Is The UK About To Have An Evergrande Moment?

Is The UK About To Have An Evergrande Moment?
Hermione Taylor

over 2 years ago3 mins

  • High energy prices in the UK are making the cost of production unaffordable, and they’re leading to shutdowns in energy-intensive industries.

  • That could send ripples throughout the UK economy, leading to shortages in other markets, higher inflation, and lower investor confidence.

  • Energy stocks could do well in this scenario, as could green energy suppliers and second-hand car sellers.

High energy prices in the UK are making the cost of production unaffordable, and they’re leading to shutdowns in energy-intensive industries.

That could send ripples throughout the UK economy, leading to shortages in other markets, higher inflation, and lower investor confidence.

Energy stocks could do well in this scenario, as could green energy suppliers and second-hand car sellers.

Mentioned in story

UK energy prices have been going through the roof, and a whole host of heavy industries are feeling the pinch: cement, steel, and chemicals execs all collectively warned last week that production is now so unaffordable that they’re at risk of shutting down. And since those industries are so tightly bound up with the success of the country’s economy, the UK could be set to have a crisis of its own…

What do sky-high energy prices mean for the UK market?

Britain’s energy crisis has brought home just how interconnected modern supply chains are. When high gas prices caused the country’s fertilizer production to stall last month, for example, the consequences were felt nationwide as shortages hit food supplies.

But this temporary supply chain chaos could lead to a much more permanent closure of UK industries. You can’t switch a furnace for the short term without effectively destroying part of your manufacturing infrastructure in the longer term, after all.

Those closures could, in turn, could lead investors to lose confidence in the UK economy. The FTSE 250 has already fallen 7% since the start of September, and that pessimism could spread further.

Just look at Evergrande: investors were worried about more than just the Chinese property giant when it looked as though it would collapse last month. The many construction and design firms that worked with Evergrande were also at risk of bankruptcy, which would have even more knock-on effects on the economy. There was also the possibility that foreign investors would be unnerved by the collapse of such a major player, and view China as a less attractive place to invest.

The parallel with the UK’s situation today is clear: heavy industries might seem like a relic of the past, but they’re heavily tied up with the wider economy. And even the whisper of collapse among the UK paper, ceramics, and steel industries (as well as others) could send a negative message to investors about the UK’s prospects.

Is there an opportunity here?

With the energy crisis highlighting the interconnectedness of so many markets, there may be gains to be made from thinking more laterally.

Making a new car, for instance, requires almost a ton of steel, which itself could face shortages if steel production falters over the coming months. That means Britain’s used car vendor stocks are in a particularly comfortable position: Autotrader (ticker: AUTO) reported that used car prices had increased every month over the past year, and the company thinks this trend will continue if manufacturing problems persist.

In the longer run, UK renewable energy could also be a good bet. Tellingly, the UK government hasn’t committed to supporting heavy industry, but it has stated that the energy crisis “underscores the importance of our plan to build a strong, homegrown renewable energy sector”. Exchange-traded funds like the First Trust Nasdaq Clean Edge Green Energy Index (ticker: QCLN, expense ratio: 0.6%) offer exposure to renewable energy companies that will be essential in Britain’s transition to greener energy. But there are also risks: the government could find itself under pressure to roll back costly green energy policies if energy prices continue to rise.

Finally, it’s worth remembering that the UK is at the heart of a much more global problem. And since Goldman Sachs is predicting an oil price of $90 a barrel by the end of the year, it looks like oil giants that extract and sell on the slippery elixir – like BP, Royal Dutch Shell and Exxon – could continue to benefit.

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