The second collapse of green vs traditional energy

The second collapse of green vs traditional energy by Saxo Group
The green transformation has had troublesome year compared to 2020 down 45% relative to oil and gas majors which have enjoyed a strong rebound in market value due to rapidly rising oil prices since early November last year.

Risk came back in many speculative equity pockets yesterday on a higher volume than the average volume from the day before yesterday suggesting investors are still in favour of buying dips in technology stocks. However, there was one outlier yesterday, and that was green transformation stocks which were down 1.1% underscoring that investors are getting second thoughts on equity valuations on green transformation.

The chart below shows the S&P Global Clean Energy Net Total Return Index as a ratio of the MSCI World Energy Sector Net Total Return Index. What we see is that global clean energy companies had strong relative outperformance back in the years 2004-2007 when solar and wind turbine makers were a hot commodity that investors chased. This was the first wave of speculation in green energy. At the time the political compass was distorted, and the negative consequences of climate change was not consensus yet, and then the Great Financial Crisis hit the world economy and the world’s priorities shifted away from clean energy to that of saving the financial industry and subsequently the Euro. Funding dried up for clean energy companies that were mostly not profitable.

Starting in early 2019 the second wave of clean energy started, the potential classification of a second wave in 2013-2015 was more driven by the oil decline than speculation on green energy itself, with governments changing their policy goals on carbon reductions as consensus among the population had shifted massively in favour of acting on climate change. Over the subsequent two years an increasing number of elections in Europe were decided on climate change issues over immigration and more governments were announcing aggressive carbon emission reduction targets driven by support for electric vehicles. Investors were starting to bet heavily on green transformation companies.

In 2020, the pandemic hit, and a tsunami of retail investors joined the equity market all engaging mostly in technology and ESG (with an emphasis on the E) investments. This combined with huge uptake in green bonds in Europe, rising carbon emission prices, more aggressive targets on carbon emission reductions from China combined with the later Biden victory in the US election fueled a stunning speculative fever.

However, in 2021, fears of rising inflation and interest rates are causing investors to re-evaluate their green transformation exposure. For one thing, higher commodity prices mean that it is more expensive to manufacture wind turbines and other type of green technologies lowering the competitive advantage in the short-term. These companies also heavily depend on access to capital and cheap financing because their investments require a lot of debt financing. A higher interest rate would increase the cost of debt and the discount rate on future cash flows. Sentiment has for now changed so much that global clean companies are down 45% relative to oil and gas majors.

The speculative fever was not seen more rampant than in Plug Power which rose 2,805% from early 2020 to the peak in January 2021. However, results could not deliver on expectations and the company turned out to have certain accounting errors have since fallen 70% from the peak. It is a stark reminder of the volatility in green technology. Our view is that the green transformation is still in its infancy, something like where the computer industry was in 1995 with the launch of Windows 95 and the humble beginning of the Internet, and that the next three decades will see blistering growth rates for this industry. Investors should in our view be exposed to this theme, but investors must diversify across many names as it is too early to predict the big winners.

Most climate conscience people believe that by buying green transformation companies they make the world better, but in fact it is a zero-sum game, because they are buying the shares of someone that is existing their green exposure. The real game changer has been in rising equity valuation on green companies because it sends a price signal to venture capital and private equity firms that by investing in green technology a highly valued IPO is a potentially a lucrative end destination.

The table below shows our green transformation basket which is our take on how to best get exposure to the green transformation.

Name Technology Mkt Cap (USD mn.) Sales growth (%) EPS growth (%) Diff to PT (%) 5yr return
Panasonic Corp Battery & energy storage 27,429 -10.6 -25.6 27.7 49.0
Ganfeng Lithium Co Ltd Battery & energy storage 21,044 18.9 3.3 21.7 368.5
Albemarle Corp Battery & energy storage 18,734 -7.9 -24.4 1.7 127.4
Alfen Beheer BV Battery & energy storage 1,531 32.1 91.6 25.0 NA
Carbios Bioplastic 390 13.3 -45.0 23.5 254.8
Avantium N.V. Bioplastic 183 -28.6 3.9 75.9 NA
Good Natured Products Inc (*) Bioplastic 194 65.5 -57.6 74.5 665.5
Symphony Environmental Technologies PLC Bioplastic 46 18.7 46.4 NM 221.7
Aker Carbon Capture AS (*) Carbon capture 1,007 NA NA 48.5 NA
Tesla Inc Electric vehicles 594,568 38.1 2617.1 -0.1 1,386.4
NIO Inc Electric vehicles 57,135 202.3 37.9 66.6 NA
XPeng Inc Electric vehicles 20,005 151.8 NA 102.5 NA
Zaptec AS/Norway Electric vehicles 379 40.4 NA 86.4 NA
Blink Charging Co Electric vehicles 1,303 125.8 -60.6 60.1 55.4
Waste Management Inc Environmental services 59,604 0.7 -4.8 0.5 155.1
Veolia Environnement SA Environmental services 17,890 -4.3 -50.1 19.2 53.1
TOMRA Systems ASA Environmental services 7,016 3.8 36.0 -3.1 366.7
Cleanaway Waste Management Ltd Environmental services 4,470 -1.1 42.0 -5.6 305.6
Plug Power Inc Fuel cells & hydrogen 11,859 55.0 -292.5 125.3 1,218.4
Ballard Power Systems Inc Fuel cells & hydrogen 4,374 -14.2 -35.1 64.6 997.0
Bloom Energy Corp (*) Fuel cells & hydrogen 3,577 19.0 67.8 58.1 NA
NEL ASA (*) Fuel cells & hydrogen 2,989 12.0 NA 65.0 362.1
ITM Power PLC Fuel cells & hydrogen 2,755 -82.3 -37.2 100.8 2,325.6
Ceres Power Holdings PLC Fuel cells & hydrogen 2,704 23.5 -33.4 78.2 1,016.3
China Yangtze Power Co Ltd Hydro 69,811 17.4 18.0 22.6 92.4
Verbund AG Hydro 30,181 -35.4 27.7 -22.0 554.6
Brookfield Renewable Partners LP Hydro 16,865 2.5 -182.8 20.9 195.8
Meridian Energy Ltd Hydro 9,916 -2.4 -56.1 3.0 173.8
Enphase Energy Inc Solar 16,477 19.3 41.3 61.4 6,759.9
Xinyi Solar Holdings Ltd Solar 12,389 35.4 82.9 54.2 335.7
Sunrun Inc Solar 8,757 19.6 NA 84.4 549.6
SolarEdge Technologies Inc Solar 11,328 -9.6 -35.5 35.2 1,144.7
First Solar Inc Solar 7,643 -2.6 32.7 21.4 48.0
Scatec ASA Solar 3,973 42.2 NA 34.8 477.5
Orsted AS Wind 59,872 -27.2 -86.3 22.8 307.5
Vestas Wind Systems A/S Wind 38,248 15.0 -24.4 1.5 178.0
Siemens Gamesa Renewable Energy SA Wind 21,727 1.3 NA 22.0 81.1
China Longyuan Power Group Corp Ltd Wind 10,493 4.1 18.6 35.8 115.6
Northland Power Inc Wind 7,186 24.2 20.4 37.7 113.0
Boralex Inc Wind 3,011 6.5 17.0 43.1 131.2
Aggregate / median values 1,189,062 13.3 3.3 35.2 305.6

Source: Bloomberg and Saxo Group
* Peter Garnry has personal holdings in these companies

Topics: Equities Green Energy Gas Oil Oil and Gas Crude Oil Technology

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