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Video: Reasons to ignore near-term challenges for energy transition market

Alex Monk thinks that with earnings at a turning point and attractive valuations, the outlook remains bright for energy transition investing, despite likely short-term volatility.



Alex Monk
Portfolio Manager, Global Resource Equities

How was the first half of 2023 for the global energy transition universe?

The first half of 2023 has been quite challenging for many parts of the global energy transition universe, with many areas within the space delivering volatile and disappointing returns. Other than parts of electrical equipment and clean mobility, almost all sub-sectors have underperformed the broader market year to date.

Three main factors have contributed to this trend: continued inflationary pressures and supply chain disruptions; tightening financial conditions by central banks, and easing demand in certain end-markets such as residential solar and electric vehicle charging. Rapidly falling energy prices have not been helpful too. 

It’s important to note that these are short-term headwinds that won’t challenge the return potential of energy transition equities longer term.

What is the outlook for the sector in second half of 2023 and beyond?

Energy transition markets may continue to experience volatility in the second half of the year.

While certain more consumer-exposed energy transition markets are already seeing easing end-demand, the risk of a broader economic slowdown could lead to further pressures moving forward.

At the same time, potential structural inflation threats could put renewed upward pressure on interest rates and valuations in the space.

But beyond the near-term volatility, we see a much brighter outlook emerging.

As supply chains ease, pent-up orders are unlocked by continued policy support, and consumers and businesses adapt to the post-Covid environment, demand for energy transition technologies is expected to rise. Mid-term earnings expectations are moving upwards, giving confidence that earnings will improve from 2024 onwards.

This expected earnings inflection, along with attractive valuations we have seen since the start of this year, could drive positive performance for energy transition equities.

How are you positioning for the next months?

We continue to take a balanced approach to portfolio construction across the sub-sectors, focusing on investing in the market leaders with attractive fundamental valuations across the different parts of the value chain.

Specifically, we are focusing on two groups of businesses:

The first is businesses under pressure due to cyclical headwinds, but with strong structural earnings growth potential and very attractive valuations. These are names are in the wind equipment space, electric vehicle charging, residential solar, batteries and storage, and the hydrogen space.

Secondly, we like businesses that continue to see strong earnings momentum due to both structural and cyclical support, and where valuations are still reasonable. These are names in the electrical equipment, transmission and distribution, and the solar equipment space.

Finally, while we still expect further volatility, we have started to deploy the cash buffer we have kept on the side over the past 18 months to protect capital into the market.

With valuation resets and the mid-term earnings outlook improving, we see increasingly attractive risk-reward opportunities in the long-term winners across the energy transition value chain.

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Alex Monk
Portfolio Manager, Global Resource Equities