How's 2021 shaping up in the Energy Transition space?
How's 2021 shaping up in the Energy Transition space?
2020 was a breakout year for energy transition equities, with fundamental earnings growth very strong and valuations re-rating to reflect the long-term more visible opportunity ahead.
Towards the end of the year, valuations had reached all-time highs, and in certain sub-sectors we felt some valuations had become slightly extended in the short term despite the positive long-term opportunity. As such, we rotated some of the strategy into slightly more defensive sectors.
And indeed at the start of 2021, we started to see some weakness and volatility creep in across the space, particularly in areas like solar, hydrogen, and renewable generation, where valuations we felt, had started to run slightly too hot in the short term.
We’ve used this weakness and the more attractive valuations as an opportunity to layer back into names that we fundamentally liked, but where valuations had started to look a little bit challenging.
The long-term visibility behind the energy transition has arguably never been stronger, both despite and because of COVID-19.
Renewables are currently the cheapest form of power generation globally across three quarters of the world and are only getting cheaper.
Policy support has never been more aligned and never been stronger. For the first time ever, we've entered a calendar year whereby US, Europe, and China all have net zero carbon goals and together they account for 75% of all emissions globally.
Consumer demand for clean technologies is really starting to pick up. More and more consumers want to drive electric vehicles, have residential solar on their roofs and use clean energy technologies.
Which ET sub-sectors offer the most compelling investment opportunity?
We look at the energy transition universe through five key sub-sectors and themes. These are clean energy generation, transmission and distribution, energy storage, energy efficiency, and clean mobility.
We're starting to see exciting growth across all these areas. Particularly interesting at the moment is the transmission and distribution sector. Recent events in Texas, where record low temperatures caused loss of coal, natural gas and nuclear power production, resulting in energy shortfalls and blackouts, highlights why investment in the grid clearly needs to pick up. Companies which are providing electric vehicle charging infrastructure, critical grid components and grid software are interesting areas.
Given the recent weakness in solar, we've started to see more attractive risk reward opportunities.
Clean mobility is also an exciting sector. Electric vehicle penetration rates have starting to pick up, particularly in Europe, where towards the end of last year, were starting to reach double digit penetration rates. New and more attractive electric vehicle models are starting to come to market that is helping to drive consumer demand.
We've been identifying companies that have that clean mobility exposure and are driving the shift in our mobility system and pushing electric vehicle usage.
We've also been looking at names which we believe are fundamental to building out the grid, whether it be cables to offshore wind farms or smart distribution software for the grid.
Solar, both at the residential and utility scale, is going to be hugely important to driving the energy transition going forward. After the recent weakness, we’ve been allocating to solar names.
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