We continue to see signs that renewable energy stocks are well orientated after the sell-off that marked the start of the year. On 9 March, we saw a big rally in one of the principal clean energy ETFs in Europe as well as a strong performance for the stock of the world’s leading Californian electric car manufacturer. In our view, the renewable energy market has potential to rally from here, particularly if the market absorbs well the bonds auctioned by the US Treasury this week.
In recent days, we have seen multiple analyst upgrades of the outlook for companies in the renewable energy sector. The upgrades focus on:
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.
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.
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.
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:
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