In recent days, we have seen multiple analyst upgrades of the outlook for companies in the renewable energy sector. The upgrades focus on:
- The attractive reset in valuations we have seen since the start of 2021 for the clean energy sector
- Upcoming clean energy legislation that we expect the US Congress to pass
- Long-duration tax credits from the US administration for solar, wind, energy storage and fuel cells as major catalysts
- Support for electric vehicle infrastructure, carbon capture and sequestration along with other innovative technologies
- Corporate and residential consumer interest in clean energy and energy storage continues to rise substantially due to a desire to have greater reliability/resiliency of their power supply given the existing grid reliability issues (e.g. the recent Texas winter storm causing unprecedented outages; California outages due to wildfires and extreme heat; outages in the northeastern US due to severe storms).
In addition, John Kerry, appointed by President Biden as the US Special Presidential Envoy for Climate, gave a speech in Brussels on 10 March stressing the need to encourage cooperation with the US to push climate change (prevention policies).
It is, my opinion, no coincidence that prices for European carbon credits (European Union Allowances or EUAs) broke substantially higher to all-time highs after John Kerry’s speech.
A major change in US climate change policy
John Kerry will potentially play a major role in pushing forward measures to limit carbon emissions. His position is part of a dual role within the White House on climate change. Kerry was, of course, Secretary of State in the Obama administration and one of the central negotiators of the 2015 Paris Climate Change agreement. He is now playing a similar role for President Biden as an international climate envoy conveying the message that the US is acting on climate change.
The US intends to lead by example. Kerry has considerable clout, including a seat at the National Security Council. As a result, climate change is likely to be an integral part of major White House decisions on national security and foreign policy.
In his role Kerry is partnered with Gina McCarthy who has been named the first White House climate advisor. She was head of the US Environmental Protection Agency (EPA) in the Obama administration. In this role, she put in place the EPA regulations to cut CO2 emissions from the biggest economic sectors. She will now be in a position to ensure these regulations are enacted.
There is now a structure in place whereby the US will implement policies to lower emissions and then ask others to do the same.
Market positioning in renewables
According to recent data focused on European stocks from brokers, ESG inflows have remained resilient. In particular, they are more stable than non-ESG equity flows. For us, this hints at the defensive features of renewable assets.
Indeed, specifically in Europe, positioning in renewables has lightened up in the wake of the sell-off and is now back at three-year lows, with a long/short ratio of 2.6:1 (versus a ratio of 2.3:1 for the STOXX Europe 600 index) after reaching 5.3:1 by mid-January. This is potential sign, in my view, of limited downside in the current momentum rotation and room for asymmetrical upside in the event of an equity de-grossing or a normalisation of interest rate volatility.
An additional perspective on valuations
Taking a step back, Exhibit 2 below illustrates, in my view, a few interesting points. The chart shows performance of one of the leading ETFs (exchange traded funds) for clean energy (the iShares Clean Energy) relative to the MSCI All Country World index. In other words, it shows how global renewable stocks have performed relative to global equity markets. The chart displays changes in the yield of 10-year US Treasury bonds on the right hand side.
A few observations:
- The selloff in renewables started before 10-year US bond yields began to rise. By the time bond yields had started to rise, renewables had already underperformed by around 10%.
- The price of the ETF relative to the market valuation of 10-year US Treasury yields is back at the absolute lows seen in March 2020 – that is a move of more than 2 standard deviations.
For more on renewable energy stocks from Ulrik Fugmann, read
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.
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