Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Opportunities expand in clean-energy sector as returns rise
The transition to clean energy supply to meet global climate targets and sanctions against Russian energy exports have boosted returns from renewable energy companies, as they benefit from greater demand and rising fossil-fuel prices.
By 2050, the share of power from renewables globally is expected to rise to 60 per cent from current levels of around 10 per cent, boosted largely by solar, wind, and hydropower. Fossil fuels are expected to shrink from almost 80 per cent of energy supply to about 20 per cent, according to the International Energy Agency’s Net-Zero by 2050 Roadmap.[1]
According to research from JP Morgan, the share of fossil fuels would need to decrease from around 80 per cent today to 20 per cent, while the share of renewables will have to increase from around 12 per cent to more than 60 per cent over the same period. For renewable energy to replace fossil fuels in the energy mix, global investment in clean energy and energy efficiency would need to triple by 2030 to US$2.3 trillion per annum, says JP Morgan.
War boosts demand for clean energy
Russia’s war against Ukraine and sanctions against Russian gas and oil exports have helped to buoy the clean energy sector this year, as it has pushed up oil prices to multi-year highs and gas prices to record highs in Europe.
“Higher fossil fuel prices will assist the transition to renewable energy as projects that were marginal become economically justifiable,” says Nick Langley, founder and senior portfolio manager with ClearBridge Investments.
Reflecting gains for clean energy companies, the S&P Global Clean Energy Index has outperformed the S&P 500 (in US dollar terms); while the clean energy index has delivered a total return of 1.4 per cent over the year to 30 March, that compares well to the S&P 500, which is down 3.1 per cent.
Those gains will help to reverse a poor year last year, when renewable energy stocks lost 23.2 per cent worldwide, as measured by the S&P Global Clean Energy Index in US dollar terms, as values fell due to rising bond yields. The index did much better in 2020, delivering a total return of 142.1 per cent.
According to Jonathan Crone, portfolio manager at Insight Investment, the renewable energy sector has performed well this year as a diversifying asset to global equities.
“This is unsurprising given both linkage to energy prices and an increased focus on the need to move away from dependency on Russian oil and gas. While both social and economic infrastructure have exhibited more volatility than renewables, the drawdown experienced (-7 per cent) was still much lower than global equities (-12.5% per cent),” he says.
Infrastructure performance in 2022 versus global equities
“Renewable energy has grown to become a significant part of the [infrastructure] sector – initially financing projects such as windfarms and solar power, but evolving to encompass projects such as anaerobic digestion, which use bacteria to turn biomass into energy, battery storage, or that seek to monetise energy efficiency gains,” says Crone.
Plato Investment Management has recently launched a Global Net Zero strategy. Out of the 158 sub-industries Plato tracks globally, renewable electricity providers have generated the third-strongest total returns since Russia invaded Ukraine in late February.
“The best-performing companies within this space were not surprisingly all located in Europe where the impact of spiralling gas, coal and oil prices has been most acute,” says David Allen, portfolio manager of the Plato Global Net Zero Hedge Fund.
“This includes Audax Renewable Energy, Solaria Energia, and Neoenm that are all up more than 20 per cent since the invasion commenced. It is worth noting, though, that the best-performing sub-industry over this period was actually coal and consumable fuels, delivering in excess of 10 per cent, so it has been a boon for energy providers of all stripes.
“In the medium term we anticipate that Putin’s actions will ironically speed up the transition to renewables, particularly in Europe as Germany and Europe in general looks to wean itself off Russian gas,” says Allen.
The S&P Global Clean Energy Index provides investors with exposure to around 100 leading clean energy companies globally, including biofuel energy, wind, solar, ethanol, alcohol-fuel production and hydro electricity production. The VanEck Clean Energy ETF tracks the S&P Global Clean Energy Select Index, which measures the performance of around 30 of the largest and most liquid companies with businesses related to global clean energy production and technology and equipment.
In the US, Berkshire Hathaway Energy is the largest investor-owned utility of regulated operating wind and solar power in the US. As of December 31, 2021, approximately 45 per cent of owned generation capacity (operating and under construction) comes from non-carbon resources; this is forecast to grow to approximately 50 per cent by 2030.
“We are increasing non-carbon generation and energy storage, investing in transmission infrastructure and reducing utilization of coal units Existing plans are expected to achieve a 50 per cent reduction in CO2 emissions by 2030 from 2005 levels,” the company said in a recent outlook report.
