Fëdor de guerra
The great Russian writer Fëdor Dostoyevsky, one of the fathers of psychoanalysis for some, many years ago unwittingly encaptured in one his novels Vladimir Putin flirting with the idea of (another) invasion of Ukraine. In Crime and Punishment (1866) he wrote that ‘sometimes man is extraordinarily, passionately in love with suffering‘ and again that ‘small things have their importance: it is always for small things that we lose ourselves‘. In his novel The Brothers Karamazov (1879), he wrote ‘the secret of human existence is not to live, but to have something to live for’. In the novel The Idiot (1869) he wrote: ‘Men are made in such a way that they must necessarily torment each other’. 
In Memoirs from the Underground (1864) he wrote ‘I am convinced that man will never renounce true suffering, that is, destruction and chaos‘. Finally, in Demons (1872) ‘If there is no God, I am God’.
Vladimir Putin is one of those autocrats who, drunk with power, is in the grip of self-destructive vapours with no real underlying logic. The Russian economy is now slowly recovering after years of sanctions following the 2014 invasion of Crimea. This is thanks to the rise in the price of gas, which has reached levels that were unthinkable a few months ago. Instead of managing this new wealth to improve the status of its citizens and get closer to the West, it is embarking on a new tug-of-war that at best will lead to ridicule and at worst to the loss of power, with all the personal repercussions that this entails. This attitude is as illogical as it is close to that of his friend/enemy Recep Tayyip Erdoğan, who is also busy waging war against ghosts rather than growing and prospering a country with great potential and increasing its consensus and legacy. Being in power for many years probably confers a certain vertigo and an uncontrollable desire for self-destruction.
War is all but certain. However, if there was an invasion in Ukraine, based on the history of the relationship between wars and stock markets, you would have to buy. If there is no war, we should still buy. After yesterday’s folkloric descent, a positive economic outlook, extremely attractive valuations on many parts of the market and a mountain of dividends coming in, we honestly don’t see a better place to invest risk capital than the stock market. Maybe not necessarily on the indices, but on the value side, which has lagged far, far behind. But here, we admit, we are biased.
As for Russia, an invasion would be political suicide for Putin and his economy. Europe, however, is better prepared than it was in 2014 to replace Russian gas with other suppliers. The road would not be easy but still feasible. Scarcely 30% of Europe’s energy needs are met by gas. Of this 1/3 comes from Russia. Reserves are not high, but they are enough to carry us through to spring when gas demand drops by 60%.
In the medium term Russia would lose Europe as a customer for its gas, making it dependent on China with which it has a shaky relationship. An invasion, moreover, as the Economist reminds us this week, would inevitably lead to Russian casualties and maintaining the conquered territories would be difficult. A new Chechen front could be opened. In the end, the risk is to bring one’s own country to its knees economically and to further lose support at home. Putin and many around him know this. So we believe that the possibility of peace is greater than the possibility of war. However, situations such as the current one can unintentionally lead to conflict. As the other great Russian writer Lev Tolstoy recalls in War and Peace (1869), ‘when you chop wood, it is inevitable that splinters will fly‘, and some can hurt.
Blowing in the wind
“How many profit warnings can an investor in Siemens Gamesa endure before he has to walk away? The answer, my friend, is blowing in the wind, the answer is blowing in the wind…” would sing Bob Dylan. He would never be more right than in this case…
Siemens Gamesa is one of the leaders in the design, construction, installation and maintenance of wind turbines. And it is the undisputed leader in the off-shore category (75% market share in Europe), i.e. those located at sea, an area with exceptional growth expectations. The company is an example of sustainability and is one of the companies most instrumental in achieving the UN 2030 agenda of sustainable development goals (SDGs).
This little gem, born in 2017 from the merger of Siemens’ Wind power division and Spain’s Gamesa, has served us no fewer than three profit warnings in a row in nine months, the latest last Friday.
To understand the potential of offshore wind energy, we take the Global Wind Energy Council’s (GWEC) 2021 report on this area (here is the link GWEC-offshore-wind-2021-updated-1.pdf ). On page 11 of that report we read “we have only begun to scratch the surface of the potential of offshore wind power. With 35 GW installed today, most of it in Europe and China, power generation from offshore wind accounts for less than 0.5% of global electricity production. However, the potentials are formidable. The World Bank has identified more than 71k GW that can be produced by offshore wind power, about 10 times the current globally installed electricity capacity. “The same report forecasts a 7-fold growth in offshore wind capacity by 2030 compared to the end of 2020 and a 50-fold growth in 2050 (see graph below).
As our readers are well aware, there is an old proverb in the stock market that profit warnings never travel alone. The process of profit warning communication by management is not so different from the psychological cycle of investment or the realisation of financial or human losses.
Initially there is a tendency to communicate a benign version of events. Management understands that there are a number of problems and is disturbed by them (unease) but perceives these problems as temporary. Later the problems develop and management has to come back to investors with more negative news. Here usually prevails the will to deny the problems, reassuring the investors and projecting recovery scenarios (denial). Finally, reality takes over and management has to come back with even more negative forecasts, partly losing credibility. This is where the feeling of pessimism prevails, albeit masked (badly) by management. From pessimism, to panic and capitulation involving the management but above all the Board of Directors and investors. It is a confusing phase that can itself be the cause of subsequent problems. This phase sees the board take an inquisitorial stance towards the management, which is often liquidated. Investors exit because the losses become too difficult to justify to clients and the stock approaches its inflection point. Expectations here are so low that the mere confirmation of past horrible forecasts is cause for enthusiasm. The stock then gradually recovers. Clearly every situation is different but for Siemens Gamesa we believe we are not too far from this inflection point. The company is not spiking for reasons that we believe are cyclical and not structural. The business trend is exceptional. Competition will increase but not as much as demand. JP Morgan calculates that Europe will spend about USD 1 trillion on fossil fuels in 2022, compared to USD 500 bln in 2019. Providing strength to Russia (see article above) as well as leaving us dependent on them and clearly accelerating global warning. At the same time, investment in renewables, although visibly increasing, is expected to be “only” USD 170 bln. The current energy crisis should act as a wake-up call and lead to increased investment. And the current logistical problems and rising costs associated with renewables will be the lesser of two evils.
Today we believe that stretching this renewable energy player to just over one times sales is attractive. We are ready to increase the exposure on any further weaknesses.
Source: Monevator
Source: Bloomberg
We in the NEF Ethical Global Trends SDG fund hold the holding company, Siemens Energy, which controls 2/3 of Siemens Gamesa. Siemens Energy also has exposure to natural gas, where it offers sustainable solutions, to electricity transmission and distribution networks, whose development is essential for renewables, and to hydrogen, a very important factor to implementing new networks. These businesses are doing very well and protect us somewhat from the sorrows that the wind turbine subsidiary is currently generously dispensing. The company trades at just over 4x EBITDA for the year ending September 2023 and has an extremely strong balance sheet. Taking the Siemens Gamesa subsidiary at market price, excluding the net cash in the portfolio and giving a minimal value to the hydrogen division (USD 1 bln vs USD 3 bln predominantly valuation) the rest of Siemens Energy now trades at less than 3x EBIT. There is a significant risk that Siemens Energy will do a buyout of Siemens Gamesa at this stage. Its recent relative weakness compared to the subsidiary indicates that the market expects this. If this were to happen we would increase it further, knowing that in the long term it is a smart move.
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