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How will politics influence energy transition equities in 2024?

Alex Monk discusses the outlook for energy transition equities and what influence politics will have on the space in 2024.

14/02/2024

Authors

Alex Monk
Portfolio Manager, Global Resource Equities

What has driven recent performance across energy transition equities?

After a very challenging third quarter, energy transition equities staged a strong finish at the end of 2023. Falling bond yields, easing financial conditions, and more positive fundamental news flow in important sectors, helped to boost sentiment across the space.

While the improved end of year performance was certainly welcome and highlighted how extreme both valuations and sentiment within the sector had become, we remain cautious about short-term volatility as risks persist around both inflation and interest rates. Indeed, it was the recent increase in bond yields after their sharp fall that contributed to the rocky start for energy transition equities this year.

What will drive returns across energy transition equities from here?

While interest rates and monetary conditions will likely continue to play a crucial role in 2024, we believe the real driver of better returns in energy transition equities moving forward is an improvement in future earnings growth. Last year, earnings consistency and exceeding expectations heavily influenced performance, despite rising and volatile interest rates.

Our 2024 outlook indicates a much stronger fundamental earnings landscape for energy transition equities compared to 2023. Although we can’t predict when the cyclical earnings headwinds that affected the sector last year will subside, our analysis and discussions with companies and industry participants point to an improvement in earnings throughout 2024 and into 2025.

We would stress that we do still see areas of earnings risk, particularly in hydrogen where activity is slowing, and potentially in parts of renewable equipment if disruption to supply chains continues in the Red Sea. The recovery of earnings in other sub-sectors may take time too, especially if macroeconomic conditions deteriorate from here. But after a year of significant earnings downgrades and a further de-rating of valuations, the outlook for energy transition equities appears more favorable going forward from here.

How will politics influence energy transition equities in 2024?

While 2023 saw some political shifts within the energy transition space, the influence of politics in 2024 could be significantly stronger.

While half of the world’s population is expected to vote this year, the US election in November will be most important for energy transition equities, given the risks to Inflation Reduction Act (IRA) support in a strong Republican win. Although support to energy transition sectors is unlikely to be removed in its entirety, the leading runners for the Republican nomination have talked about repealing aspects of the policy, making the risk of a reduction in support a credible threat. Regardless of the ultimate outcome, we would at least expect those names that currently benefit most from the policy to experience volatility as the election looms.

Outside of the US, major elections in Taiwan, India, Mexico, South Africa, the UK, and Belgium among many others must all be watched.

Authors

Alex Monk
Portfolio Manager, Global Resource Equities

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