Q What has driven the volatility of decarbonisation equities in the past year
First, rising interest rates have weighed on the shares of clean-energy utilities and other renewables-focused companies. In the latter case, the market’s concern has been over the cost of capital. However, the energy transition remains eminently affordable at today’s interest rates. And across the climate solutions universe, ‘clean’ technologies such as wind and solar power are still generally much cheaper than ‘dirty’ ones. Second, negative sentiment towards Chinese equities has impacted our universe, as a number of globally leading climate-solutions companies are based in China.
Q What is your outlook for 2024 and beyond?
We think negative sentiment has created opportunities to acquire shares in companies that are contributing to sustainable decarbonisation cheaply. Shares in these businesses have underperformed on concern over capital costs, but we believe a select group of them continue to have positive growth, revenues and earnings outlooks.
The markets that climate-solutions companies are selling into remain healthy. For example, while electric vehicle (EV) demand has disappointed a bit in the US, it continues to accelerate in China (which is c.60% of the global EV market, vs. 15% in the US) and elsewhere. More broadly, supportive demand trends across all of the pathways to a lower-carbon global economy – renewable energy, electrification and resource efficiency – are fully intact.
Q Sentiment towards China has been negative. What’s your view?
While the Western world is worrying about higher-for-longer interest rates, the cost of capital is falling in China as the authorities implement stimulus. That has unleashed strong growth in our sector. For example, solar installations are up 160% year-on-year in China. In the first half of 2023 alone, the country installed new solar-power capacity equivalent to the entire UK electricity grid.
From a policy perspective, Chinese authorities are increasingly seeing clean-tech as a way to reduce reliance on the property sector. Consequently, renewable energy, batteries and EVs are focus areas for support to spur growth and employment. This is beginning to drive a larger export industry in select clean-tech products.
That said, selectivity remains vital. Not all Chinese companies in our sector have strong competitive advantages, and there are areas where policy impetus has led to oversupply. With that caveat, we are seeing interesting opportunities in China in inverters within the solar value chain; and in certain higher-quality batteries and heat-management components within the EV value chain, among other areas.
Q Where else are you finding interesting potential investments?
The biotech sector is a fascinating area to watch, given the contribution it can make to decarbonising food production and the agriculture supply chain. Biotech can also play a role in capturing carbon, for example via enzymatic recycling.
In addition, we are seeing more policy support worldwide for businesses that are enabling energy efficiency, for example via insulation and other construction solutions. Governments are increasingly recognising that the cleanest energy is the energy you don’t use. Finally, looking further ahead, there is a potentially exciting opportunity in green hydrogen. This is a very nascent industry and some of it is still loss-making. We think it is essential to focus on the select group of companies that are generating decent returns on capital. Nevertheless, it looks increasingly likely that green hydrogen will have an important role to play in transitioning the global economy to a lower-carbon model.
Q The market is focused on the potential for a growth slowdown in 2024 and elections in the US and elsewhere. How will this affect the climate-solutions universe?
If growth slows, there would be less upside potential nearer term in more cyclically- exposed companies relative to the more ‘pure-play’ decarbonisation companies – i.e., those that are more directly levered to the structural growth driven by the energy transition, such as the renewables value chain, utilities and EVs. The latter is where we think investors should focus.
As for US politics, it looks extremely difficult to get a wide-scale roll-back of the Inflation Reduction Act (IRA) through Congress, not least because a lot of its benefits in terms of jobs and growth will occur in Republican states. The IRA is a game-changing piece of legislation, and we continue to see it supporting climate-solutions sectors in the US. The headlines, however, could well be alarmist, so there could be buying opportunities.
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