Well, as costs and interest grow, the profit prospects of green companies look worse, which investors also pay attention to Photo: Péter Gudella, Scanpix
What happened is another prime example of a high performance strategy inevitably becoming a low performance strategy.
US stock price if valued Standard & Poor’s 500 changes in the securities index, has fallen by almost 10% since the end of July. The price of European shares has also decreased by about 8% during this time.
Such a drop in prices means that a so-called correction is in sight, which is traditionally called a retreat of stock values by at least 10%. Some commentators are already suggesting that this could be the start of a new bear market, which is called a decline in stock prices of at least 20% from previous highs.
It must be said that some stock sectors are already living in the territory of a very deep decline. One such sector is the once very popular renewable energy stocks.
S&P Global Clean EnergThe y-index, which is made up of shares of the world’s 100 largest renewable energy companies, has fallen 30% since mid-summer. The aggregate value of such companies’ shares has, in turn, retreated by nearly 40% since its recent peak in mid-January. In fact, it can be highlighted that the bubble in the share prices of such companies began to burst already in 2021, when S&P Global Clean Energy the index had hit a record high. Namely, since then the value of this index has collapsed by 60%. It remains only to conclude that the bear market is not afraid of these shares. It also shatters the notion that investing in green and conditionally responsible, whatever that is, given the huge range of interpretations, gives investors some profit advantage. As we can see, this area is not safe from big losses for investors. This is probably another prime example of a high performance strategy inevitably becoming a low performance strategy.
From January 2020 to the first half of January 2021 S&P Global Clean Energy the value of the stock index had increased by almost 180%.
Hard times
It is clear that green companies strongly dislike rising interest rates and inflation. Many such companies have invested huge sums in future development. They also calculated that their development would be very rapid. The countless new projects suddenly have to pay much higher interest for the mountains of borrowed money. Also, such companies are quite clearly affected by inflation, where various technologies and the raw materials necessary for their creation have become more expensive. Labor has also become more expensive. At the same time, many such companies around the world have entered into long-term contracts for a fixed price at which they will sell their energy and/or technology. In many cases, this has happened before they have even developed such projects of their own. Well, as costs and interest grow, the industry’s profit prospects look worse, which investors also pay attention to – it can be seen that enough stock speculators claim that the business models of renewable energy groups are very poorly suited to high inflation and high interest rates.
In fact, sustaining rapid growth worked in a zero interest rate environment. In a higher rate environment, this pattern breaks down. This is the case with all growth companies, which usually finance their operations with significant borrowings. If the interest rates rise rapidly, then it bites harder for the large borrowers – traditionally technology companies, whose cash flow is often unstable when building the economy of the future. Renewable energy projects typically require large upfront funding to purchase equipment such as solar panels and wind turbines. Then, over time, such an investment is recouped by selling the electricity. 80% of such projects are financed with debt, at least according to the data of the US government (for this country). More expensive loans affect the expected return of projects. It also makes it less attractive to engage in new such projects.
It must be said that many consumers – buyers of solar panels for the same homes – finance the purchase and installation of such products using loans. Here too, as interest rates grow, at some point there may be a stoppage.
The industry has other problems as well. Challenging operation of supply chains is still a challenge – it is difficult to deliver one thing in sufficient quantity from point A to B. Also, renewable energy producers have complained that they are threatened to be outcompeted by cheaper Chinese products. In other words, high competition pushes prices down at already increased interest and other costs. It is China that also dominates, for example, the market for solar energy raw materials and parts supplies (the same can probably be said for wind turbines and batteries). Comparisons are sometimes already seen that Europe’s energy transition depends on China to the same extent as Europe was dependent on Russia’s energy resources. The risk is that the Chinese will dump this European industry to the point of widespread bankruptcies.
This decline in stock prices is also happening despite tens of billions of dollars in tax credits, subsidies and loans that governments are offering to their green energy companies in the US, Europe and other parts of the world. It can be speculated that investors do not like such a pronounced dependence of this industry on government policy – in the long term, more serious dark sides of dependence appear.
Also, the direction of government policy itself tends to be variable. If something ironclad is promised now, it may not be so in four years, when the political composition changes. Of course, this is not necessary for politicians to not fulfill their promises. Even in Western societies, if the process of greening the economy is mismanaged and a sharper drop in the standard of living is recorded, skepticism may grow in relation to the current policy.
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iShares Global Clean Energy ETF share price.Photo: Investing.com
Is it still a possibility? The long-term outlook for the industry remains
In the mentioned S&P Global Clean Energy in the calculation of the index, the biggest influence is First Solar, Consolidated Edison, Enphase Energy, Vestas Wind Systems, Iberdrola, SolarEdge Technologies, China Yangtze Power, Energies of Portugal, Chubu Electric Power and Orsted for changes in company share prices. It can be considered that the mentioned names are global leaders in the production of renewable energy and their technologies. For example, Denmark Orsted the share price has fallen by almost 50% this year.
Big rises are followed by big falls, and such pullbacks in stock prices naturally look terrible. However, this same can work the other way too! Renewable energy is not going anywhere, and governments have grandiose plans for such energy production. At some point, this area may become attractive to bargain hunters. In essence, a successful active investor may sometimes have to wade against the tide and fight against their instincts, which basically make a person do what the crowd does. Of course, it’s hard to get caught up in a falling object that may turn out to be a knife – you can’t herald this as a low point for renewable energy stocks. However, after a 60% drop from its 2021 record, it should be more likely to be closer.
Shreds the promised illusion
In recent years, it has been very diligently preached that how much a company pays attention to social responsibility and greenness can be perceived as an additional sign of the company’s future earnings and thus also the direction of the share price. Many have argued with foam on their lips that such a portfolio will provide the investor with a better return without any additional risks or even with lower risks. As we can see, such a bubble of responsibility and greenness can easily burst.
Limiting investment options leads to less diversification. This, in turn, should result in greater volatility in the investment portfolio. The so-called ESG (Environmental, Social and Corporate Governance) the implicit promise of investing is that you can do good work and make good money at the same time. However, several studies have found that there is no conclusive evidence that ESG strategies would succeed if only by fulfilling one side of this equation. As such, opinions abound that this whole event is actually misleading advertising.
2023-10-30 07:11:43
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