The market has clearly been concerned about companies involved in decarbonisation. The Biden administration's Inflation Reduction Act (IRA), which despite its name is a significant climate-action stimulus bill, is at the centre of this. There is a fear that many IRA initiatives might be cut to fund upcoming corporate tax cuts. However, we expect the IRA will be attacked with a scalpel, not an axe. It won’t be scrapped wholesale.
A secondary worry has been the potential for higher tariffs, which could affect the clean-tech sector. But the reality is that almost no clean-tech products are imported into the US from China any more.
Finally, the initial market response reflected concerns about the potential impact on inflation and interest rates in the US. If a Trump administration leads to fiscal expansion, this will put upward pressure on inflation and interest rates. A lot more spending is needed to get to net zero, and that would obviously be easier with a lower cost of capital. From a stock-market perspective, utilities are particularly exposed: as long-term assets, they are more sensitive to changes in long-term interest rates.
Production and investment tax credits for renewables account for more than half of the projected spending under the IRA, so these will probably be a focus to fund tax cuts. The most likely scenario is that the time horizon for these credits will be shortened, perhaps expiring before the end of 2028 or 2029, rather than in 2032. But that will just pull demand forward, rather than eliminating it.
We may also see a further relaxation of planning rules. In the first Trump administration, this was aimed at oil pipelines, but it significantly benefited wind and solar projects. More wind-generating capacity was installed under Trump than under previous administrations.
The most important factor for the US energy sector has nothing to do with who is in the White House: it is demand for power, which has never been higher, particularly because of artificial intelligence. This is giving pricing power to energy producers. So even if the tax advantages for renewable energy are reduced, higher costs will be able to be passed on to the big-tech companies and other corporate buyers.
That is very hard to call. Many Republicans have talked about how they want to get rid of EVs. On the other hand, Elon Musk is likely to be an influential figure on the incoming administration, and there could well be new opportunities for Tesla and other companies in the EV value chain.
Tariffs are a potential concern, but we have already seen high tariffs imposed on clean-tech sectors. No solar panels and only very limited batteries are being exported from China to the US now. In any case, our focus as investors is on Chinese companies that serve the domestic market, not the US. China remains very supportive of decarbonisation, interest rates are low and falling, and we continue to see attractive growth opportunities for Chinese clean-tech companies that are oriented towards domestic consumption.
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