We maintain a positive view on the long-term nuclear industry outlook and see it as a source of carbon-free and historically dependable energy, which cannot be ignored. At the same time, we stand by our earlier call and expect a near-term period of continuing weakness and volatility as governments, investment community and general public re-assess their appetite for nuclear power. Investors should be aware of potential challenges and opportunities resulting from this environment and focus on companies with stronger balance sheets, lower cost basis, clear near-term catalysts and exposure to long-term contracts.
With nuclear energy and uranium stocks playing with new lows, we may be setting up for a short-term oversold rally in nuclear energy stocks. Both Nuclear Energy ETF (NLR) and Global X Uranium ETF (URA) are at or close to a multi-year lows. Any improvement in macro headlines or industry specific news flow may result in a sizable rebound for the industry participants, potentially similar to the rebound seen in October 2011 or January 2012.
Yet we believe that the nuclear industry remains in the midst of bear market with considerable uncertainties and further downside potential. As a result any near-term rally likely to prove unsustainable and should be rented, not owned by investors.
In our view, a return of a sustainable nuclear bull market will require the following 4 conditions:
- More Favorable Macro Environment: A sustainable rally in nuclear energy stocks would need to see a more accommodating macro environment and a clear "risk-on" attitude from the investment community. Existing macro risks (global growth concerns, Euroquake worries, fears of policy missteps in the emerging markets) contribute to increased volatility and negatively affect risky assets, including assets with exposure to nuclear energy.
- Stronger Public Policy Support: Over the next several years we see public policy institutions as a major force in shaping direction of the nuclear energy market. We are particularly focused on policymakers in China, Japan, France, and United States as these nations represent nearly half of global operating reactors and more than half of the expected nuclear power growth. With majority of Japanese public favoring nuclear phase-out and potential delays in China's nuclear development, we continue to see further downside potential in the value of nuclear assets.
- Improved Investment Sentiment: Having lost over 50% of aggregate market capitalization over the last 18 months and under threat of further deteriorating demand, the majority of nuclear energy investors are understandably in a fear mode. NLR and URA are trading at a considerable discount to their respective NAV. Even corporates themselves see the clouds. In its recent investor update call Cameco (CCJ) acknowledge a challenging near-term outlook. So did BHP (BHP), Exelon (EXC), USEC (USU) and EnergySolutions (ES).
- Attractive Valuations: Valuations are clearly more attractive than they were for the most part of the last 4 years. But given relatively short-term investment horizon of the investment community, the valuations rightfully reflect challenging fundamentals and uncertain near-term industry outlook. In our view, it will take more than valuations alone to move to a sustainable bull market for nuclear equities.
In the meanwhile we remain cautious and are watching for a change in the conditions above as potential catalysts of a returning nuclear bull market.