The equity market, in general, has been extremely narrow, with performance concentrated in a small number of stocks. In decarbonisation sectors specifically, higher interest rates have weighed on returns, particularly in the US and Europe. Partly as a consequence, sentiment towards clean-tech sectors has been very negative. This has been made worse by policy uncertainty, which intensified after the US election.
Despite the challenges, the current climate presents an attractive opportunity for those willing to invest with a long-term view. “This may be the third major ‘sentiment cycle’ I’ve witnessed in my career. Sentiment towards clean-tech sectors also became extremely negative in 2009/10, 2013/14 and 2014/15. However, history shows that such periods often represent some of the most compelling entry points into decarbonisation companies. While this part of the equity market may be out of favour, most investors still ascribe some probability to a transition to net zero, not least because of the increasing frequency of extreme weather events. And if we are going to address carbon emissions and move along the net-zero pathway, that will be a tailwind for companies enabling decarbonisation. We think investors are likely underappreciating the future growth from decarbonisation companies, making this an attractive, countercyclical entry opportunity,” Cooper said.
It will be crucial to separate ‘noise’ from ‘signal’ – i.e., to distinguish between headline-grabbing statements and policy decisions, and the issues that are material to investments. For example, a swift US withdrawal from the Paris Agreement may harm sentiment but it will not directly affect our company forecasts. Cooper stated, “the Inflation Reduction Act (IRA), the most significant piece of US climate legislation, is more important. But while it will likely face scrutiny, we have already seen a number of Republicans in Congress back the act, so it will be very difficult to dismantle. Even if the IRA is partially repealed, this won’t necessarily affect the bottom line of all decarbonisation companies”. For example, the largest renewables producer in the US has locked in tax credits for the next four years, insulating it from potential fall-out.
There has also been a lot of discussion about the potential impact of tariffs. Our biggest concern is that tariffs could ultimately result in higher long-term interest rates, which would be a headwind given the very large capital investment required to decarbonise the economy. On the other hand, deregulation, such as changes to the planning framework, could accelerate investment in renewable infrastructure, as happened during Trump’s first term.
Turning to the global decarbonisation landscape, the role of China and other emerging markets is growing. Cooper continued, “the Chinese decarbonisation value chain is already subject to high tariffs, and as a consequence no Chinese electric vehicles (EVs) are being sold in the US. But large numbers of EVs are being sold in China itself. We have increasingly focused our China allocations on companies with strong positions in China’s large and fast-growing domestic clean-tech market, and that are also well-placed to export to the rest of the world – to countries like Thailand, Brazil, Vietnam and India. These markets are all moving quickly towards electrification, not primarily because of subsidies but for economic reasons. Many of these emerging markets now have significantly higher EV penetration than the US, which is a direct result of the availability of appealing and very keenly priced Chinese EVs.”
More broadly, climate policy continues to be strongly supported in China, and other nations such as India are rapidly stepping up their energy transitions. In Europe, the picture is more mixed, but countries like the UK are moving to accelerate climate investment.
As technological advancements continue to reshape the decarbonisation space, Cooper points to significant innovations that will drive growth in the sector. “We are seeing battery advancements that allow EV ranges of up to 1,000 kilometres, which should alleviate concerns around range anxiety. Meanwhile, innovations in energy efficiency are enabling data centres to meet the power demands of artificial intelligence (AI), an area where we’ve increased exposure in our portfolio,” stated Cooper.
The recent negativity towards decarbonisation stocks has created opportunities to invest in high-quality companies with structural growth potential that the market is not fully pricing in. “We’ve added more stocks to our portfolio in the last six months than ever before. The portfolio is very attractively priced, and its overall quality has improved.”
“Areas where we are finding particularly interesting companies include those supporting the power needs of AI and hyperscale data centres. These include developers of renewable energy, battery manufacturers, and firms supplying efficient electrical and cooling equipment, and handling the permitting and planning for new data centre projects,” Cooper concluded.