SNAPSHOT2 min read

What are the key energy transition trends so far in 2023?

Alex Monk discusses the key trends in the energy transition space since the start of 2023.

15/05/2023

Authors

Alexander Monk
Portfolio Manager, Global Resource Equities

2022 proved to be a challenging year for financial markets, with most asset classes feeling significant pain. Although certain areas across energy transition equities fared better than many other parts of global equities – as macroeconomic headwinds were offset by structural decarbonisation efforts and an energy crisis that boosted demand for new energy technologies - they were by no means immune to the pressures overall.

2023 has so far started where 2022 left off, with material market volatility caused by an uncertain and complex macroeconomic environment – and many energy transition equities have been in the eye of the storm.

While each sub-sector within the energy transition universe is exposed to long-term structural growth dynamics that will accelerate their earnings for decades to come, there will still be some sensitivity to shorter-term factors.

Indeed, as financial conditions have tightened globally, those companies and sectors more exposed to consumer financing, the economic cycle, and less readily available liquidity, such as residential solar, electrical equipment, and clean mobility, have been notably weak so far in 2023.

In contrast, those companies with stronger underlying cash flow generation, more robust balance sheets, and clear fundamental drivers, including potential policy support, have performed best. This has been most evident in the solar module and battery manufacturing sub-sectors, where demand remains strong, and the incentives provided by the US Inflation Reduction Act are most clear.

We expect volatility across the energy transition universe to remain short-term – particularly in sub-sectors that are either more exposed to cyclical economic forces or that require access to capital to continue their growth.

While the tighter financial conditions will likely have implications for companies across the energy transition space in the short-term, we could still be surprised by the potential resilience of energy transition equities given the structural forces that underline their earnings and cashflow growth. The fundamental drivers behind the energy transition remain as strong as they have ever been.

It could well be that companies historically exposed to cyclical moves in the underlying economy, for example, electrical equipment, clean mobility, and residential solar, see resilient demand for their products and services even as the economy slows, as consumers and businesses globally seek to decarbonise their operations and prepare for further energy market tightness ahead.

The continued realisation of proposed policy support, in the US from the Inflation Reduction Act, and EU in the form of the Green Deal Industrial Plan, should continue to provide both earnings and financing support too.

Finally, and perhaps most importantly, valuations across the entire space still look fundamentally attractive for those with a longer-term view. With headline multiples having now retraced almost their entire post-pandemic gains in both absolute and relative terms, valuations across the energy transition universe are starting to look very compelling for the first time in a while even in the face of continued short-term macroeconomic threats.

Important Information

The contents of this document may not be reproduced or distributed in any manner without prior permission.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.

Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.

This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.

Authors

Alexander Monk
Portfolio Manager, Global Resource Equities

Topics

Follow us

Contact Us

Level 33, Two Pacific Place, 88 Queensway, Hong Kong

(852) 2521 1633

Online enquiry: Please complete the web form below and we will reply as soon as possible.

Contact us

The investments mentioned in this website may not be suitable to all investors. The information contained in this website is provided for reference only and does not constitute any investment advice. Investors are advised to seek independent advice before making any investment decision.

Investment involves risk. Past performance is not indicative of future performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Please refer to the relevant offering document including the risk factors.

This website is intended for Hong Kong residents only. Non-Hong Kong residents are responsible for observing all applicable laws and regulations of their relevant jurisdictions before proceeding to access the information contained herein. Schroder Investment Management (Hong Kong) Limited is regulated by the SFC. The website (excluding Schroder Provident Plan related pages) has not been reviewed by the SFC.

The website is issued by Schroder Investment Management (Hong Kong) Limited.

Important notice: Schroders does not make unsolicited requests through emails, calls, messages, WhatsApp, WeChat, Facebook, Instagram applications. Any contact other than via Schroders’ official channels for personal or financial information is likely to be false and fraudulent. Please stay vigilant and refer to our Fraud Alert Notice for further details. If you have doubts about the person, platforms, websites or institutions that claim to be associated with Schroders, please contact us via (852) 2521 1633 and inform the local police.