The official blog of BNP Paribas Asset Management

Edward Lees
2 AUTHORS · Investing
06/04/2021 · 6 min read

Biden’s infrastructure plan – A golden egg from the Easter bunny?

Valuations of clean energy stocks, as represented by the iShares Clean Energy index, (an exchange-traded fund (ETF) that we view as a proxy for the clean energy equity sector), are now up by around 16% from the lows in early March.

It was at that time that we highlighted what we saw as a significant opportunity for our energy transition strategy. We argued that the selloff in February/early March presented investors with an outsized opportunity to add to positions amid the:

  1. Rise in interest rates with nervousness around US Treasury auctions and reflation
  2. Rebalancing of the iShares Clean Energy ETF that would create potential flow-back
  3. A general sell-off in equity momentum/growth sectors as the US yield curve steepened.

However, with the underlying investment universe down by 25% since the highs in January and underperforming the broader equity markets by 26%, we think this is a great time to be adding to the clean energy sector in our strategy.

In light of the developments mentioned below, we believe it now makes sense to increase allocations to clean energy stocks.

Biden's infrastructure plan

Announced by President Joe Biden on 31 March, the American Jobs Plan is, in our view, a significant development.

We expect substantial follow-through in equity markets, which we see as the main asset class benefiting from the plan.

(i) “The American Jobs Plan is a USD 2.4 trillion investment in the country’s infrastructure, designed to improve the quality of infrastructure, create jobs and “out-compete China”. The plan includes a USD 621 billion allocation for transportation infrastructure, USD 580 billion for American manufacturing, and USD 650 billion for other initiatives such as water infrastructure, electric grid upgrades, and high-speed broadband"

Solar and wind: A 10-year extension and phase-down of the investment tax credit (ITC) and production tax credit (PTC) for wind, solar and hydrogen fuel cells. This is a significant extension beyond the current two-year period. It provides a long runway for high growth in wind, solar and hydrogen fuel cells. These tax credits reinforce the already favourable economics for these technologies, and can result in greater customer (and regulator) confidence in long-term decisions that favour rapid growth in clean energy.

Energy storage: As a direct pay-off from the tax credits, the growth rate, and returns, on energy storage deployment will be boosted. This area has the highest growth rate among the clean energy technologies on which we focus.

Carbon capture and sequestration (CCS): To speed up responsible carbon capture deployment and ensure permanent storage, the plan reforms and expands the Section 45Q tax credit, making it easier to use for hard-to-decarbonise industrial applications, direct air capture, and retrofits of existing power plants.

A 'path' to 100% carbon-free electricity: To create a more resilient grid, lower energy bills for middle class Americans, improve air quality and public health outcomes, and create jobs on the path to achieving 100% carbon-free power by 2035.

Significant support for electric vehicle (EV) deployment and EV infrastructure: The plan enables US carmakers to spur on domestic supply chains in supplying raw materials and parts. Factories are to be retooled to compete globally and support American workers in making batteries and EVs.

(ii) To "give consumers point of sale rebates and tax incentives to buy American-made EVs, while ensuring that these vehicles are affordable for all families and manufactured by workers with good jobs"

(iii) To "establish grant and incentive programmes for state and local governments in the US and in the private sector to build a national network across America of 500,000 EV chargers by 2030"

(iv) To "replace 50,000 diesel transit vehicles and electrify at least 20% of the US yellow school bus fleet through a new Clean Buses for Kids Programme at the Environmental Protection Agency, with support from the Department of Energy. These investments will set us on a path to 100% clean buses, while ensuring that the American workforce is trained to operate and maintain this 21st century infrastructure"

(v) To "utilise the vast tools of federal procurement to electrify the federal fleet, including the United States Postal Service."

More to come on Earth Day

We expect the US government to use Earth Day (22 April) to announce further details on its environmental policy.

What of higher interest rates?

While the rise in interest rates in the first quarter of 2021 does somewhat increase the cost of capital in our modelling of companies’ current and future cash flows, what the market seems to be forgetting is that those cash flows are expected to ramp up significantly.

In addition, the costs of renewables are coming down, not least after the announcement of the details in the Biden infrastructure plan.

In our opinion, it is worth noting that companies raising financing in the fixed income markets have been doing so at some of the lowest rates achieved despite the rise in headline interest rates.

Rebalancing mostly behind us

The rebalancing of the iShares Clean Energy ETF sent shockwaves through the passive investment community. It caused it to start positioning for what was expected to be significant flow-back as the constituents in the ETF would be up for consultation and indeed, the number of constituents would rise from 30 to 100.

Much of this positioning and flow-back is now behind us. The market is now looking at being underweight in potential ETF additions that could create a significant reversal of the ETF and indeed in new constituents that would enter the portfolio.

The new constituents were announced on 1 April. We expect a significant reaction in markets after the Easter holiday.

Valuations have been reset

The recent selloff has created an attractive entry point for investors already invested, but waiting to add to positions.

We would argue that the clean energy investment universe is in an incredibly strong position.

  • There have been multiple upgrades from sell-side analysts.
  • Balance sheets are stronger than they were a year ago with companies having raised capital through 2020.
  • Valuations have been reset. On the basis of a price/earnings to growth multiple, they are now at a close to 50% discount to the NASDAQ index.

In conclusion…

We expect the clean energy investment universe to recoup all if not more of the underperformance relative to the broader markets.

…and the risk

In the shorter term, there could be a market 'hangover' related to the implications for higher corporate taxes in the US and onshoring of profits.

Management calls we have attended ahead of earnings reports indicate that first-quarter earnings will be strong for the clean energy universe.

We expect to see some supply chain pressure in semiconductors and battery cells as well as companies reaching capacity levels as a result of strong demand.

That said, the market is well aware of these supply issues and will likely look beyond them. We expect these supply constraints to dissipate over the summer.

Other recent posts from Ulrik Fugmann and Edward Lees that may interest you:

On 18 March 2021: What you need to know about the UN Decade on Ecosystem Restoration

On 12 March 2021, read: Renewable energy stocks look set to rally

On 9 March 2021, read Environmental strategies - An opportunity is knocking!

Full details of the American Jobs Plan are here

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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