A Summer of Competition

It’s been a summer of competition here in the UK (and globally). Firstly, we welcomed back Wimbledon, then had the excitement of the football not quite coming home, followed by one of golf’s majors and now the Olympics. Not to mention the bonus of a British and Irish Lions tour in South Africa, where a game of two halves gave the Lions victory in the first test. By the time this blog is released we will know the result of the second test so I will choose my words carefully by not trying to pre-empt a result. In the midst of these great sporting events there was one other competition that may have caught your eye, the billionaire’s race to space. For those who have not yet seen the result Richard Branson’s Virgin Galactic narrowly beat Jeff Bezos’s Blue Origin by 9 earth days. Having said that, Jeff did go higher than Richard so who was the real winner? On a more serious note, over the last 10 years there has been $199.8bn of equity investment across 1,553 unique companies in the space economy, with $4.5bn being invested in the second quarter of this year¹ . So, for those who aren’t willing to spend $250,000 on a ticket for four minutes (or $62,500 per minute) of weightlessness in space today, you may get a better deal in the years to come. But before you go and purchase your ticket, think about one small matter: the environment

There is no doubt that the innovation and advances in technology within the space sector is evolutionary. Companies such as Jeff Bezos’s Blue Origin and Elon Musk’s SpaceX are visionaries, with a belief that their activities will help save Planet Earth, not destroy it. These commercial space flights are a source of income that enables these businesses to reinvest and expedite the process of reaching that goal. However, the question must be asked, do the benefits outweigh the environmental risks?

For some context, Richard Branson’s Virgin Galactic endeavour mentions that the carbon dioxide (CO₂) emissions from its VSS Unity spaceship, the shuttle used for its commercial space flights, is the same as one transatlantic business class flight. The difference here is that one transatlantic flight is approximately 6,900 miles whereas the VSS Unity’s round trip is nearer the 100- mile mark, resulting in an estimated 12kg per passenger per mile of CO₂ emissions compared to a transatlantic business class flight of 0.2kg per passenger per mile. The more concerning aspect of space tourism is the amount of black carbon, otherwise known as soot, being released in the upper layers of the atmosphere; the stratosphere. VSS Unity used a hybrid propellant comprised of a solid carbon-based fuel, hydroxyl-terminated polybutadiene (HTPB), and a liquid oxidant (nitrous oxide) to launch itself into space. This generates levels of soot which has an atmospheric warming impact over 460 times greater than C0₂ (per unit of mass).

Comparing the Blue Origin launch to the VSS Unity, Jeff Bezos insists that his space plane is greener. The Blue Origin was propelled into space using liquid hydrogen and liquid oxygen which produces no carbon emissions – just water vapour - so yes, it is cleaner. A lot cleaner. However, if we look at the ‘embodied’ carbon - the CO₂ emitted in producing a substance - the production of 1kg of liquid hydrogen generates the equivalent of 9.3kg of CO₂ emissions. There are renewable sources that are also able to produce the required liquid hydrogen, but this comes at a financial cost - 2 to 3 times more expensive than producing it using fossil fuels.

Although the above may sound worrying (and complex), especially with the significant increase in tourist carrying space launches expected over the next decade, these businesses, like us, must have sustainability targets. At Momentum, incorporated into our investment process, we conduct extensive work to understand our managers’ credentials and their capabilities for assessing environmental risks in the companies in which they invest to ensure they are aligned with our own sustainability goals. So, with the first stage of the billionaire’s space race over, perhaps attention needs to turn to the advancement of sustainability within the sector for the benefit of others and for our beautiful planet.

The economic recovery that is underway is likely to see a period of growth we haven’t seen in decades. A consumer (which don’t forget accounts for 70% of US GDP) supported by unprecedented government support, ready to unleash pent up demand with over $2.6 trillion3 of excess savings will likely trigger an extraordinary spending boom. However, whilst the backdrop in the US is positive, it is in other regions too. The UK and Japanese equity markets are two examples where cyclical sectors and stocks form a higher weight in market indexes. These are set to do well in the years ahead, and this has started to be reflected in earnings expectations. Couple this with valuations that are at wide discounts and we feel these regions justify an overweight position. So, whilst we are constructive on equities overall, we maintain an underweight to the US today on valuation grounds, although less underweight than might otherwise be the case on valuations alone given the supportive backdrop (notwithstanding inflation risks) and opportunities for active managers to add value.

¹Space Capital: Space Investment Quarterly Dashboard Q2 2021.