Existing Citi Research clients can follow <a href="https://www.citivelocity.com/t/eppublic/35HLR" data-link-source="tiny">this link</a> to access the full report, which also includes a sector-by-sector look at potential beneficiaries and a discussion of the implications for data-center stocks.

The growth prospects for data-center capacity still seem underappreciated given the growing power demands posed by GenAI. In a new Super-Sector Analysis, Citi Research estimates data centers&rsquo; market size at 33 Gigawatts (GW) in 2023 and forecasts compound annual growth of 17% to 100 GW in 2030.

Data Center Powerplay: The Chips Have to Go Somewhere

Supply Chain

Macroeconomics

Sustainable Investing

Research

In a new Citi Research report, a team led by Lydia Ling looks at how the return of Chinese tourists – the world’s biggest tourism spenders – is reigniting the global travel market. We draw on our global coverage and an extensive survey by our Innovation Lab to conclude that strong leisure travel demand, beauty premiumization and luxury shopping will continue to reshape the global travel retail market.&nbsp;The following is a freely accessible summary of a published Citi Research report.While Chinese consumers are facing macro uncertainties, experience consumption such as leisure travel remains a top spending category for them. Our Innovation Lab surveyed 2,502 Chinese about their outbound travel plans, spending patterns, preferred destinations, luxury shopping and brand appeal. The results suggest decent travel demand in the next three to six months. And with travel giving Chinese travelers more satisfaction, they’re willing to spend on it and explore more diverse activities. China’s consumption has been evolving, with a shift toward experience and emotional value. Experience consumption abroad – a category that includes activities, lodging and dining -- has been gaining traction at the expense of shopping, though shopping remains a top consideration.Chinese outbound travelers remain a long-term driver of global luxury spending despite a gradual shift in wallet share toward experiential spend, as well as a repatriation of luxury spending to China. We estimate Chinese nationals will return to making a ~35% contribution to global luxury spending in 2024, in line with pre-pandemic levels. Such a return would be a driving force for a sustained recovery of the global travel retail market. We see their onshore/offshore split in luxury spending as ~70/30%, a product of improved variety and pricing of onshore offerings as well as concerns about taxes levied when returning to China.<h2>Fig 1. Chinese luxury spending still below pre-Covid level</h2><img style="border-radius:10px;" src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/66b09e632d3e324f2111dd9a.png" alt="This bar graph provides an overview of Chinese luxury spending from 2015 and 2023(estimated), focusing on its performance relative to pre-COVID levels. See image description below. " width="600" height="300"><div><div><figure class="table"><table style="border:0.5px solid hsl(0, 0%, 60%);"><thead><tr><th style="border-color:hsl(0, 0%, 30%);"><h3>Fig 1. Image Description</h3></th></tr></thead><tbody><tr><td style="border-color:hsl(0, 0%, 30%);"><h4>Key Observations</h4>The chart illustrates luxury spending in EUR bn from 2015 to 2023E (estimated). The data points are approximately as follows: 2015: Approximately 75 EUR bn 2016: Approximately 73 EUR bn 2017: Approximately 82 EUR bn 2018: Approximately 87 EUR bn 2019: Approximately 92 EUR bn 2020: Approximately 62 EUR bn 2021: Approximately 65 EUR bn 2022: Approximately 63 EUR bn 2023E (Estimated): Approximately 80 EUR bn This shows recovery compared to the 2020-2022 period, but still positioned "below pre-Covid level".<h4>Overall Trend</h4>Luxury spending experienced growth from 2015 to 2019. A significant drop occurred in 2020, likely due to the COVID-19 pandemic. Spending remained relatively stable in 2021 and 2022. An estimated increase is projected for 2023, but it remains below pre-pandemic levels.© 2024 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Citi Research, Bain &amp; Company</td></tr></tbody></table></figure><h2>Fig 2. Chinese was the top luxury spender with 33% share in 2019 but this was down to 22-24% in 2023E</h2><img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/66b09f1917dbc039b6efd7c5.png" alt="This bar graph presents a bar chart illustrating the spending habits of Chinese tourists on luxury brands from 2015 to 2023 (estimated). See image description below." width="650" height="300"><figure class="table"><table style="border:0.5px solid hsl(0, 0%, 60%);"><thead><tr><th style="border-color:hsl(0, 0%, 30%);"><h3>Fig 2. Image Description</h3></th></tr></thead><tbody><tr><td style="border-color:hsl(0, 0%, 30%);"><h4>Key Observations</h4>2015: Chinese tourists accounted for 31% of luxury spending. 2016: Spending slightly decreased to 30%. 2017: A slight increase to 32% was observed. 2018: Spending reached 33%. 2019: Chinese tourists maintained their position as top luxury spenders with a 33% share. 2020: Spending decreased to between 27% and 29%. 2021: A further decrease resulted in a 21%-23% spending range. 2022: Spending dropped to between 17% and 19%. 2023 (Estimate): An estimated increase to between 22% and 24% is projected.<h4>Overall Trend</h4>The data indicates that while Chinese tourists were top luxury spenders in 2019, their contribution declined significantly in subsequent years, with an estimated partial recovery in 2023.© 2024 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Citi Research, Bain &amp; Company</td></tr></tbody></table></figure>&nbsp;We selected 66 luxury items popular among Chinese shoppers and compared their prices across France, Japan, Korea, Hong Kong and Hainan to assess how much cheaper they are compared with official prices in mainland China. Given the yen’s depreciation, Japan is now the most attractive destination for the Chinese for luxury goods and Hong Kong the least. But as brands gradually adjust pricing in Japan, the pricing gap could fade. France is more attractive to China tourists for handbags as well as apparel and footwear. In Hainan, prices are more competitive after factoring in promotional activities. While Hainan still needs to enrich its luxury-brand portfolio, its allure for luxury shoppers is rising as more luxury brands enter the province.</div></div>

Our new Super-Sector Analysis, China&rsquo;s Travel Enthusiast Returns, Luxury Brands Set to Benefit, also features stock implications of Chinese tourists&rsquo; return.
Existing Citi Research clients can follow&nbsp;<a href="https://www.citivelocity.com/t/eppublic/3DPun" target="_blank" rel="noopener" data-link-source="tiny">this link</a> to access the full report.

In a new Citi Research report, a team led by Lydia Ling looks at how the return of Chinese tourists – the world’s biggest tourism spenders – is reigniting the global travel market. We draw on our global coverage and an extensive survey by our Innovation Lab to conclude that strong leisure travel demand, beauty premiumization and luxury shopping will continue to reshape the global travel retail market.

Chinese Tourists’ Return Should Benefit Luxury Brands

In our new Super-Sector Analysis, a team led by Pierre Lau looks at what may lie ahead for investment in global solar installations. We&rsquo;re revising our global solar installation forecasts down by 3% to 455 Gigawatts (GW) for 2024 (up 16.7% year over year) and by 4% to 530 GW for 2025 (up 16.5% year over year), from previous forecasts for 470 GW and 550 GW, respectively.
Our revisions are prompted by concerns about bottlenecks for power grid transmission and distribution, and center on the U.S., China and Europe; in the last of these, 14 national transmission system operators (TSOs) plan to lag national solar targets by 89 GW in total, and only five countries have more ambitious targets (representing 66 GW in aggregate) in their TSO plans. China will remain the biggest contributor to global installations, representing ~54% of the total in 2024 and 2025.
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More global grid investments are essential for spurring more renewable installations. We expect China&rsquo;s national grid capex growth to accelerate to at least 7% year over year in 2024 from 5% in 2023. According to one forecast for Europe, around 173 GW of solar could hit gridlock by 2030, suggesting grid congestion will persist or grow worse over the coming decade. In the U.S., interconnection wait times have increased from less than two years for projects built in 2002&ndash;2007 to more than four years for those built since 2018, with more than 2,600 GW in the queue. And transformers, switch gear and substation equipment are all in short supply in the U.S.
We also see more demand for grid reinforcement and energy storage systems. The more renewables are integrated into the system, the more on-grid stability comes under pressure, as negative power prices from excess renewable supply during low-demand periods increasingly become part of the new normal. Energy storage helps balance daily fluctuations in output from solar and wind generation; by one estimate, energy storage capacity in Europe needs to grow 7.6 times to 156 GW by 2030.
Factors at work in our downward revisions to global solar installation forecasts include more prominent grid-consumption issues in China as grid construction lags behind renewable-capacity growth. We expect spending of Rmb230 billion on construction of Ultra High Voltage power transmission lines, as well as more investment in the power distribution network. In Europe, we see structural constraints such as longer permitting processes and underdeveloped networks and interconnectors. The current grid capacity also needs to be reinforced for more renewable consumption; RePowerEU has estimated that around &euro;180 billion in investment in high-voltage grids is needed to achieve the EU&rsquo;s target of 45% renewables share in 2030.
In the U.S., we expect a challenging environment for residential solar in the near term, with headwinds including high interest rates and California&rsquo;s Net Energy Metering (NEM) 3.0 solar billing structure. Interconnection is the key bottleneck for U.S. renewable projects, which regulators have recently sought to address.
Turning to the solar supply chain, its geographical concentration in China intensified in 2023, according to the International Energy Agency. China accounts for more than 90% of cell, wafer and polysilicon manufacturing. For modules, China has around 80% of planned and existing capacity, with the U.S. and India far behind at 5% and Europe accounting for just 1%. The global manufacturing capacity for major solar components increased dramatically by as much as 114% year over year in 2023, with the highest growth seen in the polysilicon and module segment. This steep rise in capacity and excessive supply have led to fierce price competition. And foreign trade restrictions remain a major headwind for China&rsquo;s solar module companies.
&nbsp;

Our new report, Global Renewable Energy: Grid &amp; Electrical Equipment Suppliers Gaining From More Solar Use, also includes forecasts for India and equity-strategy recommendations. It&rsquo;s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/38BqS" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

Inside Our Revised Forecasts for Global Solar Installation

We lower our global solar installation forecasts by 3% for 2024 and by 4% for 2025 amid concerns about grid bottlenecks, with more capex to be spent on adding capacity, reinforcement and energy storage systems.

Global Renewable Energy

A new Super-Sector Analysis by a team led by Martin Wilkie, Co-Head of Industrial Tech &amp; Mobility at Citi Research, explores five tectonic shifts that are transforming industry norms in Germany, and looks at the strategies companies are turning to by way of a response.
For openers, we note striking differences between the U.S. and German stock markets. NVIDIA&rsquo;s market cap, at ~$2.9 trillion, is higher than the entirety of the German stock market at ~$2.6 trillion. The five largest U.S. companies by market cap are, on average, less than 40 years old; in Germany the average age of the top five is more than a century. This speaks volumes, both about the durability of Germany&rsquo;s industrial champions but also about the lack of new corporate goliaths.
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How Germany&rsquo;s industrial champions respond to major shifts could have major effects on investment allocations and M&amp;A. The five trends we see as increasingly disruptive forces for Germany&rsquo;s industrial and auto sectors are:
<ul>
<li>Rising national protectionism in other regions, especially China and increasingly the U.S.;</li>
<li>the long-term impact of the Russia&ndash;Ukraine war, especially on energy and defense markets;</li>
<li>the fallout from the pandemic on business models, notably supply chains;</li>
<li>technology disruption, most recently from AI;</li>
<li>and Europe&rsquo;s Green Deal.</li>
</ul>
And the strategic responses we expect can be summarized as digitization; decarbonization; defense, diversification globally; and deconglomeration.&nbsp;
<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/66e422104d586a720792d75a.jpg" alt="" width="870" height="668">
Digitization: Germany&rsquo;s &ldquo;Industry 4.0&rdquo; strategy is aimed at driving digital manufacturing and consolidating Germany&rsquo;s leading position in many manufacturing and engineering markets. We see the sudden surge in AI investment as adding new urgency to this push; our view is that vertical industry expertise and the installed base of industrial edge devices that control and gather information should form an AI &ldquo;moat&rdquo; for most industrial companies, with a further push into software to protect this moat. An aspect we see as worth watching is the digitalization of the car, with sharp development of cars&rsquo; electronic architecture, computing power and software to drive functionality. Historically, none of these domains has been a strength of the auto industry, leading to significant competitive disadvantages and long delays in new-model launches. This has led Volkswagen, for one, to invest in firms in China and the U.S.; we expect many more such tech-driven investments.
Decarbonization: We see two major industrial drivers of this trend for investment. The first is support for Germany&rsquo;s energy-intense industries, which are currently at a structural global disadvantage due to high relative energy costs. Such cost disadvantages look set to persist, but in order to prevent an industry exit, Germany&rsquo;s government is providing subsidies to these industries in return for reducing emissions during production. The second driver is the need for the German auto industry to future-proof itself against the rise of China battery electric vehicles (BEVs). Elements of this strategy include a need to make huge investments in manufacturing, government policies aimed at speeding consumer adoption of BEVs, and potential EU tariffs on China BEV imports.
Defense: Increased U.S. isolationism and potential policy changes under a Trump presidency have increased expectations for German defense spending and detoxified an end market that some industrial companies had spurned. An increasing number of German businesses have lifted self-imposed bans on supplying the defense industry; meanwhile, Germany now aims to spend 2% of its GDP on defense later this decade, an unprecedented policy change following three decades of underspending.
Diversification globally: U.S. domestic content credits and/or high import tariffs could incentivize local U.S. production to serve the U.S. market. This would mean U.S. domestic assets could be needed to serve U.S. demand, with such assets becoming more appealing as a hedge against isolationism. We also think past dependence on China for growth and earnings will be reappraised. That would mean a balancing act for the auto market, as China has been the key growth driver for the industry for more than 20 years and generates nearly 30% of global auto demand, making this important market hard to give up. As part of the China reappraisal, we expect other markets (such as India) to become targets for growth.
Deconglomeration: This trend isn&rsquo;t new, as industrial conglomerates arguably had their global heyday in the 1980s and 1990s; General Electric was the world&rsquo;s most valuable company in August 2000. Since then, dismantling conglomerates has been the trend, with sector companies simplifying and decentralizing at an increased pace over the last decade. In autos, descending valuations have often meant group valuations substantially below their sum-of-the-parts value. This has driven some management teams to either spin off some group companies or create IPOs for them.
&nbsp;
&nbsp;

Our new report, Industrial Technology &amp; Mobility: How disruptive forces are driving the M&amp;A landscape in Industrials; Focus on Germany, also includes stock conclusions and a discussion of how Germany might respond to changes in EU industrial and competition policies. It&rsquo;s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/3IQiG" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

In a new Super-Sector Analysis, we look at five tectonic shifts remaking industry norms in Germany and the strategies that German companies are employing in response.

Five Tectonic Shifts for German Industrials and Autos

A new Super-Sector Analysis from a Citi Research team led by biotech analyst Yigal Nochomovitz offers an overview of antibody conjugates (ADC), which have become critical weapons in the war against cancer. ADCs combine the potency of chemotherapy with the precise cancer-targeting capabilities of monoclonal antibodies, resulting in a safer and more effective package. Sales of currently FDA-approved ADCs are seen growing to some $18 billion in the U.S. by 2030, up from around $5 billion in 2023.
That&rsquo;s impressive growth, but we think ADCs are still in their infancy. Technological advancements in ADC components are overcoming key limitations, allowing for further innovations, and big pharma companies are investing heavily through deal-making: in 2023 Pfizer acquired Seagen in a $43 billion deal, while Merck and Daiichi struck a $22 billion deal to collaborate.
An overview of ADCs
Introduced in the 1940s, chemotherapy offers a potent way to kill cancerous cells. But it&rsquo;s a very imprecise and toxic way to attack cancer, causing significant damage to noncancerous areas in the body. Monoclonal antibodies emerged in the 1980s as an advance in immunotherapy: the idea of using the body&rsquo;s immune system to attack cancer cells. Monoclonal antibodies are Y-shaped proteins that bind to cell surface markers primarily found on cancer cells and then can activate and guide the immune system straight to the cancer. The problem is that they don&rsquo;t offer direct, intrinsic cancer-killing capabilities.
Enter ADCs, which are monoclonal antibodies with very small amounts of highly potent chemotherapy chemically attached to them via a &ldquo;linker.&rdquo; (This attachment process is called &ldquo;conjugation,&rdquo; hence the name antibody drug conjugate.) Once locked onto a target protein, an ADC enters a cancer cell via a process called internalization. Its linker is then clipped by enzymes, freeing the cytotoxic payload and killing the cancer cell. The stability of the linker is a critical factor in ADC design: An unstable linker can release its payload prematurely, resulting in less drug reaching the tumor and more systemic toxicities.
<img src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/66e8140252652c711a1df32e.jpg" alt="" width="850" height="498">
&nbsp;
Target selection for ADCs is critical to avoid systemic toxicities. Another important consideration of target selection is internalization dynamics &mdash; higher ADC internalization rates mean larger amounts of cytotoxic payload delivered into tumor cells.
Typically, ADCs carry cytotoxic payloads too potent to be safely dosed systemically in their free form. These payloads are in the range of 100 to 1,000 times more potent than those used in small-molecule chemotherapies; a small amount of drug delivered directly to a target cell should be sufficient to induce cytotoxicity. In theory, ADCs can be far safer than chemotherapy and offer a wider &ldquo;therapeutic window&rdquo; in which dosages fall between ineffectiveness and excess toxicity.
ADCs&rsquo; potential
Since 2011, 11 ADCs have been approved and are currently on the market. Many approved and discontinued ADCs faced significant safety challenges, mainly due to limitations in the engineering of proteins, linkers, conjugation and chemo payloads. But all these technologies have improved dramatically in recent years, allowing for more stable ADCs and increased efficacy and safety. These improvements have advanced ADCs&rsquo; promise and accelerated research and investment interest from biotech and pharma. Eight of the 11 available ADCs were approved between 2018 and now, highlighting this acceleration.
A key commercial advantage of ADCs is their design complexity. They include multiple components, each with its own intellectual property, and so may be difficult for generic competitors to replicate. This could give ADCs long, uninterrupted commercial lives in comparison with easier-to-replicate oncology agents. Pfizer cited this dynamic as a key reason for the price it paid to acquire Seagen, and we expect ADCs to be a growing contributor to big pharma topline revenues.
R&amp;D efforts around ADCs remain very robust, with continued innovations. Hundreds of ADCs are now in development for oncology, and we believe continued innovation will be driven by substantial M&amp;A activity around them, as well as by collaborations and partnerships such as that between Merck and Daiichi. Other variations of ADCs are being rapidly commercialized and clinically developed, such as radiopharmaceuticals that use radioactive isotopes instead of cytotoxic payloads; immune-stimulating ADCs; and ADCs for use outside of cancer, such as treatment of autoimmune or infectious diseases.

Our new report, Citi&rsquo;s Global Healthcare Conference Innovation Series &ndash; Edition 1: Antibody Drug Conjugates, also includes a list of our favored ideas for investors seeking exposure to ADCs and an exploration of upcoming catalysts. It&rsquo;s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/3I6U7" target="_blank" rel="noopener" data-link-source="tiny">here</a>.

Citi’s Global Healthcare Conference Innovation Series

Antibody drug conjugates (ADCs) are becoming critical new weapons in the war against cancer. Ahead of December's Global Healthcare Conference, Citi Research kicks off a series of looks at healthcare innovations with an overview of ADCs, which combine the potency of chemotherapy with the precision of monoclonal antibodies in a single therapeutic package.

Antibody Drug Conjugates

Citi’s Research team leverages expertise across all asset classes and regions to provide our clients with independent analysis of financial markets, economies, industries and companies.

A demographic transformation is ushering in a new era for China, with fast-aging baby boomers key to a burgeoning "silver economy." In the first of a series of notes from Citi Research, we examine industries that could benefit from this shift, starting with tourism and private pensions.

China’s Burgeoning Silver Economy: Pension and Lodging

Research through the lens of broader peer analysis that cuts across traditional industry lines.

Super-Sector Analysis

<ul><li>We size up existing energy transition technologies to see if they can match the current energy system’s affordability target of $45 per megawatt-hour. </li><li>A big challenge is that to meet seasonal swings in demand, renewables need to be combined with a backup energy system. </li><li>We see cheap gas as key to delivering an alternative system, a boon for the U.S.</li></ul>

In a new Super-Sector Analysis, a team led by Alastair Syme, Global Head of Energy Research, looks at what an affordable Energy Transition might look like, setting $45 per megawatt-hour (MWh) as a target for affordability and sizing up energy technologies based on this reference point. Our conclusion is that access to cheap gas is critical for delivering an alternative to our existing energy system. Cheap gas looks to be a big asset for the U.S., and we believe it will emerge as a cornerstone of Trump’s 2025 energy policy.<o:p></o:p>The Energy Transition has become politicized, and in many respects that’s extraordinary: Why should the debate about “clean” seemingly divide along ideological lines? But it’s also not hard to see why it’s happened. The job of any industry is to deliver a cheaper and better product to consumers, and the Transition industry has delivered a product that’s “better” as in “low carbon” while failing to offer energy at a more competitive price than our existing global system. The divide is not really one around political ideology, it is one around affordability. <o:p></o:p><h3>“The divide is not really one around political ideology, it is one around affordability.”<o:p></o:p></h3> The closest affordable alternative to our existing energy system looks to be a combination of renewables (solar and wind) and a backup system of gas-fired power to meet seasonal swings in demand, though we emphasize this is only true in certain parts of the world. The target for affordability we’re using is a reference point of $45/MWh; in regions where renewables output is high and gas is cheap (such as Texas and the Middle East), we think a new system’s cost can get down to around $50/MWh.<o:p></o:p>Access to cheap gas is critical to affordability, and because of that we see the bounty of cheap U.S. gas emerging as a cornerstone of Trump’s 2025 energy policy. Technically recoverable gas reserves in the U.S. are estimated at more than 100 years of current production, and we think much of this would come at a price point not too far away from today’s low prices. The ability to use these reserves to provide flexible backup for renewables, or even as a baseload for powering AI data centers, is an opportunity few other countries have.<o:p></o:p><h2>The “strive for 45” and current competitiveness<o:p></o:p></h2>Media coverage of the Energy Transition often creates a picture of rapid change by focusing on selected elements of the Transition, when the discussion really needs to be a much broader one about the entire energy system.<o:p></o:p>We estimate that some 83% of today’s global useful energy (the thing that heats, moves and powers society, after accounting for losses in energy conversion) is provided by oil, gas and coal. Another 5% comes from bioenergy and waste; the remaining 12% comes from hydro, nuclear, geothermal, solar and wind.<o:p></o:p>Our estimate is that global society is spending around $5 trillion a year on wholesale energy costs, though that number varies considerably year by year given swings in global oil, gas and coal prices. That equates to a price of around $45/MWh when measured against final energy consumption, giving us our reference price for further discussion. We argue that the competitiveness of Energy Transition technologies will be defined by their ability to match or beat this reference price.<o:p></o:p><img class="image_resized" style="aspect-ratio:975/719;width:75.17%;" src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/6793fdf7b282f80bc49319e8.png" alt="Chart showing Global Energy Costs (based on Final Consumption) - $/MWh; Chart Source: Energy Institute, IEA and Citi Research estimates" width="975" height="719"><o:p></o:p>So how cost-competitive are the major Transition energy technologies? We consider renewable energy (via solar and wind), green hydrogen, nuclear (fission and fusion), and bioenergy. We don’t consider hydro, as most practical large-scale hydro in the world has already been deployed. We also don’t consider geothermal energy, as from what we’ve seen the costs are still far from being competitive.<o:p></o:p><img class="image_resized" style="aspect-ratio:975/765;width:75.26%;" src="/rcs/v1/media/citigpa/akpublic/storage/retrieveMediaFile/6793fe517822171d9b3eb406.png" alt="Chart showing Full-Cycle Costs of Energy Transition Technologies ($/MWh); Chart source: Citi Research" width="975" height="765"><o:p></o:p>The conclusions of our technology run-through aren’t particularly encouraging. Renewables can be competitive in parts of the world, but generally only on an as-produced basis; they’re incapable of meeting the significant seasonal swings in demand most countries face. This need for seasonal backup capacity adds materially to the system cost, and means that cost-competitiveness will really be defined by where natural gas — the logical backup source for seasonal swings — is cheap.<o:p></o:p><h2>Renewables and reserve<o:p></o:p></h2>We begin with renewables and reserve. In parts of the world, renewables can be a low-cost source of energy. But there’s a huge range of prices, ranging from $16/MWh for utility-scale solar in the Middle East to above $130/MWh for recent purchase deals for offshore wind in New York. This range reflects a variety of factors that make comparisons difficult: technology, load (availability), supply-chain and construction costs, and the cost of capital.<o:p></o:p>Solar has proven the most cost-competitive technology, with gains coming from improvements in output but more fundamentally from deflation, led by China. The Middle East is at the bottom of the solar cost-curve due to ample sunlight, cheap land and a willingness to fully benefit from the supply-chain deflation. A key question for the U.S. and Europe is whether there’s the political will to continue to embrace deflation, or if governments will turn to protectionist tariffs that could slow solar investment. Tariffs on Chinese solar equipment certainly look like a possibility in the U.S.<o:p></o:p>The world is installing 2.5 times the solar capacity it did in 2020, but wind installations are expanding at just 1.2x. Arguably wind is where the renewables industry got inflation wrong, working on the premise that prices would continue to drop when in fact technological progress has stalled, with turbines no longer getting bigger, and the supply-chain has struggled to return a profit. As with solar, a pathway to deflation looks largely dependent on the political will to embrace the Chinese supply chain, where costs are 30% cheaper.<o:p></o:p>Assuming real weighted average cost of capital of 6% to 7%, achieved through 80%+ debt financing, the full-cycle costs of solar and onshore wind in places such as Texas, southern Europe, parts of China and the Middle East can match or undercut our $45/MWh reference price. But that’s on a “when-produced” basis, and the inherent problem of renewables is that they’re intermittent over both the short and long term.<o:p></o:p>Short-term intermittency (such as during the day or week) can be resolved using batteries, other storage methods or smart grids. But these solutions can’t meet the challenge posed by seasonal variation. The solution for long-term storage, which we call “reserve,” has to be something that provides much higher energy density and deliverability, which makes this a debate about gas, coal and nuclear. Gas offers low upfront capital costs and high operational flexibility, making it easily the best candidate of the three.<o:p></o:p>The intermittency issue is different in different places. In Texas, renewables meet about half of winter demand, and it’s possible to imagine a future in which they scale to 100% of that demand. But Texas demand in summer is 1.7 times that seen in winter due to air conditioning.<o:p></o:p>It would be nonsensical to build renewables to meet summer demand, as you’d have overcapacity for half the year. Texas’s strategy has been to meet higher summer demand with gas; it’s formed a $5 billion state government fund to provide loans for new gas-fired power generation, helping builders of these facilities overcome the economic challenge that comes with this capacity only being needed as reserve.<o:p></o:p>In Germany, renewables are already well on the way to meeting a large part of annual power needs. But there the demand peak is in winter, not summer, and a lot of current winter energy needs are met by gas. Decarbonization plans to replace gas heating with electricity (i.e., heat pumps) would push winter power needs to more than twice that seen in the summer.<o:p></o:p>Texas renewables look to fall in the range of $35/MWh to $55/MWh, but there’s the need to meet a 70% hike in demand for around half the year. This reserve capacity will need power prices of at least $50/MWh to make a return. In theory this means the entire system cost is also a little more than $50/MWh.<o:p></o:p>In Germany renewables are in the range of $50/MWh to $70/MWh. Here we need reserve to meet winter demand that’s two to three times what’s seen in the summer. Germany also faces much higher gas prices. All told, the overall system cost is at least $65/MWh.<o:p></o:p><h2>Green hydrogen<o:p></o:p></h2>What about parts of the world such as the Middle East that can offer much cheaper renewable power? Could we overbuild renewables in these locations and then export the energy? This is where governments in Europe, South Korea and Japan see a role for green hydrogen.<o:p></o:p>Hydrogen is a store of energy, but unfortunately, it’s rarely found in its pure form. The key cost of hydrogen supply is the energy required to break its bonds with other molecules: Getting hydrogen from water through electrolysis, for instance, sees 30% of the energy lost in breaking the bonds. Electrolysis, compression and transport push the costs of exporting green hydrogen into Europe or Asia above that of gas. Getting hydrogen prices to a level where they’d be a truly economic alternative essentially needs zero-cost renewables. Even if that were achievable, it would raise the question of whether the system would be better off consuming that energy as electricity rather than converting it to chemical energy for export.<o:p></o:p>Put differently, if countries such as Germany are adamant that their industry needs to run on green hydrogen, it might be better to relocate that industry to the Middle East and allow finished goods to be exported instead.<o:p></o:p><h2>Fission and fusion<o:p></o:p></h2>Nuclear fission as a power source for North American AI data centers was a key narrative in 2024, but we struggle to see cost-competitiveness at scale. Bringing a few mothballed assets back to life has little to do with new-build economics, which is what we think needs to be the center of discussions.<o:p></o:p>The Energy Department estimates the full-cycle cost of the most recent plant built in the U.S., Georgia’s Vogtle facility, at $126/MWh, but it’s closer to $200/MWh if adjusted for 2024 supply-chain and borrowing costs. The inherent expense of large-scale fission power reflects build cost and time, with operational safety the obvious priority, and nuclear isn’t good at scaling utilization up and down, so it doesn’t offer the same seasonal versatility as gas.<o:p></o:p>Some pin hopes around Small Modular Reactors (SMRs), but as yet the price point of this technology is unproven. The Energy Department theorizes prices could be as low as $60/MWh, but the cancellation of a potential project in Utah at the end of 2023 came amid cost analysis suggesting prices of $90/MWh, even after significant federal benefits and tax credits. The Energy Department’s lower cost-analysis appears to come from a view that adoption of SMR technology can shrink construction costs and build times as the supply chain develops. But how do you get to this point given the economic uncertainties?<o:p></o:p>As for nuclear fusion, we estimate that some $7 billion has been raised for private projects, giving rise to the idea that the industry is on the cusp of economic breakthrough. But in our view, fusion is still a science project.<o:p></o:p><h2>Bioenergy<o:p></o:p></h2>Bioenergy refers either to biofuels made from crops or waste products that can be blended into gasoline, diesel and kerosene or to biogas, generally methane used for power generation. The bioenergy industry has a lot of political support in the U.S., Brazil and Europe. We estimate bioenergy now provides 1.1% of the global energy supply, with four-fifths of that through biofuels; roughly speaking, we estimate bioenergy is now an $80 billion a year industry.<o:p></o:p>But anyone who looks at the industry will quickly appreciate the complex web of incentives and mandates that drive demand, with this market structure simultaneously the industry’s basis and its failing. The bioenergy industry seems to rely on more and more layers of incentives, which we think illustrates the cost challenges it faces.<o:p></o:p>The basic problem is that bioenergy’s base foodstocks have a substantial cost disadvantage vs. hydrocarbons: Crops such as corn, soybeans or sugar cane have an energy density that’s at most 55% that of gasoline and diesel. That’s why Brazil and Indonesia lead the world in biofuels penetration: Conditions there are conducive to high crop yields that help offset the problem of low energy density.<o:p></o:p>We estimate that bioenergy, on an unsubsidized basis, provides energy in a range of $60/MWh to $170/MWh. Because of this inflationary expense, policymakers try to reserve bioenergy’s use case for its most valued purpose: Especially for advanced biofuels, that use case is around jet fuel, as this industry has no other practical route to decarbonization and so can get the most value from bioenergy.<o:p></o:p>The problem with an industry based on incentives and mandates is policy risk. Currently, sustainable aviation fuel runs at a hefty 3x premium to traditional jet fuel. Europe’s current answer to this problem is to keep blending mandates very low (2% in 2025) so consumers won’t notice the additional cost. But those mandates are set to rise to 35% in 2035 and 40% in 2040. If costs haven’t come down considerably by then, consumers will notice, and we suspect political support will wane.<o:p></o:p><o:p></o:p>

Our new report, The Strive for 45 and the Role of Cheap Gas in the Energy Transition, also includes a look at opportunities for energy investors. It’s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/3WJ6G" target="_blank">here</a>.

In a new Super-Sector Analysis, a team led by Alastair Syme, Global Head of Energy Research, looks at what an affordable Energy Transition might look like, setting $45 per megawatt-hour (MWh) as a target for affordability and sizing up energy technologies based on this reference point.

The Strive for 45 and the Role of Cheap Gas in the Energy Transition

<ul><li>European policymakers are moving with unprecedented urgency to scale up defense spending amid growing tensions within the transatlantic alliance with the U.S.</li><li>The bulk of additional spending will likely come from national budgets and not from an EU direct financing.</li><li>We see national budgets as less reliable and less supportive commitments than an EU-funded plan.</li></ul>

In a new Citi Research note, a team of economists and analysts led by Head of European Equity Strategy Beata Manthey looks at the unprecedented urgency among European policymakers to scale up defense spending. Our Super-Sector Analysis explores what policymakers’ plans are, how they might be accomplished, and the potential implications of these plans.<h4>Action from von der Leyen, Merz</h4>The urgency has come from growing tensions within the transatlantic alliance with the United States. EU Commission President Ursula von der Leyen has pledged €150 billion in EU loans for the 27 EU member states (EU27) for defense spending, and proposed excluding new defense spending from EU fiscal rules, which would allow the 27 to use their national budgets to spend up to €650 billion without triggering budgetary penalties. The total package of €800 billion implies ~1.1 percentage point (pp) of EU GDP extra spending per year through 2028, de facto targeting spending/GDP at 3%, up from 1.9% in 2024.Friedrich Merz, Germany’s chancellor-elect, has also announced bold and unexpected plans to overhaul the country’s debt brake to exclude defense and security spending above 1% of GDP from the domestic fiscal rule’s calculations. This would mean his government would no longer be constrained in raising arms procurement and investment and could also expand military recruitment, incentivize domestic arms production and finance military operations and partnerships.Scaling up European defense spending isn’t new — NATO estimates EU27 defense spending has already increased 44% to $360 billion last year from $110 billion in 2022, with the largest shift Germany’s increase of $36 billion. As a percentage of GDP, EU27 spending has risen to 1.9% in 2024 from 1.5% in 2022. Still, reaching 3% would be a significant acceleration compared with the recent pace.<h4>National budgets and their drawbacks</h4>Financing is a question. The main takeaway from von der Leyen’s announcement is that the bulk of additional spending will likely come from national budgets and not from EU joint debt. The traditionally “frugal” countries (such as Germany, the Baltics and the Nordics) seem the most determined to use the domestic fiscal lever to finance re-armament. The “escape clause” for defense spending, meanwhile, could also be a significant incentive for spending by higher-deficit countries constrained by EU fiscal limits, such as France, Italy and to some extent Spain. As things stand, EU direct financing looks like more of a complement to national budgets, with a new EU-wide funding tool similar to the 2020 Next Generation EU recovery plan pretty unlikely for now.We see two drawbacks to using national budgets instead of an EU joint tool. The first is that defense spending always reflects the perceived geopolitical risk, so if the pressure fades spending will most likely slow. The second drawback is that adding 1% to 1.5% of GDP to annual budget deficits may not be sustainable for long, even if allowed by EU rules. Overall, we see financial commitments via national budgets as less reliable and less supportive than an EU-funded defense plan.The growth impact of increased defense spending will mostly depend on three factors: the speed of spending, the fiscal multipliers for it, and the potential offset from fiscal consolidation and crowding out.<h4>Questions about spending speed</h4>On speed of spending, direct public spending usually takes time even when the money is freely available. Over the past six decades, German public investment jumped by 1 pp of GDP over a year’s period only once, during German reunification in the early 1990s. However, deployment may prove somewhat faster if public money is mobilized to incentivize public investment, such as through grants or tax breaks.On fiscal multipliers for defense spending, the economic literature suggests they’re generally below unity (meaning for each €1 spent, GDP grows by less than €1) and tend to be small in the first year or two.With regard to potential offsetting factors, we don’t see funding defense efforts with spending cuts and/or tax cuts as high on European policymakers’ agenda, meaning at least in the short term, extra defense spending will be largely unfunded. Given the already challenging fiscal positions of some member states, fiscal consolidation would clearly be a medium-term risk for growth. At the same time, unfunded spending may be associated with higher bond yields and generally tighter financial conditions.Given the above, we tentatively estimate that if the planned additional spending goes ahead, the growth impact on euro-zone growth may be very small in 2025, rising to +0.2 pp in 2026 and to the range of +0.5 pp to +0.7 pp in 2028–2029. On balance, we’d view the risks around these estimates as skewed to the downside.<h4>A profound shift for the UK</h4>We see this European strategic shift as profound for the UK, though the economic ramifications may prove more limited, at least at first. That reflects the tight constraints on the UK’s fiscal position; we expect additional defense spending to contribute a modest +0.1 pp to GDP over the coming years. &nbsp;<figure class="image image_resized image-style-align-center" style="border-radius:10px;display:flex;overflow:hidden;width:95%;"><img style="aspect-ratio:1430/817;" src="/rcs/citigpa/storage/public/Research_re-arming_jets.jpg" width="1430" height="817"></figure>&nbsp;We see the main aim of the current UK administration as the effective replacement of U.S. deterrence on Europe’s eastern flank. What would that entail? According to RAND Corporation, existing U.S. plans call for a fighting force of 300,000 U.S. soldiers, some 2,000 battle tanks, various additional armored vehicles, air defense and infrastructure support. We think the €500 billion to €800 billion package suggested by the euro area should be largely sufficient. For the UK, we think that leaves the current administration free to scale up defense spending to around 3% of GDP, in line with current euro area proposals.&nbsp;How this would be delivered will determine how additional spending feeds through into growth. The UK’s public finances are already stretched, and we think only a portion of additional spending will be debt financed. We expect a further £16 billion a year to be spent on defense by 2028, with £5 billion in additional borrowing. While precise figures are hard to come by in considering the boost to domestic demand, we think it would be effectively neutral, perhaps adding 0.1 pp at most to GDP.Ultimately, potential growth benefits depend on the UK’s capacity to use additional military investment to generate broader productivity improvements. This is by no means implausible, but the benefits would likely require further increases in defense spending and a convincing industrial strategy to see them effectively utilized.<h4>What will the money be spent on?</h4>While the shape of future warfare is changing rapidly, there are certain capabilities we believe European militaries would consider vital in the near term. With the rise of hypersonic missile development, missile defense spending has become a major priority. European nations currently lack the kind of sophisticated, multi-layered air defense required to defend against a peer adversary.The Russia–Ukraine conflict has seen a vast quantity of artillery shells expended, leaving European stockpiles depleted and in urgent need of renewal. Rockets (and their munitions) such as the Multiple Launch Rocket System are also in very high demand, having proved devastatingly effective in Ukraine by targeting key operational assets.Man-portable munitions have been used to great effect by Ukraine’s infantry, most notably neutralizing enemy armor in the conflict’s early phases. Man-portable air defenses, such as Starstreak, have also helped prevent Russia from dominating the air.Conflicts in both Ukraine and the Middle East have demonstrated the effectiveness of inexpensive unmanned aerial vehicles (UAVs), with Ukraine having demonstrated that UAVs are a critical capability on the modern battlefield. Armored vehicles are a vital asset for seizing ground and remain crucial for opposing enemy armored assets, and we assume they now need urgent replacement in Ukraine.<h4>Mid-term considerations</h4>Looking to the mid-term, we note that the U.S. provides a very significant portion of capability enablers within NATO. Such capabilities encompass logistics/sustainment, Intelligence Surveillance and Reconnaissance assets, C4 assets (Command, Control, Communications and Computers), cyber/electronic warfare, space-based assets and AI. These are ultimately capabilities in which Europe will need to invest more money.&nbsp;Beyond procurement, we’re likely to see an increase in personnel and potentially some increase in defense infrastructure spending as well. We’d expect that procurement will be the fastest-growing category, adding further tailwinds to growth beyond the headline budget increases.

Our new report, ReArming Europe: “Whatever It Takes” 2.0?, also addresses equity implications for key sectors and other asset strategies. It’s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/3dnoE" target="_blank">here.</a>

In a new Citi Research note, a team of economists and analysts led by Head of European Equity Strategy Beata Manthey looks at the unprecedented urgency among European policymakers to scale up defense spending.&nbsp;

Re-Arming Europe: “Whatever It Takes” 2.0?

<ul><li>China faces a new era driven by a demographic transformation, with fast-aging baby boomers key to an expanding “silver economy.”</li><li>Tourism and private pensions are among the sectors set to benefit from this shift, and are examined in this first note in our series about the silver economy.</li><li>As the world’s first “super-aged” society, Japan may provide insights into what awaits China and which sectors could benefit.</li></ul>

In a new Super-Sector Analysis from Citi Research, a team led by insurance analyst Michelle Ma looks at China’s significant demographic shift toward an aging population and how it’s reshaping the country’s economic landscape. In the first of a series of notes from Citi Research, we examine industries that could benefit from this shift to a “silver economy,” starting with tourism and private pensions.The demographic wave remaking China has its origins in the country’s 1950–1970 baby booms and the declining birth rate since the implementation of the 1979–2015 “one-child policy.” The percentage of the population aged 65 or older stood at 15.4% in 2023. China became an “aged society” (defined by the United Nations as a country where 14% of the population is 65 or older) in 2021; it’s expected to become a “super-aged society” (defined as a country with an elderly population mix above 21%) within 10 years. &nbsp;The “silver economy” offers untapped opportunities, while phenomena such as longer life expectancies and changing consumer behaviors are creating new and increasing demand underpinned by the unprecedented wealth accumulation of the Baby Boomers. The demographic known as the “young elderly” (typically defined as between 50 and 64) account for approximately 11% of the population. This cohort has amassed significant wealth and exhibit a mindset that’s distinct from China’s traditional elderly; its members are now actively planning for retirement and displaying a greater willingness to spend. Meanwhile, China’s Generation Z and millennials are still struggling with a rising unemployment rate amid a slowdown in economic growth.Among industries poised to benefit, we note the private pension and elderly tourism sectors. Seasoned travelers are seeking enriching experiences and also want financial products tailored for the unique needs of an aging population. In looking at these two sectors, we draw experience from Japan’s similar demographic journey; in upcoming installments of the Silver Economy series, we’ll look at high-end elderly communities promoted by insurers, elderly healthcare management services, and the elderly health supplement industry.<h2>Private pensions</h2>China’s pension system has been evolving since the 1990s and has three pillars. The pay-as-you-go public pension system (the first pillar) is the basic pension insurance system, and faces mounting funding pressure due to the aging population and declining birth rate. The employer-sponsored enterprise pension system (the second pillar) has suffered from a low participation rate, due in part to private companies’ low profitability. Given these challenges, China has been actively and urgently promoting development of the third pillar, the private pension system controlled by individuals. Such efforts have included attractive tax incentives capped at Rmb 12,000. After a two-year pilot of this system, more than 70 million people have set up personal accounts. But building the third pillar remains a work in progress: Only 22% of account holders made contributions in 2023, with the average annual contribution a mere Rmb 2,000, far below the cap.&nbsp;We estimate that annual contributions to the private pension system should rise to Rmb 1.8 trillion over the next decade. As a result, Rmb 533 billion in new funds could be flowing into the insurance industry annually, assuming 30% allocation to insurance products. That’s equivalent to 13% of the life insurance premium in 2024, making life insurers key beneficiaries as the private pension system expands.<h2>Japan’s experiences</h2>Japan’s experience could shed light on what’s ahead for China. Japan also faces significant demographic challenges due to its low fertility rate and aging population, and became the world’s first “super-aged” society in 2006.&nbsp; According to a January Mizuho Bank report, demographics in Japan are expected to boost “silver economy” industries to a market value of ¥114 trillion by 2040, up from ¥96.4 trillion in 2023. As with China, we also see significant opportunities for Japan’s commercial insurers in the long-term-care space, as Japan’s mandatory public long-term system is pressured by an increase in insurance premiums, out-of-pocket expenses amid medical inflation, and concerns about the availability and quality of nursing services. That’s creating an opportunity for private players that can offer tailored solutions such as flexible payout structures, preventative care incentives and digital health integration. Looking ahead, we see three key development strategies that private insurers could adopt: direct involvement in facility management; expansion of long-term care and dementia insurance products; and leveraging synergies with related long-term care services.Unlike Japan, China’s long-term-care system is still emerging. China’s system was only launched in 2016 and covered some 180 million people at the end of 2024. In the private sector, commercial long-term-care insurance accounted for 3.5% of total commercial health insurance premiums in 2022. Many long-term-care products sold are still structured as ordinary savings products and remain sensitive to interest rates. In the long term, we see big opportunities for China insurers in the long-term-care space.<h2>Silver-economy tourism</h2>We also see changing consumer behavior in China’s silver economy. Elderly tourism is gaining traction, with relatively younger and healthier elderly prioritizing leisure and cultural experiences above other activities, a change from patterns seen with older generations.Market research consultancy Frost &amp; Sullivan estimates the silver tourism market will grow to Rmb 2.7 trillion in 2028 from Rmb 1.4 trillion in 2023 at a compound annual growth rate (CAGR) of 13.6%, above the overall silver-economy CAGR of 11.6%. According to Frost &amp; Sullivan, tourists older than 60 represented 20.6% of total domestic tourists in 2023, followed by 17.2% for travelers aged 50 to 59. According to Trip.com, tourism order volume rose 58% year over year for those aged 61 to 65 in the first nine months of 2024.Silver tourists generally prefer high-quality accommodations focusing on safety, hygiene, wellness facilities and convenient locations as well as value for money. This leads us to expect high opportunities for mid-to-upscale hotel chains with strong brand recognition. &nbsp;

Our new report, China’s Burgeoning Silver Economy I: Pension and Lodging, also includes investment recommendations for the private pension and lodging sectors. It’s available in full to existing Citi Research clients <a href="https://www.citivelocity.com/t/eppublic/3sYi5" target="_blank">here</a>

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