"Shock and awe" intended

When news broke of Donald Trump's resounding victory at the November 2024 US presidential elections, many countries and businesses girded themselves for another round of trade wars.

But this time, the 47th US president upped the ante from his previous term by imposing across-the-board tariffs on friends and foes alike. The Republican party's majority in both the US House of Representatives and Senate helped to ensure that Trump would have near-unchecked power, leading to such policy extremes.

In light of these developments, we see markets as the remaining check and balance to hold the current administration's actions to account in the immediate term. As would be expected, Trump's tariffs roiled global stock markets. We therefore expect risk premiums for US assets to remain elevated for some time. Prior to the outcome of the US elections, we had explored the likely implications of a second Trump presidency and potential implications for portfolio companies in "If Trump wins: uncertainties and opportunities from an Asian equity perspective".

Similarly, from a global perspective, the pronounced market volatility suggests that it will be hazardous to sell following large declines and to buy after major upturns unless we have greater conviction that concrete steps are being taken towards de-escalation. Energy and commodities also took a hit as the ongoing trade disputes raised doubts over future demand. We expect crude oil prices to remain lower for longer though other commodities may be more economically sensitive and thus, volatile.

In our view, Trump's re-escalation of the tariff wars will only exacerbate the slowdown in global growth and may potentially plunge the US into recession unless his administration significantly reverses course with key trading partners including China, the European Union (EU), Canada and Mexico.

Another factor which could prevent an impending US downturn is intervention by the Federal Reserve (Fed). However, the Fed faces a very tough task, as rising inflation poses a risk that could make it challenging for it to further reduce interest rates.

China in the crosshairs

Although seemingly indiscriminate, the so-called "Liberation Day" tariffs primarily targeted China. We believe that Washington will maintain this approach even if it rolls back punitive measures, such as with the surprise 90-day reciprocal tariff reprieve announced by the White House, for all countries apart from China.

The chaos caused by Trump's unpredictable actions may seem surreal, almost like events from a reality TV show. Nonetheless, we believe he is still a businessman at heart with deal-making as his main objective.

The ability of all countries to weather the US tariffs hinges on sound policy decisions, supportive domestic demand, capacity to stimulate the economy via monetary and fiscal means and the ability to negotiate concessions with the Trump administration by increasing purchases of US goods or investment. We think this last point may help countries to secure a bigger share of the export manufacturing market to the US over time if balanced correctly. The country with the most potential in this regard is India, which also stands to benefit from a sustained drop in energy prices.

Most countries in Asia will likely try and hold discussions with the Trump administration. To date, over 75 countries have sought to strike a deal with the White House.

Given Trump's preference to conduct one-on-one talks, we feel it would be prudent for the Association of Southeast Asian Nations (ASEAN) to negotiate as a bloc for more favourable terms as opposed to a country-by-country basis. For potential guidance ASEAN can look at the EU, which has banded together even more closely amid current developments.

In the context of Asia excluding Japan, although countries that are part of the "China plus one" risk diversification strategy were also hit with tariffs to varying degrees, most of them are in the process of negotiating trade agreements with the White House. We believe that they could potentially be well-positioned to benefit from subsequent lowered duties as well as the accelerating trend of diversifying supply chains away from China.

Meanwhile, the Philippines' services and agriculture-focused economy means that the reciprocal tariffs, which mainly penalise manufacturing hubs in Trump's quest to bring such jobs back to the US, will have less of a negative impact on the Philippines.

And finally, while India is yet to officially respond to the sweeping US tariffs, we believe that its economy, driven more domestic consumption, puts it in a stronger position to negotiate a more favourable trade agreement with Trump compared to countries more heavily reliant on exports.

Sino resolution

China, however, is not having any of it. Compared to Trump's first term in office, Beijing is hitting back more forcefully with tit-for-tat tariffs having learned the hard way that any signs of weakness will certainly be exploited. With neither Trump nor Chinese President Xi Jinping likely to back down, we believe China's actions must be accompanied by corresponding domestic support packages to prevent Chinese assets from suffering collateral damage. Further restrictions on investments in China or the US could be on the cards should tensions escalate. US Treasury Secretary Scott Bessent raised the possibility of delisting Chinese companies from local stock exchanges following the tariffs announcements. Beijing had also earlier ordered the National Development and Reform Commission to halt approvals for Chinese firms aiming to invest in the US.

Government officials have said China is ready to lower interest rates and relax the reserve requirement ratio to stimulate the economy in the face of rising trade tensions with the US. In a planned emergency meeting of high-level economic officials, we expect the authorities to redouble efforts to bolster consumption, artificial intelligence (AI) and energy infrastructure and focus on localising industries such as medical devices.

Initial measures to boost domestic consumption are expected to include the streamlining of duty-free purchases by inbound tourists, which could benefit duty free names. The measures could also include a plan to ramp up health-related consumption though fitness and sports initiatives and the promotion of high-quality agricultural products. These are likely to be just the beginning of a series of policies aimed at supporting domestic demand.

Manufacturing mayhem

At a sectoral level, pharmaceutical and semiconductor imports are currently not subject to US reciprocal tariffs. However, Trump is threatening to revoke these exemptions as part of a wider national security agenda. Chinese companies in these industries are the likely targets of future measures.

In the broader manufacturing space, we view flexibility in production as necessary for supply chain resilience as per Apple's decision to produce more iPhones in India in a shift away from China. Nevertheless, committing to longer-term manufacturing capital expenditure decisions poses significant challenges under current conditions.

A new world order born of fundamental change

Trump's unprecedented actions have torn down the established global trade order as the US seeks to structurally cut its deficit and bring back manufacturing jobs, while China has been making attempts to shift away from an export-led economy towards consumption-driven growth. The 90-day tariff moratorium may provide nations some time to assess the optimal route to navigate these US tariffs. However, the risk of further escalation is very real, given that the world's two largest economies are adamant about not appearing weak in the eyes of the other. Regardless of who gains the upper hand in the end, all countries will need to chart a new course into the proverbial unknown.

Volatility typically brings both risk and opportunities. Significant fundamental changes have been set in motion and will lead to long-term, sustainable investment opportunities in the days and months ahead. Cutting through the noise and bluster to identify longer term investment opportunities is what excites us. Over the last 15 years, US equities and assets have been the biggest beneficiary of global portfolio flows. However, if US risk premiums are expected to remain elevated for an extended period, investors are likely to ask, "Where else should I reallocate my capital to"? We would not rule out large parts of Asia.

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Nuclear energy is undergoing a renaissance. While it has long been associated with images of devastation and disaster, it is now increasingly recognised as a crucial part of the global energy transition, offering a reliable solution to rising energy demand and decarbonisation efforts.

In this edition of News & Views we examine the decline of nuclear energy, the catalysts behind its resurgence and how the 4D investment strategy captures exposure to this evolving theme.

Why did nuclear decline?

1. Public fear

At its peak in the late 1990s to early 2000s, nuclear energy accounted for nearly 17% of global electricity generation, compared to around 9% today.

Incidents like Three Mile Island in the US in 1979 and Chernobyl in 1986 increased public anxiety around nuclear energy. While both these incidents resulted in greatly increased safety regulations and oversight, the stigma remained. The 2011 Fukushima disaster in Japan reignited safety concerns, resulting in several countries scaling back or halting their nuclear programs. The US for example increased regulatory scrutiny while Germany decided to exit nuclear power altogether.

2. High costs and complex construction

Higher safety standards and regulatory obligations have made nuclear projects increasingly expensive. The need for more advanced safety systems, robust containment structures and ongoing design and regulatory changes have all increased the cost to build, operate and maintain nuclear power plants.

Project management complexities have also been detrimental. With less nuclear plants being built, the industry experienced a loss of skilled labour and expertise in nuclear construction. This, coupled with the incredible complexity yet lack of standardisation in plant build, has also led to increased inefficiencies and costs.

As a result, many of the more recent nuclear power plant projects have seen significant delays and cost overruns. Examples include:

• Hinkley Point C (UK): Costs to build two EPR reactors have nearly doubled to ~£35b, with completion pushed out from 2025 to potentially 2031.
   
• Flamanville 3 (France): Another EPR reactor project delayed by 12 years with costs quadrupling from €3.3b to €13.2b. Construction commenced in 2007 with its first electricity delivered in late 2024.
   
• Vogtle Plant (USA): Construction of two AP1000 reactors started in 2009 and took seven years longer than planned and was $17bn over budget. the first electricity was delivered in 2023 and 2024 respectively, compared to original commissioning dates in 2016 and 2017.

What's driving nuclear's revival?

1. Reliable, carbon-free baseload power

Nuclear energy offers continuous, emissions-free power -- a valuable complement to intermittent renewables like wind and solar.

While wind and solar energy are expanding, they remain intermittent, generating electricity only when the wind blows or the sun shines. Managing this intermittency requires energy storage to store excess energy during high-output periods and release it during high-demand or low-generation periods. Even though storage technology and deployment has grown rapidly, costs remain too high to implement at scale. At the same time supply pressures are increasing as coal and gas-fired power plants being phased out or growing more slowly. This is why nuclear energy stands out as the only large-scale baseload power source that can reliably bridge the supply gap, combat climate change and avoid the intermittency challenges of other renewables.

Capacity Factors across various energy sources

^{Source: US Energy Information Administration}

It is important to note that even with safety and cost concerns, nuclear continues to be a pivotal component of the electricity generation mix for many countries. For example, in France, where nuclear accounts for approximately 65% of the generation mix, power prices have remained relatively low compared to other European countries. The relatively low cost of nuclear power generation has also contributed to France becoming one of the world's largest net exporters of energy, bringing in €5bn in revenues in 2024.¹ Recognising the value of nuclear power assets, France plans to replace its aging nuclear fleet with six new reactors by 2050, with an option for an additional eight.

Nuclear Production 2023 and Proportion of Generation Mix

^{Source: NEI, IAEA-PRIS 2}

2. Rising demand from electrification and AI

Electricity demand, previously growing modestly (~1% per year in the US), is now accelerating due to manufacturing onshoring, electrification and surging AI data centre usage.

While estimates of demand growth are difficult to quantify, it is estimated that over the next five years the US will see load growth of at least 3%³, with further upside potential as data centre demand increases alongside demand for AI computing. Government reports project US data centre demand leaping from 176TwH in 2023 to 325-580TwH in 2028.⁴ This equates to between 6.7% and 12% of total US electricity consumption - up from 4% currently.⁵

Estimated data centre consumption growth

^{Source: Berkeley Lab - 2024 United States Data Center - Energy Usage Report}

3. Hyperscaler investment

'Hyperscalers' (large technology companies using data centres for cloud computing and data management services) are turning to nuclear energy due to its ability to provide 24/7 secure base load power for data centres while also aligning with their significant carbon reduction goals.

The main drawback of nuclear power for hyperscalers is build time: with planning and construction times of over 10 years along (notwithstanding time and cost blowouts (as set out above). These long lead times conflict with hyperscalers' ambitions to deliver nascent high-profile AI technologies as soon as possible. As an alternative, hyperscalers have focused on leveraging existing nuclear capacity and exploring innovative reactor designs to mitigate cost and construction times. This is demonstrated through examples from key hyperscalers including:

• Microsoft - in September 2024 Microsoft signed a premium priced 20-year PPA with Constellation Energy for the restart of their Crane nuclear plant (formerly Three Mile Island which had closed in 2019 for economic reasons). This plant doesn't physically provide power to a Microsoft data centre but helps serve their power needs in the region and contributes to their emission targets.
   
• Amazon - In March 24 Amazon Web Services (AWS) acquired Talen Energy's 960MW data centre campus for $650m. The deal included a 10-year PPA to take power from Talen's adjacent Susquehanna Nuclear power plant.
  • This type of agreement is known as 'co-location' where a data centre is located directly on a nuclear power plant site. This gives hyperscalers like AWS the opportunity to connect directly to the power source (known as behind the meter), rather than having to potentially wait years to connect to the grid.
  • While co-location provides the ability to connect to carbon free energy at scale, it may be to the detriment of other customers who may have to unfairly bear grid costs. This has become a material issue for hyperscalers, with the AWS deal initially rejected by US regulators, and is now under appeal.
     
• Google - In October 2024 Google signed a deal with Kairos Power to develop 500MW of Small Modular Reactors (SMRs) by 2035 to supply energy to their closely-located data centres.
  • SMRs are significantly more cost effective and quicker to build versus traditional nuclear power plants due to their modular design and easier construction.
  • While SMRs appear to be a neat solution for large hyperscalers with aggressive growth plans, commercialisation at scale is still a while away and the SMR model is not yet economically proven.

4. Policy support

Government policy is increasingly supportive. The US Inflation Reduction Act (IRA) is the most prominent example, with the Act containing several tax credit provisions that serve to boost nuclear's financial viability. Examples include:

1. A Production Tax Credit (PTC) supports existing operating plants, while new capacity can obtain even higher PTCs.
    
2. New capacity can opt for an Investment Tax Credit (ITC), which effectively reduces the upfront cost to build. Even higher ITCs are possible if plants meet a threshold of domestic content or repurpose legacy assets in local energy communities such as retired coal plants.

^{Source: U.S. Department of Energy}

Nuclear's investment case

We anticipate continued growth in nuclear demand, driven by AI-related consumption, supportive policies and decarbonisation mandates. Given the long lead times and high costs of new build, leveraging existing capacity remains the focus.

Translating this to investment decisions

4D supports the nuclear theme as part of the Energy Transition. However, for us to take exposure the underlying assets must meet our infrastructure definition by either being 'regulated' or 'contracted'. One or both of these arrangements serves to secure the investment and operating costs of the plant as well as the return to the shareholder.

At 4D we have nuclear power generating exposures across multiple US utility investments, but most prominently through our investment in Dominion Energy (D). Dominion owns regulated nuclear facilities in Virginia and South Carolina, as well as the Millstone Nuclear Power Station in Connecticut, which the company is exploring contracting opportunities for. We also have exposure through European utilities including Iberdrola [IBE] who have some legacy nuclear exposure in Spain.

We are also closely monitoring nuclear-exposed Independent Power Producers (IPPs) like Constellation Energy, Talen and Vistra. While these stocks appeal in different ways, they currently either lack the cash flow visibility we require in our investments or lack a compelling enough risk-reward proposition amid stretched valuations.

Case Study: Millstone nuclear power plant

Owned by Dominion Energy, the Millstone Nuclear Power Plant (Millstone) is based in Connecticut, US, and has an operating capacity of 2GW across units 2 and 3. The power station began operating in 1975 and has an operating license from the US Nuclear Regulatory Commission (NRC) until July 2037 and November 2045 for Units 2 and 3 respectively. The power station provides around 47% of Connecticut's power needs, more than 90% of the state's carbon-free power and employs around 4,000 people.

Until March 2019, Millstone sold 100% of its capacity into the ISO New England merchant energy market in the northeast of the US. Prior to the Covid-19 recovery, benign growth in power demand from customers (around 1% annual demand growth for the previous decade), combined with cheaper forms of alternative energy generation (such as renewables and natural gas), meant the merchant price of power earned by Millstone was uneconomic compared to the running costs of the facility. The load-weighted average prices achieved in 2016, 2017 and 2018 were $34.62/MWh, $37.45/MWh and $52.27/MWh respectively.

Dominion management lobbied Connecticut legislators and regulators, stressing they would have to decommission Millstone if the state didn't provide some form of financial support as low and volatile market prices meant the facility was loss making. In response, the Connecticut regulator, PURA, signed a fixed price agreement with Dominion for approximately half of Millstone's capacity, for a maturity of 11 years (to 2029). The price within the contract was $49.99/MWh, well above the prevailing market price achieved for the facility. This contract supported the financial viability of Millstone and incentivised Dominion to continue operating the facility.

Fast forwarding to the current environment, the northeast US power market is now in short supply, driven by the aforementioned strong demand growth from data centres, onshoring of manufacturing and wider electrification efforts. This has resulted in much higher market prices with capacity contracts agreed with data centre companies at prices rumoured in excess of $100/MWh. The carbon-free, firm power capacity provided by nuclear facilities like Millstone are particularly sought after by tech companies. Dominion management are now considering options of what to do with the uncontracted capacity of the facility, and potential utilisation of capacity post expiry of the agreement with PURA in 2029.