also ordered exporting companies, including state-backed energy giants Gazprom and Rosneft, to sell 80% of their foreign-exchange revenues on the market to help prop up the rouble. And this points up the glaring omission in the sanctions to date: the oil and gas sector. Germany might have “de-certified” the Nord Stream 2 pipeline – for now – but not the pipelines through which gas is continuing to flow to Europe.

How will this affect the economy?

Overall, Russia’s economy is relatively small and globally unimportant. Italy’s is twice as big with half the population. Poland exports more goods to the EU than Russia does. But Russia’s energy sector is vast, accounting for more than half of Russian exports and dominating government revenues.

That makes the country ultimately vulnerable, but right now it gives Moscow leverage. Europe relies on Russia for about a quarter of its oil and more than a third of its gas, so an outright embargo would incur massive costs, including spiralling inflation and a potentially deep recession. Ultimately, the EU is willing “to freeze Russian banks – but not German homes”, says Lex in the Financial Times.

The West has announced some new restrictions on high-tech exports to Russia, including equipment connected to extracting oil and gas. Firms such as BP and Shell have rushed to dump stakes in Russian energy firms. And Germany announced a long-term pivot away from reliance on Russia. But for as long as Europe still relies on Moscow for a big slice of its energy, the Kremlin has cards to play. In fact, the main macroeconomic consequence of the war, says Rana Foroohar in the FT, may well be to accelerate Russia’s financial decoupling from the West, make Moscow much more dependent on China, and hasten the shift to a bipolar global financial system based on the dollar and renminbi.

If Russian president Vladimir Putin had any doubt that the West was serious about imposing strict sanctions against its invasion of Ukraine, he met with a nasty surprise this weekend.

The UK, US, EU and Canada banned some Russian banks’ access to SWIFT this weekend, a move which caused the Russian rouble to plunge by almost 30% against the US dollar on Monday and prompted Russia’s central bank to more than double its interest rate to 20%.

A statement from the EU, US and UK said the ban will "ensure that these banks are disconnected from the international financial system and harm their ability to operate globally".

According to Ursula von der Leyen, president of the European Commision, the SWIFT ban will effectively bar Russia’s exports and imports.

What is SWIFT?

SWIFT was founded in 1973 and stands for Society for Worldwide Interbank Financial Telecommunication. It is a network used by financial institutions to send secure messages relating to transactions and the transfer of money.

It connects banks when a transaction is made; if the two organisations making the transaction are not already partners, then SWIFT can connect them through an intermediary.

More than 11,000 financial institutions around the world use the system to send more than five billion messages a year, making it an integral part of the global system of financial transfers.

It is overseen by the central banks of the G10 countries (actually 11: Belgium, France, Canada, Germany, Italy, Japan, the UK, the US, Switzerland, Sweden and the Netherlands) with the National Bank of Belgium acting as the lead overseer.

It is owned by its shareholders (financial institutions) and represents roughly 3,500 firms across the globe.

How badly will the SWIFT ban affect Russia?

It remains unclear how badly the move will affect Russia as it is not yet known which banks will be excluded from SWIFT. But around 70% of the country’s banking market will be affected, says Reuters.

If Russia’s largest banks, including the likes of Sberbank and Gazprombank, are targeted, then it could be a huge blow to the economy.

SWIFT is significant to Russia because, of the 40 million messages sent a day via SWIFT, 1% are estimated to involve Russian payments, says the BBC.

Zoltan Pozsar, a strategist at Credit Suisse, believes “exclusions from SWIFT will lead to missed payments and giant overdrafts similar to the missed payments and giant overdrafts that we saw in March 2020.”

“Banks’ inability to make payments due to their exclusion from SWIFT is the same as Lehman’s inability to make payments due to its clearing bank’s unwillingness to send payments on its behalf. History doesn't repeat itself, but it rhymes,” he added.

The collapse of Lehman Brothers is widely seen as the start of the Great Financial Crisis of 2008.

According to estimates by Alexei Kudrin, Russia’s former finance minister, Russia’s exclusion from SWIFT could cut Russia’s GDP by 5%.

This is not the first time Russia has faced the threat of expulsion from SWIFT. Russia was threatened with a similar move in 2014 when it annexed Crimea. That expulsion did not happen, and Russia set up an alternative, albeit smaller system, called System for Transfer of Financial Messages (STFM).

While it is hard to see STFM as a serious contender to SWIFT today, it could still help Russia cushion some of the economic shock. And there is also the possibility that Russian banks “might route payments via countries that have not imposed sanctions, such as China, which has its own payments system,” says the BBC.

What other sanctions have been imposed?

Apart from banning Russia from SWIFT, Russia’s central bank has also been blocked from using its $630bn in foreign reserves, making it harder for the country to shore up its economy against the wave of sanctions, reports the Financial Times.

“With assets of CBR [the Central Bank of the Russian Federation] set to be frozen around the world, it will severely limit Moscow’s ability to access its foreign currency reserves, part of the war chest it had built up, to try and insulate the country from the worst of the economic punishments,” says Susannah Streeter, investment and markets analyst at Hargreaves Lansdown.

The EU also froze foreign assets held by both Putin and Russia’s foreign minister, Sergey Lavrov.

Switzerland, a nation known for its neutrality, broke from tradition and said it will also sanction Russia. "In view of Russia’s continuing military intervention in Ukraine, the Federal Council took the decision on February 28 to adopt the packages of sanctions imposed by the EU on February 23 and 25“, the country’s government said in a statement on Monday.

Russian-registered planes and airlines have also been banned from most of Europe’s airspace.

How has the rouble reacted?

As my colleague John pointed out, it would be an understatement to say that the Russian rouble was in freefall. As recently as a fortnight ago, one pound would fetch you just shy of 104 rubles, but as of this morning it’ll get you 140, a jump of more than 30%.

Russians were scrambling to withdraw foreign cash such as dollars from cash machines on Monday according to multiple reports.

How does the SWIFT ban affect Russia’s energy sector?

The move also has ramifications for the energy sector, through higher inflation, given Russia is the world’s second largest exporter of both oil and natural gas and supplies Europe with 40% of natural gas.

There may also be further turmoil caused by missed payments for Russia’s agricultural and energy sectors.

According to Rick Joswick, head of global oil analytics at S&P Global Platts, the SWIFT ban will make Russian oil less attractive: "It will likely make many buyers more hesitant to purchase Russian oil. That will tend to drive down the price of Russian crude oil even more until it ultimately clears outside of its traditional markets in Europe".

However, the oil price is likely to continue to rise as sanctions threaten further disruptions to supply. On Monday, Brent crude oil was trading above $100 a barrel, a level which was passed last week for the first time since 2014.

Brent crude oil hit an eight year high of $111 on Wednesday as Russia’s invasion of Ukraine showed little signs of abating. The price of gas has also shot up.

Russia, which plays a prominent role in both the oil and gas markets, has been hit with a host of sanctions by the West.

“Energy markets have largely been spared from sanctions deployed by the US, EU and UK on Russia’s financial sector, but typical buyers are effectively self-sanctioning, setting off a race to secure alternative supplies in an already tight market,” says the Financial Times.

So what does Putin want and what does the situation mean for fuel and energy prices?

Why has Russia invaded Ukraine?

The Kremlin ostensibly wants Nato to guarantee that Ukraine will not join the defensive alliance. He also wants Nato to stop all military activity in eastern Europe and pull out troops from countries that joined after 2017.

More fundamentally, he wants to reclaim what he sees as historic Russian territory. Putin has long pushed the idea that Ukraine is not a real country and is merely a region of Russia. Last year, he published an essay in which he appeared to be “rewriting Ukraine’s history”, notes the FT. He repeated these views last week in a scathing televised speech.

In 2014 Russia invaded and then annexed the Ukrainian peninsula of Crimea, which it regards as an integral part of Russia that was erroneously given to Ukraine after the breakup of the Soviet Union. In the same year, encouraged and armed by Russia, “separatists” in the cities of Donetsk and Luhansk in Ukraine’s eastern Donbas province broke off from Ukraine.

Now, a week after invading Ukraine and having made little progress, Russia has stepped up its attacks, pounding the city of Kharkiv and inching closer to Kyiv, the capital.

How has the oil market reacted?

The price of Brent crude oil continues to rise despite 31 member countries of the International Energy Agency agreeing to release 60 million barrels of oil on Tuesday in an attempt to control prices

Vishnu Varathan, head of economics and strategy at Japan’s Mizuho Bank, said last week “the scale of disruption and corresponding difficulty in substituting for lost Russian supply mean that price sensitivity to Russian oil disruptions are high.”

He expects oil prices to rise by at least another 15% if around a third of Russian oil exports are affected. So there is further pain ahead for the oil market, with prices “as high as $115-$130 (a barrel) is not unimaginable amid elevated risks of a head-on conflict between Russia and the West,” he said.

Russia’s influence on the oil market cannot be understated. It is the world’s second-largest oil exporter after Saudi Arabia, and is the world’s largest producer of natural gas.

What about gas prices?

EU natural gas prices briefly hit a record high of €194.72 per megawatt hour on Wednesday before slipping back to €160. UK natural gas prices followed suit. The last time European gas prices traded near these levels was December 2021.

Several gas companies have said they are exiting contracts with Russian firms, including state-owned giant Gazprom. It comes as oil giants including Shell and BP have exited all Russian operations, with the latter abandoning its stake in Rosneft, something which could cost the company well over $25bn.

Russia has faced a barrage of sanctions in recent days, including against the country’s central bank and cutting access to SWIFT, the international payments system, for seven of the country’s banks.

There are fears that gas prices may rise if Russia, which supplies around 4% of the UK’s and 40% of Europe’s gas may, along with Belarus, reduce flows as a response to sanctions. For now, however, Russia has said it will continue to export gas. But Alexander Lukashenko, the Belarussian president, hasn’t ruled out halting flows through his country.

Germany has refused to certify Nord Stream 2, an $11bn gas pipeline from western Siberia to Germany owned by Gazprom. It was intended to double the capacity of the Nord Stream 1 pipeline which is already operational.

A sardonic Tweet by Dimitry Medvedev, Russia’s former prime minister and now deputy chair of Russia’s Security Council, underscores how much higher European gas prices may rise. Medvedev, who tweeted in response to the project being cancelled last week, said: “Welcome to the brave new world where Europeans will soon be paying €2,000 per 1,000 cubic meters of gas!”

For comparison, European gas prices were trading at around €830 per 1,000 cubic meters of gas before the invasion took place.

How will this affect UK energy bills?

While the UK is less reliant than its European peers on Russian energy, wholesale prices rising in Europe means prices will jump in the UK as well.

Jonathan Brearly – chief executive of Ofgem, the UK’s energy regulator – warned earlier this month that a Russian invasion of Ukraine could send prices higher in the UK and ultimately result in an even higher energy price cap.

The energy price cap, which is the maximum price per kilowatt hour (kWH) that energy providers can charge consumers for gas and electricity, increased by £693 (for the average household’s usage) at the start of the month and Russia’s conflict with Ukraine is just one of many factors that are likely to see the price cap rise even further in October.

How will it affect petrol prices?

The crisis in Ukraine is driving the price of petrol to record highs, too.A litre of petrol on UK forecourts hit £1.52 on Tuesday, with the average cost of a litre of diesel at £1.55, according to Experian Catalist, a data firm.

As oil prices are still climbing further, petrol is expected to hit new highs in the coming days.

Simon Williams, a spokesperson for the RAC, warned of further pain ahead for petrol prices. “The sudden $10 (£7.50) jump in the oil price on Tuesday to $113 (£85) a barrel is likely to take the average price of petrol towards 155p a litre and diesel to 160p...”

For perspective, in 2000, when protests erupted over rising petrol prices in the UK (partly due to higher fuel duty) the price for a litre of unleaded had just hit 80p.

• The Money Edit: Fuel prices hit record highs: how can you keep your fuel costs down?

What about interest rates?

One bigger concern with higher oil prices is that it may exacerbate inflation, which is already running high around the world.

This will make life even trickier for central banks. Higher energy and petrol prices push inflation up but they also cut into consumers’ disposable income – which is in itself recessionary.

Jason Hollands, managing director of online investing platform BestInvest, says: ‘There is now a real possibility that the Bank of England’s forecast CPI inflation peak of 7.25% in April will be exceeded, and inflation at those levels will be totally unprecedented for many of today’s investors.”

That could lead to interest rates rising faster than many people are comfortable with.

It was not the kind of warning you see very often in company statements. In its annual report filed with regulators in New York earlier this month, Meta, which owns Facebook, Instagram and WhatsApp, stated bluntly that it may be forced to pull its operations from the EU. The reason? That planned rules for transferring data between America and the EU were so onerous it would be impossible for the company to operate anymore. Leaving would be the only responsible option.

You might think that would be of concern to the EU’s leaders. Meta is, after all, one of the world’s biggest, most innovative, and fastest-growing businesses with a market value of close on $600bn and more than two billion users, and which is investing huge sums in new products. Politicians usually bend over backwards to persuade those kinds of companies to invest more, not less, in their countries. Yet the continent’s power-brokers could hardly be more pleased. “Life would be very good without Facebook,” said French finance minister Bruno le Maire, alongside German counterpart Robert Habeck. Both made it clear that driving Meta out of the continent would be a victory for their policies.

A perverse pride in obstruction

We understand that Meta is not a popular company. It has paid little attention to privacy and aggressively monetised its data. Its ubiquitous apps have sown political division. Even so, it would be quite something if it left the EU completely. Yet that is surely only a matter of time.

Over the last decade, the EU has engaged in a sustained campaign of harassment against the US tech giants, with ever larger fines and more and more cumbersome rules. In GDPR it created data rules that were so badly designed and difficult to follow, backed up by the threat of huge fines, that they crushed innovation and forced some websites to close. Another huge piece of digital markets legislation is being drafted right now. Vast fines have been levied, such as the €13bn punishment of Apple for basing itself in Ireland, or the $2.8bn Google was charged for allegedly abusing its position in the search market, even though many of them have subsequently been overturned by the European Court as clearly illegal.

The EU’s commissioners pride themselves on punishing the tech companies as if this were a virtue in itself. The data transfer rules are simply the latest in a long series of barriers put in place. At a certain point, it is surely only a rational commercial decision for one or two of the internet giants to decide it is simply not worth the cost of trying to operate a business on the continent. Sure, the EU is a big prize, but in the end it is only 15% of global GDP, and doesn’t grow very fast. It might be better to concentrate on other markets.

Making the EU a museum

European leaders can welcome that if they want to, but they face three big problems. First, you can’t regulate your way to success. The EU believes that if it can drive US companies out then European ones will replace them. But that is not necessarily true. Nothing might replace them, or the firms that do might be far less competitive and innovative. Second, if companies such as Meta are forced to leave, it will isolate Europe from the most dynamic sector of the global economy, leaving it to the Americans and the Chinese. Ideas won’t be incubated and consumers won’t have access to the most advanced technology. Finally, it will almost certainly set a precedent for the other internet giants. If Meta goes it may not be long before Amazon, Apple and Alphabet, the owner of Google, follow.

“Mexit” could then very quickly turn into a wider “Tech-xit”. That would turn the EU into a museum – a nice place to visit, but one cut off from the rest of the world. Growth would dwindle and the world’s fastest-growing industries may decide it is no longer worth bothering with. Maybe then the French and German finance ministers won’t be quite so relaxed about i

Energy prices are soaring across the globe, and it is no secret that higher bills are crippling consumer finances. Most consumers may be scratching their heads wondering why prices are so high and asking: “how is my energy bill made up anyway?”

There are six main elements to an electricity bill, according to Ofgem, the UK’s energy regulator. These are: wholesale costs, network costs, social and environmental obligation costs, supplier margin costs, VAT costs, and other direct costs. Though it is worth noting that the proportion of each element varies depending on your type of energy bill, ie, whether it is a gas bill, an electricity bill, or a dual fuel plan, a type of plan which provides consumers with gas and electricity from the same energy supplier.

In the UK, rising wholesale costs have been the main culprit for higher energy prices as European gas prices jumped by more than 300% last year causing a spike in bills and prompting around 30 providers in the UK to go bust.

Ofgem breaks down what those six components are and what proportion they represent across gas, electric and dual plans. Figures are from August 2021, the latest available, but relate to costs in 2020.

Wholesale costs

Energy providers need to first buy electricity and gas on wholesale markets, often months or even years in advance. These costs differ from the retail energy price, which is the price at which companies sell the electricity to consumers. Prices on the wholesale market can fluctuate very rapidly depending on global economic events or even weather conditions – a significant cold snap can see a big rise in demand, for example.

In 2020, wholesale costs accounted for 41.4% of a gas bill, 34.6% for a dual fuel bill and 29.3% for an electricity bill, according to Ofgem.

Network costs

Network costs, also known as transportation costs, refers to the costs related with maintaining, building and operating the UK’s gas and electricity infrastructure. The company that run the network charge energy suppliers to use it.

Unlike choosing a domestic energy provider, consumers do not have a say in which energy network runs the infrastructure, as this is decided by Ofgem. In 2020, network costs accounted for 27.9% of a gas bill, 25.4% of a dual fuel bill and 23.4% of an electricity bill.

Environmental/social obligation costs

Environmental and social obligation costs are the costs that help pay for green policies, and the costs involved in looking after some of the most vulnerable energy consumers, for example those who are struggling to pay bills.

Environmental and social obligation costs include the costs of government programmes to conserve energy and reduce emissions. Programmes such as the Warm Homes Discount – a £140 energy bill discount for households on low incomes – are included, as well as the costs of policies intended to foster a faster transition to green energy.

Many suppliers have attributed growth in this component to “green levies”, which include policies such as Feed in Tariffs, which pay consumers for surplus energy produced at home through rooftop solar panels, for example; and the Energy Company Obligation – a government energy efficiency programme which helps reduce carbon emissions and address fuel poverty. The amount consumers pay on environmental levies could rise as the UK inches closer towards its net zero target of 2050.

As of 2020, environmental and social obligation costs accounted for 2.5% of a gas bill, 15.3% of a dual fuel bill and 25.5% of an electric bill.

Operating costs

Operating costs are all the costs that are involved in running a retail energy business and include such things as customer service, IT systems, billing, and premises. It also includes the cost of metering, such as the cost of providing the meter itself and the data handling responsibilities involved in meter readings.

Operating costs accounted for 21.5% of a gas bill, 18.6% of a dual fuel bill and 16.3% of an electric bill in 2020.

Supplier pre-tax margin

The supplier pre-tax margin is the difference between the payment that goes to your energy supplier and the cost the supplier charges to deliver the energy to you. As energy provider Octopus Energy points out, “this doesn't mean profit, since tax payments and other costs have to come out of this wedge, but profit will be an element of it”.

Supplier pre-tax margin accounted for -0.4% of a gas bill, -0.9% of a dual fuel bill meanwhile the figure is much higher for a dual fuel bill- at -1.3%- with suppliers having lost money on average because of the energy crisis.

VAT

The UK government is currently facing pressure from both politicians and campaigners to provide consumers with much needed relief on rising prices, and removing VAT on bills for a year is one of the proposals currently being considered.

But Adam Scorer, chief executive of National Energy Action, a campaign group, reckons cutting VAT will do little to give consumers respite as he argues that VAT accounts for only a minor proportion of the overall bill.

VAT makes up 4.7% of all bills.

Other direct costs

In reality, there can be so many other factors that influence a bill, but other direct costs can also play their part. These refer to a variety of smaller expenses and include such things as commissions paid to brokers that sell energy on behalf of a wholesale supplier. Ofgem says that other direct costs accounted for just above 2% for all bills.

While Ofgem has not explicitly mentioned the impact of mutualisation, which results in the cost of failed energy companies being spread across the sector – and the costs of bad debt in its graphic, they are still very important as they can significantly hike the cost of bills.

Companies collapsing also affects the Renewables Obligation – a mechanism intended to foster large-scale renewable electricity generation. All licensed electricity suppliers are obliged under the scheme to source a proportion of the electricity they supply from renewable sources.

“When energy companies collapse without paying their share of the Renewables Obligation (RO), the shortfall needs to be covered by other suppliers – even if those suppliers have already paid their share of the RO in full,” according to Choose, a price comparison website.

Bad debts usually raise the price of energy bills – customers unable to pay often leaves energy companies with little choice but to increase prices for other customers to make up the shortfall.

What has changed in the EU?

At the start of the month the European Commission presented the 27 EU member states with new draft rules classifying natural gas and nuclear power as “green” fuels for electricity generation. It reflects the growing acceptance that nuclear will be crucial to the process of decarbonisation.

Assuming the rules are approved (France is in favour; Germany is less keen but unlikely to block them), it means nuclear will take its place alongside renewables such as wind and solar on the EU’s list of technologies approved for financial support from next year onwards. That matters because the EU’s stamp of approval is likely to spur investment and help firms, investment funds and lenders hit environmental, social and governance (ESG) targets.

Is nuclear power really a green energy?

In terms of the production of carbon and other greenhouse gases – even taking into account the whole life cycle of a power plant – proponents say it’s a far greener energy than either fossils fuels or renewables.

One estimate, by a nuclear-engineering professor at MIT, calculates that, over the life of a power plant – including construction, mining, transport, operation, decommissioning and disposal of waste – the greenhouse-gas emissions for nuclear power are 1/700th those of coal, 1/400th of gas, and a quarter of solar. In addition to not producing carbon, nuclear power installations take up negligible land – and use smaller amounts of raw materials – compared with renewables such as wind and solar.

Critics say that the uncertainties about nuclear waste, and how much it will cost to store, make such calculations meaningless and make optimism misplaced.

Is dealing with nuclear waste costly?

In 2019, official estimates of the liabilities attached to cleaning up 17 of Britain’s oldest nuclear sites put the cost at £124bn over the next 120 years, of which £97bn applies to Sellafield alone. But there’s a good deal of uncertainty around decommissioning and waste figures. For example, estimates of the decommissioning costs for the UK’s non-Sellafield first-generation sites rose from £12bn in 2005 to £30bn by 2019.

However, Tim Stone, chief executive of the Nuclear Industry Association, argues that when it comes to this issue the past is not a good guide to the future. Everything could all become much cheaper if we get better at it. New reactors are designed with dismantling in mind, argues Jonathan Ford in the Financial Times, and “their longer lives (they are built to last for 60-80 years) mean their decommissioning costs should easily be covered out of operating revenue”.

As for the new EU proposals, they require newly built reactors – and existing ones whose lives are being extended – to have detailed plans in place for disposing of high-level radioactive waste by 2050. The EU’s demands are a tall order though, says Mark Hibbs in Foreign Policy, because it implies that “all essential activities for a repository project – geological screening, site and technology selection, political approvals, licensing, and construction – be completed in less than three decades”.

What is “high-level” nuclear waste?

When a nuclear plant closes, there are three types of waste material. The safest category, including items such as old protective clothing, accounts for about 90% of all the waste by volume, says Ford. In this category the contamination is limited and the waste can be buried in sites with less elaborate safety procedures.

But much more difficult to handle is “intermediate” waste (7%), which includes items such as fuel cladding and old machinery, and the “high level” waste – essentially the highly irradiated spent fuel itself. Nuclear fuel rods, once spent, are moved into pools of water to cool, and then encased in 15-foot tall canisters known as “dry casks” that weigh 100 tons or more. This high-level category accounts for just 3% of waste by volume, but is responsible for 95% of the radioactivity.

Where does all the nuclear waste end up?

For now, all of the UK’s high-activity radioactive waste (from power generation, military, medical and civil uses) remains stored on the surface – between 70% and 75% of it at Sellafield. But eventually, given that plutonium and certain fission products remain radioactive for hundreds of thousands of years, Britain will need a “geological disposal facility” (GDF). It needs to be buried – in the case of intermediate and high-level waste several hundred metres underground.

Choosing an area with the right geology, the waste needs to be placed in containers with several engineered barriers and then surrounded by clay. In the UK, three sites are currently under consideration by the government – one in Cumbria, one near Hartlepool, and at Theddlethorpe, near the Lincolnshire coast. But all face strong local opposition. The first country to take the plunge and start building a GDF is Finland, where a geological repository for high-level spent nuclear fuel is under construction at Olkiluoto. A few other countries are considering similar schemes.

How can that be safe?

Industry scientists say that much opposition to nuclear rests on a fundamental misunderstanding of the risks. Plutonium might have a half-life of 24,000 years, for example, but it doesn’t emit much radiation. According to the US radiation expert Robert Gale, “for every terawatt hour of electricity produced, nuclear energy is 10-100 times safer than coal or gas”.

What it does emit are alpha particles, which do not even penetrate human skin. As part of the risk assessments ahead of the GDF at Olkiluoto, Finnish scientists predicted that the impact of waste leaking from it after 1,000 years on someone living directly above the site – with food and water coming from the most contaminated plot of land – would be likely to receive a radiation dose of 0.00018 millisieverts per year. That’s the equivalent to the radiation we get from eating two bananas.

What does it mean?

Levelling up means to reduce inequality between places while improving outcomes in all places. In recent decades the phrase has been used in education-policy debates, and has been seized upon by Boris Johnson as the core of his post-Brexit mission.

The problem at least is clear: according to OECD figures, the UK is one of the most regionally unequal economies of any in the advanced world. Measured by GDP per head, London is far ahead of all other regions, and especially Wales, the northeast of England and Northern Ireland.

Moreover, it is also highly unequal on a range of other measures, including overall wealth, health, educational attainment and social mobility. And at the local level, Britain has the worst inequality of any of the mainly rich countries in the OECD club, reflecting the fact that differences within regions are even bigger than the differences between them. London, for example, is over-represented at both the top and bottom of the income distribution.

What is the current government’s plan?

The new Department for Levelling Up, Housing and Communities – with Michael Gove at the helm – defines levelling up “every part of the UK” as this government’s “central mission”. This will be achieved, it says, by “empowering local leaders and communities…; boosting living standards, particularly where they are lower; spreading opportunity and improving public services, particularly where they are weak; and restoring local pride”. The white paper setting out actual policy proposals, promised by the PM for this year, is still described as “forthcoming”.

Do we know anything?

We have the broad pledges made in the 2019 Conservative manifesto, which promised to “level up opportunities” across the UK by investing in towns, cities, and rural and coastal areas; giving those areas more control over how investment is made; levelling up skills using apprenticeships and a £3bn National Skills Fund; making life easier for farming and fishing industries; and creating up to ten freeports to boost trade in deprived communities.

In terms of steps taken by the new department, so far we have a new £4.8bn Levelling Up Fund, which will “invest in infrastructure to improve everyday local life and boost growth and jobs”. An example cited by the department is major highways improvements around Birmingham city centre. In all, 106 successful bids, amounting to £1.7bn, have been announced, including the reopening of the Whorlton suspension bridge in County Durham and the redevelopment of Leicester’s train station.

But more is planned?

Next year, a UK Shared Prosperity Fund will be launched, worth over £2.6bn, aimed at levelling up opportunity in “places in need, such as ex-industrial areas, deprived towns and rural and coastal communities, and for people in disadvantaged groups across the UK”. Its first priority will be a “locally delivered new adult numeracy programme, Multiply, to help hundreds of thousands of adults improve their maths”.

There’s also a £3.6bn Towns Fund, aimed at “driving regeneration and levelling up towns from Birkenhead and Bloxwich, to West Bromwich and Wakefield”, and a £150m Community Ownership Fund, to be spent over four years, helping communities buy and refurbish assets at risk of closure – such as sports halls, theatres and parks.

So it’s just splashing a big wodge of cash?

That’s the worry. A more ambitious version of levelling up, says Andrew Carter of the Centre for Cities think tank, would cut across departmental spending lines and create a virtuous circle that sees separate policy agendas – for example, net-zero, planning and transport reforms – working to reinforce the others.

His think tank reckons the core problem is the underperformance of Britain’s big cities outside London – in terms of productivity – compared with second-tier cities in similar countries. The underperformance of places such as Birmingham, Manchester and Glasgow explains much of the problem – it accounts for almost 60% of the economy’s lost output, which the think tank conservatively estimates at 4% of GDP a year.

The problem, as David Smith points out in The Times, is that these places have been spruced up in recent years but without attracting the kinds of high-productivity, exporting businesses that really make the difference economically. Fixing this should be much easier than lifting the performance of lots of smaller places. And those smaller places should anyway be lifted if their local cities did better. Devolving more powers to the regions will be key to fixing the problem.

Will any of that happen?

One promising sign is that Gove has co-opted the Bank of England’s ex-chief economist Andy Haldane, long a champion of the levelling-up agenda. Haldane’s vision is focused on regional differences in income and productivity, and he has argued for “a new regional ecosystem” covering infrastructure, innovation, skills, finance, social concerns (making places nice to live in) and governance, citing a need to devolve more power. Certainly, local delivery will be key to achieving results; many expect some form of devolution or local government reorganisation to be on the table.

How will success be measured?

Any real levelling up will be the work of years and decades, and will be measured by the distribution of wages, skilled jobs and skilled workers across the country, says Paul Johnson in The Times. But there’s an even more fundamental yardstick: life expectancy. A man in Glasgow or Blackpool dies ten years earlier than one in Hart in Hampshire, because “people who are better off, and have happier, more fulfilling lives and good jobs, live longer and healthier lives than those who don’t”. We’ll know levelling up has been a success when tragic gaps such as these have been closed.

Investors have long despaired of Italy, says Miles Johnson in the Financial Times. The economy has barely grown since 2000. “Anyone who purchased Italian equities at the start of 1999… has lost a fifth of their investment.” But now things are looking up under prime minister Mario Draghi’s unity government.

Italy’s government debt-to-GDP ratio of 155% is the second-highest in Europe, behind only Greece. For now, massive bond buying by the European Central Bank (ECB) is keeping borrowing costs low: at 0.85% Italy’s ten-year government bond yield is barely higher than the UK’s. But a brief spike in the gap with German bond yields earlier this month was a reminder that Italian debt is underpinned by the ECB’s stimulus. To solve its debt problems Italy needs growth.

Reform in Rome

Draghi’s government is shaking up Italy’s sluggish bureaucracy and courts, says Anna Momigliano in Foreign Policy. “By far the slowest in the European Union… civil proceedings can often last up to seven years,” which scares away international investors. The government is giving extra resources to the overwhelmed judiciary to help clear a backlog of cases and is imposing a new timetable to accelerate legal processes. Rome will receive the biggest slice of the EU’s pandemic recovery fund over the next five years: €191.5bn. Spending priorities include insulating buildings and rolling out new digital and rail infrastructure. That money should provide a steady tailwind for the economy. Italy’s FTSE MIB index has returned 23% so far this year, more than double the FTSE 100’s performance over the same period.

A country that has had seven prime ministers in the past decade is enjoying a rare moment of political calm, says Tom Rees in The Daily Telegraph. But another storm may not be far away. The Italian president’s term ends next February and Draghi is tipped to replace him. That could lead to early elections the far right is well placed to win. Investors have long feared that outcome, but Italy’s right is not the threat to the euro that it once was after toning down its criticisms of Brussels in recent years.

A key concern is that a new government could unpick Draghi’s reforms, says Nick Andrews of Gavekal Research. Yet Brussels has a “trump card… it can pull the plug on recovery fund transfers”. That should encourage Italian politicians to keep reforms on track. Italy’s debt woes date back to the 1980s, a period marked by excessive spending and overmighty trade unions.

Rome has done a better job at balancing the books since it joined the euro, but a lack of growth has kept debt levels high. Turning around the economy is a formidable task, but for “the first time in decades Italy does look to be headed the right way”.

“Emerging market” is not just a euphemism for “poor”, says Karthik Sankaran in Barron’s. An emerging market is supposed to converge with income levels in wealthy countries. The US was a fast-growing “19th-century emerging market that first converged and then surpassed the UK”.

But they don’t always make it: 19th-century investors regarded Argentina as an exciting new economy. Today the investment category encompasses a jumble of Asian manufacturers, Latin American commodity exporters and Eastern European states.

Policymaking is improving

A key difference between developed and emerging markets is that the former have reliable legal, political and economic institutions that give investors confidence. Happily, the quality of policy making in many emerging economies is improving. Central banks in Poland, Russia, Mexico and Brazil have been raising interest rates to get ahead of global inflationary pressures, says the Financial Times.

Higher rates protect these countries against a repeat of the 2013 taper tantrum, when tightening US monetary policy prompted a rush of capital out of emerging markets, sending EM currencies plunging. Asian central banks have yet to join the tightening trend, says Nicholas Spiro in the South China Morning Post. Policymakers in developing Asia are betting that vaccinations will enable them to reopen factories, easing inflationary pressure without needing to hike interest rates. But there are risks: amid soaring energy prices, almost “all the region’s economies are net energy importers”.

Investors are instead turning to commodity exporters, reports Bloomberg. Russia has become the “traders’ favourite investment destination”. The “oil and gas superpower” has healthy currency reserves and “an enviably low debt burden”. The rouble has been the best-performing emerging-market currency so far this month. Energy firms make up roughly half of the Russian stockmarket, so it is little surprise that the local MOEX index is up by 5% over the past month. Not that emerging market investors will notice.

The MSCI Emerging Markets index is now dominated by East Asia, says Sankaran. Chinese, Taiwanese and South Korean firms jointly make up 61% of the index. “Brazil comes in well behind at 4.5% and Russia at 3.7%.” The practice of lumping so many different economies into one investment category is “increasingly odd”, says The Economist. Some suggest alternative regional indices, but that doesn’t always work: “The Turkish and Saudi Arabian markets… have little in common.”

Even more confusingly, the index also includes countries, such as South Korea, with rich-country income levels, but whose markets are not deemed open enough to qualify for developed market status. It is “time to experiment” with other ways of investing in countries that make up 40% of the global economy.

Not so very long ago, the idea that fossil fuels might be replaced by hydrogen – which when burnt or used in fuel cells to provide energy releases no pollution, but water vapour – was for the birds. It was just too expensive to produce and inefficient when compared with the already-available alternatives, and hence all the investment needed to develop the technology and roll out the necessary infrastructure was unlikely to be forthcoming.

Today, hydrogen is rapidly becoming global policy, as Leigh Collins points out on Recharge, and set to become a multi-trillion-dollar industry. China recently approved a massive power project to produce hydrogen. Australia is planning to build a renewable energy hub ten times the size of Greater London to power electrolysers that produce hydrogen. Countries accounting for more than a third of the world’s population, including India, Russia and the EU, have hydrogen strategies in place. The US is introducing one “by the back door”, as Collins puts it, with a clause in the country’s giant infrastructure bill. And the UK’s long-awaited hydrogen strategy was finally announced in August. So when will Boris Johnson finally flip the switch on our greener future?

A blue bridge to a green future

Those nervous about the implications of our current energy crisis will be hoping that he treads carefully. Some will even be seeking to weaponise it to force a U-turn away from all the “green crap”, as David Cameron once called it. But that is unlikely, says James Kirkup in The Spectator. Sceptics of “net zero” – the legally binding commitment that Britain be carbon neutral by 2050 – are a small minority among Tory MPs, most of whom support the prime minister’s green ambition.

In a recent speech, Johnson talked passionately about the need to “grow up” and take responsibility for the kind of planet we will leave our grandchildren. It was the speech of a politician “burning his boats and giving himself no room to retreat on the environment”, says Kirkup. Besides, what our current energy crisis shows is that we rely too much on gas. Net zero is the answer to this problem, not a barrier to its achievement. Indeed, even as gas prices surge and winter looms, the government is pressing ahead with its plans to impose a green surcharge on household gas bills in an attempt to nudge them to lower-carbon alternatives.

Eventually, hydrogen may be one of those alternatives. The UK’s hydrogen strategy is part of the prime minister’s vision for a “green industrial revolution” and lays out plans for reaching 5GW of low-carbon hydrogen production capacity by 2030 – enough to power about 1.5 million homes – from around zero today, with a similar subsidy mechanism to the one used for the expanding offshore-wind sector. Billions of pounds of taxpayers’ money and from higher bills for consumers will be funnelled into the industry.

By 2030, the government hopes hydrogen will play an important role in decarbonising energy-intensive industries that could not easily be run on electricity produced by renewable energy – industries such as chemicals and oil refineries, steel and cement making, and in heavy transport such as shipping, lorries and trains. It might also heat our homes and fuel our cookers and even cars – the plan is to expand the infrastructure that’s needed for more people to switch to hydrogen-powered vehicles. Up to 35% of the UK’s energy consumption could be hydrogen based by 2050, according to the strategy document, and that changeover will be critical if the government is to meet its net-zero target.

The hope is that the subsidies will boost the industry and lead to a reduction in costs – currently one of the biggest barriers to the widespread adoption of the fuel, since hydrogen must itself be produced through energy-intensive, and often carbon-producing, processes. Most of the key decisions about the development of a broader hydrogen economy have, however, been pushed into the future, says Collins. Decisions about the extent to which hydrogen will be used in domestic heating, for example, and exactly how it is to be produced in a low-carbon way, have been kicked down the road.

That last point in particular sparked controversy. Most hydrogen is currently made using natural gas, so committing to a hydrogen-fuelled future is one way for fossil-fuel companies to cling onto a role for themselves in the energy transition, says Josh Gabbatiss for Climate Brief. The government has committed to pursuing a “twin track” approach, which will include the production of both blue hydrogen (made from natural gas with carbon capture and storage technology) and green hydrogen (made using renewable electricity and hence producing zero carbon emissions).

There is a risk that the strategy will cause Britain to commit too heavily to the blue stuff and so keep the country locked into fossil-fuel-based technology, says Jess Ralston of the Energy and Climate Intelligence Unit. But the thinking in government is that blue hydrogen could be a useful bridge, replacing fossil fuels while there is not enough green hydrogen available, and hence giving Britain a competitive advantage in the race to build the coming hydrogen economy and become a global leader in the industry. It will also, as an industry expert told the Financial Times, help break the Catch-22, whereby hydrogen supply remains low without sufficient demand, yet demand stays stuck until supply rises.

This “blue bridge” will help ensure the sector attracts the vital investment needed for the long term and create the scale necessary to build the ecosystem of a plausible hydrogen economy, says Ambrose Evans-Pritchard in The Daily Telegraph. The twin-track approach will also exploit Britain’s competitive advantage in the form of “pipelines and disused fields in the North Sea, half a century of offshore engineering skills and an oil and gas industry seeking a new purpose in life”.

Green hydrogen may well win out over blue in the long term. But “in the meantime there is a huge gap to fill and the lucrative hydrogen prize will go to those who move fastest, in the right sequence… Britain’s twin-pronged blue and green strategy is a calibrated hedge that plays to this island’s North Sea strengths. It is well-judged and legitimate.”

Despite all the announcements and excitement over new technologies and the shiny green future, it would be as well to remember that global production of green and blue hydrogen is currently minimal and not one single country has yet put policies in place that would help to make hydrogen cost-competitive with grey hydrogen (produced from unabated natural gas or coal), says Collins.

In fact, no nation has definitively decided what its policy should be, with every strategy published to date pushing key decisions into the future. The strategies thus “offer a direction of travel to potential investors that can encourage investment”, but so far represent “merely ambitions or wishful thinking”.

How to invest

Still, it’s hard to imagine that the political winds behind the sector will abate – the broad direction of travel is supported by all the main political parties – and investors remain excited by the story. Research group BloombergNEF says that last year investors poured more than $500bn into the so-called “energy transition” to greener tech generally, twice as much as in 2010. The PWC consultancy estimates that between 2013 and 2020 venture-capital investments in climate tech grew at five times the rate of overall global start-up funding, reports The Economist. This flood of green money has lifted hydrogen-related investments.

The hydrogen plays we suggested in the past – Ceres Power (Aim: CWR), ITM Power (Aim: ITM) and McPhy Energy (Euronext: MCPHY) – have all soared since, though have fallen back from their peaks since February of this year. AFC Energy (Aim: AFC) is another option. It remains likely that hydrogen will find some niche application within the overall transition away from fossil fuels– especially if, as expected, costs come down – even if the more ambitious visions of an entirely hydrogen-based economy don’t come to fruition. But buying hydrogen-related stocks is a gamble that you are getting on the right side of that transition and choosing the companies that will make progress (and hopefully profits) over the next 20 to 30 years.

There are a number of other ways to ride the boom while hedging your bets. One is to buy the bigger engineering groups whose fortunes are not entirely tied to the rise of the hydrogen economy, but which might profit from it should it take off at a later date – Siemens (Xetra: SIE), for example, which is a world leader in the manufacture of hydrolysis equipment for the large-scale production of hydrogen and has its fingers in many promising pies; and Johnson Matthey (LSE: JMAT), which has been investing to expand its exposure to hydrogen.

The second is to get exposure to green energy more generally. Hydrogen can only live up to the hype if it is able to ride the coattails of a more general transition to a post-carbon future, so the hydrogen we’re talking about will have to be of the “green” variety, which will in turn depend on the growth and development of renewable energy. You can play this theme with exchange-traded funds such as iShares Global Clean Energy (LSE: INRG) and the Lyxor New Energy (LSE: NRJL). Among investment trusts, consider the Renewables Infrastructure Group (LSE: TRIG).

But perhaps the most intriguing option is suggested by Evans-Pritchard, who says he owns shares in oil giants because he considers them hydrogen plays: BP has announced plans for the UK’s largest blue hydrogen facility; Shell has already opened Europe’s largest electrolyser to produce green hydrogen in Germany; all the other big oil majors have similar plans. And as Cris Sholto Heaton pointed out for MoneyWeek recently, markets are putting little value on the long-term prospects of Shell (LSE: RDSA) and BP (LSE: BP) in particular. With dividend payouts starting to rise, then “so long as the world doesn’t abandon oil faster than seems likely, both look extremely cheap plays in a cheap sector”. All the more so if they get a lift from hydrogen.

As has been regularly argued in MoneyWeek, the UK stockmarket has been left behind global markets.

UK-listed shares, especially those that are domestically orientated, have underperformed their overseas competitors and comparators and are now cheap.

But are they cheap for a reason? I’m going to look at the other side of the argument this morning – and give a contrarian view on the contrarian take.

Rocketing public spending could hold back the UK stockmarket

There are a number of explanations for the UK stockmarket’s underperformance. These include Brexit; political uncertainty; the aversion of overseas investors; international diversification by UK investors; the “value” rather than “growth” focus of the UK market; and entrenched poor momentum.

This, so the argument goes, is set to change thanks to a good economic outlook, strong growth in corporate profits, more managerial dynamism and irresistible valuation anomalies.

The UK stockmarket’s better performance this year is the start of a long-term trend, with overseas bids for UK companies endorsing the opportunity. But is there an argument that the UK is cheap for very good reasons?

Brexit was always going to be a short-term negative for the UK economy. But it offered the potential – if the government grasped the opportunity to escape the constraints and costs imposed by the EU – of being a long-term positive. In football parlance, the UK would start a goal down but that didn’t mean the game was lost.

In reality, the UK has shown little interest in breaking free, continuing to shadow EU regulations and practice and compromising free trade deals to protect farmers and domestic industry.

During the pandemic, the UK spent like a drunken sailor while eurozone countries, constrained by budget rules, were far more cautious. UK public spending has ratcheted up at the cost of private sector growth. In the EU, it hasn’t. The score is now 2-0 or 3-0 to Europe.

As a result of this, public spending in the UK is now over 40% of GDP, the highest ever excluding wartime, while public sector net debt is almost 100% of GDP, the highest since the early 1960s. When interest rates rise, as even the inflation optimists expect, debt servicing costs will rise, increasing the deficit and debt further.

Productivity growth in the public sector has historically been negligible; an encouraging improvement some five years ago is by now almost certain to have been reversed. This explains why ever-increasing amounts of money have to be shovelled into the NHS and other public services to such little effect.

The increasing share in GDP of the low productivity public sector must slow overall economic growth, while the private sector is squeezed by the resource demands, especially labour, of the public sector.

Increased spending has, in turn, precipitated the biggest ever increase in taxation. In 2019, the UK’s tax-to-GDP ratio was 33%, slightly behind the OECD average. That is set to rise to 35% in 2022 and further thereafter.

Ostensibly, half of the 2.5% increase in national insurance contributions falls on employees and half on employers. But many employers will respond by reducing pay rises while the increased costs to the public sector will mean either further increases or reduced services.

Why tax rises are adding to political risk

This tax increase will further reduce domestic economic growth. Supposedly, the increase is to pay for a catch-up in NHS treatment, but will then be diverted to social care. It could as easily be attributed to the monstrous extravagance of the HS2 rail project; the “track and trace” programme; and the waste and fraud of much of the pandemic spending.

This makes the increase politically toxic for the government, especially as it breaks a key pledge from its 2019 election manifesto.

In 1992, Michael Portillo, then a government minister, predicted that increasing taxes would be suicidal for the then-Conservative government. Kenneth, now Lord, Clarke, the chancellor, proceeded to raise taxes and the Conservatives were routed at the 1997 election.

History is set to repeat itself; electorates do not forgive broken promises. Keir Starmer may appear unimpressive compared with Tony Blair in the 1990s but that does not matter.

In the February 1974 election, the Labour party, led by the discredited former prime minister, Harold Wilson, lost millions of votes, yet still emerged as the largest party. In a second election later that year, he won a narrow overall majority and Labour ruled for four and a half disastrous years.

In 2023-2024, abstentions plus increased votes for Liberal Democrats, Greens and others are likely to hand Starmer’s Labour Party victory, even if its vote, or share of the vote, doesn’t rise.

Such a government is not going to shrink the state or cut taxes. Tax increases will be targeted at investors and “the rich” (in practice, as always, the middle classes) but also at companies.

The rate of corporation tax will rise to at least 25% and perhaps 30%, hitting corporate earnings. Businesses with overseas earnings will be protected by devaluation, but domestic businesses will have the additional problem of stagflation.

Every period of Labour government in 100 years has seen a permanent devaluation, while devaluations under the Conservatives, such as in 1992 and 2016, have subsequently been clawed back.

Even if the Conservative Party seeks to return to its principles by kicking out Boris Johnson, the electoral outlook will be bleak. After four consecutive victories under three discredited leaders, the electorate will be sceptical and revert to its usual preference for “level down” over “level up.”

Under this outlook, UK equities deserve to trade at a discount to global equities. Short-term outperformance is possible but likely to be unsustainable. A portfolio tilt to Japan or emerging markets looks more attractive for the long term than to the UK but global funds or equities should be the core of any portfolio.

There is no faulting the ambition. Last week, Ursula von der Leyen, the president of the European Commission, announced a new “Chips Act” to coordinate European efforts to create a microprocessor industry.

After falling way behind Taiwan, South Korea, the United States and China, the EU plans to take control of its member states’ industrial policy, and make sure the bloc takes at least 20% of the global chips market by the end of the decade.

Billions of euros will be made available for investment in research and development (R&D) and factories, and markets will be protected if necessary, while officials in Brussels will no doubt steer the continent’s car makers, electronics companies, and telecoms suppliers towards EU-based manufacturers.

The EU’s problem

There is certainly space for more players in this market. The challenges of the pandemic have created critical supply shortages this year. Even once that sorts itself out, as it will, there will still be huge and growing demand for processors. However, the EU is not nearly as good at creating new industries as it likes to pretend it is, and the more high-tech they are the worse its record.

Most recently we have seen that in vaccines. The EU hijacked control of the procurement of inoculations to deal with Covid-19. It ordered the wrong vaccines, in the wrong quantities, and found itself in a war of words with AstraZeneca, the manufacturer of the most cost-effective jab on the market. Far from boosting European industry, one of the intentions, it ended up completely reliant on the American-controlled Pfizer and Moderna vaccines, and while it caught up eventually it was way behind the US and UK.

We’ve seen the same with other projects. Remember Quaero? It was the alternative European search engine to Google that received hundreds of millions of euros in EU funding. Launched with huge fanfare, it quickly disappeared without trace. Or take the Europe 2020 strategy, launched in 2010, to create an “Innovation Union” that would be a world leader in new technologies. In the subsequent decade, it has fallen even further behind. The UK has as many tech “unicorns’” as the whole of Europe put together. The EU’s record is only consistent in one respect. It always fails. There is no reason it will be any different this time.

The EU doesn’t have the expertise to create a microchip industry. It will move too slowly, back the wrong technologies, and invest money where it is politically expedient rather than where it is needed. However, that creates an opportunity for the UK to fill the gap that undoubtedly exists. Britain has produced some huge microprocessor companies such as Arm, and promising ones such as Newport Wafer Fab – but it allowed them to be sold off. There are three obvious steps the government should take to repair that damage.

Three steps to a better strategy

First, expand the freeports so that chip plants can be built tax free. We are already building low-tax, low-regulation zones around the country. Let’s expand three or four of them and encourage microchip0- manufacturers and start-ups to base themselves there.

Next, create an R&D hub modelled on the new Vaccines Manufacturing and Innovation Centre in Oxfordshire. This would be a centre of excellence, bringing together cutting edge science and state-of-the-art manufacturing.

Finally, target state aid at selected manufacturers in computing. Even better, the Treasury should use its new Breakthrough fund, which invests in early-stage businesses that might struggle to attract funding elsewhere.

Most of all, a UK microprocessor strategy should be market-led, and work with the US and China instead of against them. Small countries can do well in this industry: Taiwan is a world leader. But top-down, statist, politically compromised industrial strategies almost always fail. The Chips Act will be added to that list, quickly bogged down in politics and suffocated in red tape. The UK should seize the opportunity. We might even be able to sell some processors to the rest of Europe.

Most economists seem to believe that economy-wide carbon pricing – such as the EU’s Emissions Trading System (ETS) – will be needed to shift our energy use to renewable sources and tackle climate change. If the scope of schemes like these continues to grow, it will push up the price of carbon-emission allowances – thereby helping to bring about change, but also creating an opportunity for investors.

So it’s notable that the first UK-listed exchange traded product to give investors access to this market arrived at the end of August. The WisdomTree Carbon ETP (LSE: CARB) tracks the ICE Carbon Emission Allowances (EUA) futures contract, which is the most liquid exchange-traded carbon futures contract globally. To understand what’s going on with this unusual product, let’s see how carbon pricing works.

How carbon pricing works

In simple terms, there are two ways of pricing carbon emissions. The first is a straight tax per tonne of emissions. The second involves an emissions trading system that allows existing industries a certain amount of emissions, which can be traded if the industry doesn’t use its allowance. A few state governments in North America have adopted simple carbon taxes, but the most advanced regime is Europe’s ETS. Total EU carbon emission allowances from trading activities were valued at over €201bn in 2020, equivalent to 8,096 million tonnes of carbon dioxide, an increase of 19% from a year earlier, according to WisdomTree.

ETS has a ratchet effect – over time the emissions allowed decline, forcing the industries to change their processes or pay what is in effect an excess carbon charge. Higher prices for allowances mean it gets more expensive for companies to cover their carbon footprint and incentivises them to invest in pollution-abatement technology. As Europe becomes greener at the policy level, the ratchet effect is intensifying. The existing target was a 40% reduction in carbon dioxide emissions by 2030 (from 1990 levels), but that’s now being raised to 55% for the 27 remaining EU countries by 2030, with a plan to eliminate net emissions by 2050. The emissions cap is being reduced at 2.2% per year between 2021 and 2030 and the 55% cap could raise that rate of reduction to 4.2% in 2024.

These pressures have already led to ETS carbon prices rising, but there’s also another factor at work: financial interest. Big institutions (and hedge funds) are waking up and buying into the ETS market. The combination of policy pressures and increased investor participation should be a positive for carbon prices, reckon analysts at Morgan Stanley. They have raised their medium-term forecasts to €48 per tonne for the end of 2021, and to €58, €65 and €74 for 2022, 2023 and 2024 respectively.

A volatile market

That’s the bull case. What of the risks? ETS has produced hugely volatile carbon prices over the last decade. Most commentators reckon that too many free emissions were issued at the beginning of the scheme, resulting in a price crash in the early years. Sceptics also think that a higher EU carbon price might not achieve the desired objective – it could incentivise carbon-intensive industries such as steel to shift production to countries that don’t have carbon pricing. Some argue instead for a carbon border tax (which may be hard to implement under current global trade rules).

So it’s by no means certain that the EU’s approach will work, while the rising financial interest might result in a short-term overshoot in prices. Still, I’d counsel against too much pessimism. Pricing will remain volatile but this seems to be a genuinely diversified, non-correlated asset class that doesn’t really move around very much depending on the economic cycle. I’d also suggest that the direction of travel – upwards to possibly €100 per tonne by the middle of this decade – is obvious.

Frankfurt has attracted only a handful of bankers over the last four years. If any firms have relocated to Paris, then they are keeping it a secret. Despite all the money and political capital Germany and France poured into making sure London was no longer Europe’s financial capital in the wake of our departure from the European Union, so far it has had very little impact. Some share trading has shifted, mostly to Amsterdam, and so have some deposits, but that is just numbers stored on a server. Most of the real work is being done in London.

The City may well feel it is time to relax. But hold on. Perhaps we are looking in the wrong place. London has plenty of competition in Europe – it is just not coming from the cities we expected. Financial centres are booming in two other cities that no one usually pays much too: Warsaw and Stockholm. Sweden has more than 1,000 listed companies, more than either Paris or Frankfurt, while Warsaw has 770, only 35 below Paris. Both are some way behind London, which has more than 2,000 listed companies, but they are gaining fast.

Fast-growing economies

Warsaw is building on the strength of the Polish economy. Annualised growth of more than 4% a year is steadily turning Poland into one of the richer countries on the continent (its stockmarket is one of the world’s few remaining bargains, but that is a different story). That is throwing up lots of growing businesses, some of which are ready to float. At least 20 companies are expected to list on the main market this year, and another 16 at least on NewConnect, its version of Aim. But it is also starting to attract global companies as well. Pepco, the owner of discount retailer Poundland, also has a big business in Poland and it decided to list in Warsaw earlier this year, rather than London.

Likewise, Stockholm is thriving on the back of the booming technology industry. Sweden is second only to the UK in Europe in the number of new tech companies it has created, and on a per capita basis it is probably ahead. Nasdaq Stockholm has benefitted hugely from that, as well as from positioning itself at the centre of a vibrant, tech-led Nordic economy that also takes in Denmark, Norway, Finland and Estonia. The trend is not likely to stop any time soon. Klarna, the buy-now-pay-later start-up based in Stockholm, is valued at $45bn, making it the most successful fintech company in Europe. When it lists, it may well choose its home market – there is no reason not to – and that will give Stockholm yet another boost.

Four big advantages over Britain

Warsaw and Stockholm have four things going for them. Both are outside the single currency, but inside the EU, just as Britain was before we left. That means they have their own central bank which can help the finance sector when it needs to, and they have their own domestic bond market. They can also be a lot more flexible, both in terms of devising regulations and implementing them. Sure, they still have to comply with directives from Brussels, but they have more independence than they otherwise would.

Next, they have thriving entrepreneurial economies to tap into. An emerging market such as Poland is always going to have a lot more energy than a mature, developed one. That means a steady stream of companies coming to the market. Thirdly, they have competitive tax systems. Poland has no capital gains tax, and just levies the standard corporate tax rate of 19% on gains, while Sweden is a lot more competitive than it used to be. And finally both are inside the single market. Brokers and asset managers based in either city have full access to financial markets across the continent whilst preserving some flexibility and independence. The UK has lost that, and there is little chance of getting it now.

London has done well to fend off the assault from Frankfurt and Paris. Warsaw and Stockholm may be more serious challengers. The City can’t take its status as Europe’s financial hub for granted. Competition is arriving from new centres. It will have to work harder to survive that.

Small and medium-sized businesses (SMEs) are under-protected from cybersecurity risk, while the pandemic has increased their vulnerability to attacks. The European Union Agency for Cybersecurity (ENISA) says a third of SMEs have experienced a cyber incident over the past five years. Half believe that a serious incident could completely sink their company.

Despite this level of risk, most SMEs have only basic protections in place. The majority of smaller firms have taken steps such as installing firewalls and anti-virus software, but only a minority routinely train staff on cybersecurity issues or use more sophisticated protection tools.

ENISA’s data suggests that the five most common threats to SMEs are: phishing attacks; web-based raids; general malware; malicious insiders; and denial-of-service strikes. What’s more, measures introduced by many SMEs during the pandemic, including remote-working practices and contactless-payment options, have given cyberattackers new opportunities.

The big challenge, says ENISA, is that managers are not sufficiently focused on the potentially existential threat that cyberattacks pose. As a result, their efforts to counter the threat often fall short of what is required. They don’t invest enough money in cybersecurity, they fail to recruit the right type of cybersecurity expertise, and they favour seemingly quick fixes such as anti-virus software, rather than building a culture of cybersecurity awareness.

Shocking statistics

Such complacency leaves smaller firms exposed. Research published by Vodafone in early 2021 found that 41% of UK SMEs had suffered cyberattacks over the previous 12-month period, with 20% experiencing multiple attacks. It warned that as many as 1.3 million UK SMEs could collapse completely after falling victim to a cyber-attack.

ENISA’s most important recommendation is that SMEs should focus on how to build stronger cultures of cybersecurity, with management working harder to build employees’ awareness. The agency suggests practical steps such as regular cybersecurity audits, training for staff, the development of cybersecurity policies, and work on incident response plans.

More technical steps will also help. Too few SMEs are taking steps to secure their devices, such as installing all software patches and upgrades, encrypting data and focusing on how to manage mobile devices. Network security also needs to be reviewed, particularly as more staff work remotely. Third parties such as suppliers may also be introducing new vulnerabilities.

However, the starting point for many smaller businesses will be to recognise that they represent an attractive target. SMEs are less likely to have robust defences in place than their larger counterparts.

Even simple steps can prove hugely valuable. For example, SMEs that routinely back up their systems and data will be much less vulnerable to ransomware attacks. Firms that introduce multi-factor authentication on remote devices decrease their chances of attackers getting in this way.