#13 - 2021 was a good year for clean energy, so why not the companies?
Looking into the market rout of 2021
It’s no secret this publication encourages investment into clean energy. I believe it will not only stop climate change but transform our world for the better. And though 2021 was a big year for clean energy, it’s also no secret that companies in the sector didn’t fare well.
So, is clean energy no longer an attractive investment? Let’s explore.
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Back to the main story. First, let’s look at the numbers to illustrate my point.
Here are the top clean energy ETFs (by assets under management) issued in US Dollars. (An Exchange Traded Fund is a ‘basket of shares’ that can track an index, sector or other asset, and can be bought or sold as a share.) These ETFs invest into clean energy companies and offer a broader overview of the market.
The graph illustrates the stark difference. While 2020 was a stellar year for clean energy companies, 2021 turned negative for almost all of them.
This chart of how the top 4 ETFs have performed since 2017 gives us another overview.
One explanation for 2021 is that the sector peaked too early. In 2020, an unprecedented amount of money poured into clean energy ETFs. But there weren’t that many large clean energy companies to invest into, and so the value of the (smaller) companies shot up. As the FT pointed out, global inflows into clean energy ETFs surged to $14.7bn in the six months to March 2021, up from just $1.3bn over the same period the year before. Companies reached valuations that became impossible to justify and when they weren’t able to live up to expectations, their share prices rapidly declined.
Another explanation is that clean energy companies face the same headwinds as ‘growth stocks’ in the technology sector. The prospect of the Federal Reserve ending its bond-buying programme, thus leading to higher interest rates, have spooked most investors. Many worry these companies won’t be able to maintain their high growth rates if interest rates go up sharply. The technology sector has seen similarly brutal declines over 2021.
There are other factors too. President Biden’s Build Back Better Act - which intended to spend billions on domestic clean energy companies - stalled in the Senate. Worse, California is planning to slash incentives and add fees for new home rooftop solar, attracting a barrage of criticism. The bad news keeps coming.
Is the party over for clean energy companies?
Many challenges still remain. Supply chain shocks have raised prices for solar, wind and battery materials along with everything else. That may reduce demand. Moreover, we still don’t know how the Federal Reserve’s attempts to cut inflation will impact the economy. Companies relying on future growth prospects are likely to face a lot of volatility in coming months. Also, the beneficiaries of clean energy growth may be Chinese companies, not American ones.
But there is a positive case to be made too. If you had invested $1000 in any of these ETFs at the beginning of 2020, you would still be ahead compared to the S&P 500 index. Those shares may fall further, of course, but a decline was inevitable given how high shares jumped in 2020.
Investment analysts have been sounding bullish again. Morgan Stanley recently raised its outlook for the sector to ‘attractive’. An accompanying note said: “We see strong growth and valuations that broadly screen attractive”, even if Build Back Better does not eventually get passed. “We see continued strong growth for wind, solar, energy storage, fuel cells, and electrification technologies,” the note added (via Bloomberg). Analysts at BNP Paribas Exane recommended, “playing the renewable theme through the integrated companies, which are better hedged, diversified and more balanced.”
So what is an investor to do?
One option is to wait until the market settles and gains more confidence.
Another option is to focus on the fastest growing segment of the market: electrified transport. EVs are stealing share from petrol and diesel cars at an exponential pace and the sector could see huge growth very quickly. Another is to expect and ignore short term volatility and focus on the longer horizon.
Wall street analysts don’t always get it right but there’s little doubt clean energy is the future and the industry has a lot more to grow. As I wrote a few weeks ago, hold on to your hats.
What do you think? Did I miss anything out? Feel free to share your investing opinions with me, and maybe we can turn this into a public conversation.