Perspective

Is the Russia-Ukraine situation fast-tracking energy transition?


As one of the world’s major oil and natural gas providers, Russia’s tensions with Ukraine not only disrupted energy supplies, but also triggered shockwaves in commodity markets. From a macroeconomic perspective, we expect high energy prices to persist, which could elevate this year’s global inflation from 3.8% in our November 2021 forecast to 4.7%.

Despite the current fossil fuel issue, energy transition is already an inevitable trend given the increasing challenges of climate change and energy supply shortages. Global leaders at the COP26 Climate Summit have pledged to step up their efforts in tackling climate change with environmental policies that could achieve a green, low-carbon future. The Russia-Ukraine conflict has brought the fragility of the global fossil fuel supply to the forefront, and further highlights the importance of transitioning to the use of economically viable, reliable, and clean renewable energy.

This energy transition will not happen overnight. We think there remains significant investment opportunities, spanning different markets and industries. As such, we believe energy transition will continue to be a long-term investment theme.

Tech innovation and policy to drive further development

Energy transition is closely related to “environment and sustainability", and we have been optimistic about this theme since early this year. With various markets increasing their expenditure on green infrastructure, this could benefit companies involved in the energy transition story. Valuation of this sector has also come down to a reasonable level.

The production cost of renewable energy is expected to decline further as technological advancements in battery storage and electricity grids continues. This not only creates a favourable environment for accelerating energy transition, but also presents long-term opportunities for investors.

Many emerging markets have just begun their emission reduction process. Against this backdrop, more investments in areas such as renewable energy infrastructure to facilitate the transition are needed. In addition, the European Union is poised to continue its tightening of carbon allowances. As such, investors can pay attention to companies driven by the respective change in supply and demand.

China’s commitment to wind and solar power continues

Elsewhere, China is also a powerhouse in driving the energy transition story. As one of the fastest-growing countries in renewable energy production, China has announced a series of ambitious targets, such as reaching peak carbon emissions by 2030 and achieving carbon neutrality by 2060.

Following the recent National People’s Congress and the National Committee of the Chinese People’s Political Consultative Conference, the Chinese government has proposed measures for the construction of large-scale wind and solar power facilities and enhancements of power grids for renewable energy – all of which aims to drive green and low-carbon developments.

Whilst China is already a major producer of wind and solar energy, with companies taking leadership positions in their areas, we believe there remains potential investment opportunities. In order to achieve its low-carbon economy target as soon as possible, it is expected that China’s focus on sustainability will only intensify. That increases the likelihood for the country to devote more support to the renewable energy sector on the policy front.

Mitigating risk through a multi-asset approach

Investors should be mindful that risks are still in play, including geopolitical tensions and the possibility of stagflation, all of which points to a potential low growth, high inflation environment.

Given the rising cost of raw materials needed for building energy production facilities, coupled with supply chain issues, companies involved in the energy transition story may experience pressure on their bottom line. However, we believe renewable energy remains an attractive, long-term growth theme. Climate change is an imminent challenge, and renewable energy will play a key role in the future energy mix that could address this issue.

Under a volatile and complex investment environment, it becomes even more important for investors to agilely adjust their allocations to enhance the overall defensiveness of their portfolios. Multi-asset investment seems to be a viable solution to meet this purpose. Investors taking a bottom-up securities selection approach are likely able to uncover companies that could benefit from structural changes through a robust, intellectual and disciplined framework. Combined with top-down multi-asset tactical opportunities, it shall provide investors with defensive attributes as they capture long-term capital growth.

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