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Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Chief Macro Strategist
Uranium prices eclipse 2022 high; Bubble stocks are hurt by rising rates
Peter Garnry
Chief Investment Strategist
Summary: The uranium spot price is continuing higher due to supply concerns and improving demand outlook for nuclear power plants driven by construction pipeline in Asia. Our nuclear power theme basket is getting closer to overtake semiconductors as the best performing theme basket in 2023. On the flip side, our bubble stocks basket is under pressure from rising US bond yields and waning risk sentiment in AI-related stocks.
Key points in this equity note:
- Offshore wind and green transformation technology have had a bad year due to rising bond yields and high energy costs making steel and concrete expensive leading to waning appetite from investors.
- Nuclear power is getting closer to overtake semiconductors as the best performing theme in 2023 as governments are realizing that nuclear power is critical to achieve zero-carbon emission goals.
- Bubble stocks are under pressure from higher US bond yields and risk sentiment in generative AI stocks declining.
Nuclear theme is steadily advancing as best theme in 2023
This year has been a catastrophe for wind turbine manufacturers such as Siemens Energy and Vestas. On the development side, Orsted’s massive write-down on its US offshore wind farms and UK offshore wind auctions attracting zero bidders underscore the problem for green transformation technologies amid rising long-term bond yields and still elevated spot prices on industrial metals. Higher energy costs also make steel and concrete more expensive. As green transformation and renewable energy theme baskets have had a terrible year another zero-carbon electricity source such as nuclear power is having a field day.
Our nuclear power theme basket is the only basket with a positive return the past week and is now up 24% zooming in on semiconductors which is currently the best performing basket. With the fallout of wind turbines and the acknowledgement of the need for a clean and reliant baseload nuclear power is fast becoming a critical option for governments among developed countries to expand clean electricity. Another driving force has been the steadily higher uranium prices which are a function of a squeeze in the physical uranium market as industry players are scrambling to deal with a potential ban of Russian nuclear fuel which would severely constrain the industry’s access to fuel. The Uranium spot weekly price (Ux U308) has risen well above its 2022 high. Physical uranium is difficult to get access to as an ordinary investor. The only viable option is investing in uranium miners which naturally have direct exposure to the uranium spot price. The chart below shows the Sprott Uranium Miners UCITS ETF.
There are currently 60 nuclear power reactors under construction and the pipeline is steadily expanding with the majority of planned reactors still in Asia. Poland announced back in July another new nuclear power plant extending the country’s plans for nuclear power to takeover from coal power plants. In addition to new nuclear power plants, many upgrades are being done on existing power plants to expand capacity. In 2021, there were 440 operating nuclear power plants producing roughly 10% of the world’s electricity. As mentioned in one of recent equity notes, Sam Altman, the co-founder of OpenAI, is planning to IPO a small modular nuclear reactor company called Oklo in a sign that investor appetite has risen dramatically for this energy source.
Most of the companies in our nuclear power theme basket are either utilities with a lot of exposure to nuclear power production or uranium miners. Cameco is one of the world’s largest uranium miners and providers of nuclear power fuel for reactors and has recently acquired (deal is not completed) a 49% stake in Westinghouse Electric in order to divest away from the volatile market in uranium. Westinghouse Electric is one for the world’s largest suppliers of technology to nuclear power plants and thus the move by Cameco will create the most vertically integrated company in the nuclear power industry.
Bubble stocks have the highest beta and highest sensitivity to cost of capital
On the flipside of the strong performance in nuclear power stocks and commodity related stock we find bubble stocks. These companies have high equity valuations and still not profitable which naturally make them more sensitive to higher cost of capital. In addition, these stocks have a very high downside beta of 2 or more, which means that they more twice as much or more when the general equity market declines. If US longer end bond yields continue higher then this group of stocks are extremely vulnerable. Another potential risk is the ending of the hype cycle around generative AI which has helped inflate equity valuations in bubble stocks.
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