Markets struggle for direction with Brexit and US stimulus up in the air, while Ofgem plays hardball with the energy sector

“Another day and the markets are still no clearer on the two big stories which currently dominate the agenda, both a case of economics meeting politics,” says AJ Bell Investment Director Russ Mould.

“Brexit remains unresolved despite extensive talks with an apparent deadline fluctuating between Wednesday and Thursday this week while efforts to get a bi-partisan stimulus package away in the US continue.

“How both these scenarios play out are likely to set the tone for the last few weeks of 2020 and the first part of 2021.

“Given both events are still in flux it was no surprise to see the FTSE 100 struggle for direction on Tuesday morning, as the index and sterling were jittery.

“In a sign that investors are looking for some protection from potential volatility, gold prices have started creeping up again, still some way short of the summer’s record highs but back firmly above $1,800 per ounce having fallen below this threshold in November.”

Ofgem/Energy Sector

“Like a hard-nosed negotiator energy regulator Ofgem started with such a low-ball offer on its new returns framework for companies in July that today’s pretty miserly deal doesn’t feel so bad.

“The proposed return on equity of 3.95% in July was around half the previous level and would have meant lower returns for shareholders of utility companies.

“Knowing that pleading on behalf of big investors was an argument less likely to carry water the industry – notably SSE and National Grid – instead outlined the threat the new regime would pose to the energy transition and reducing emissions.

“In effect they were saying you’d better let us make and spend more or we won’t deliver on a greener future. The resulting compromise on returns is hardly a huge move on the part of Ofgem, and still only a little more than 50% of the previously allowed rate but it does in part address this latter point as companies’ spending allowance is increased.

“Utilities are often seen as safer investments as their returns are regulated and therefore predictable but as this episode illustrates this is only true over the course of fixed period and then the regulator can pull the rug from under their feet.

“In a post-covid world there is understandable pressure to reduce the strain energy prices put on many households.

“Predictably SSE, National Grid and their peers are still unconvinced by this latest offer and the authorities face the task of balancing the need to incentivise investment in renewables and other low-carbon energy sources while also looking to protect the consumer.”

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