Clean Energy History Is Repeating, Sort of, But There's Opportunity to Consider

Seasoned advisors know almost as quickly as markets giveth, they taketh away. Sometimes even more rapidly. To start 2021, such a scenario is at play with renewable energy equities.

Last year, the S&P Global Clean Energy Index returned almost 142%. To start 2021, that benchmark is off 10%. Under any circumstances, that's a bad showing, but more so when considering the S&P 500 is higher by 5.4% year-to-date. One educated guess explaining the 2021 lethargy of previously scintillating clean energy stocks is that group is merely falling victim to good ole “buy the rumor, sell the news” action.

In 2020, the “rumor” was President Biden winning the election. He did and green energy stocks and funds responded through the duration of 2020 and into January as the Democrats won both Georgia Senate elections.

Another reason for the sluggish start to 2021 by green energy names is pressure. As in the Biden Administration and Democrat-controlled House and Senate are under pressure from clean energy and environmental groups – many of which are party boosters – to finally deliver substantial the legislative goods on the renewables front.

The recently passed $1.9 trillion coronavirus stimulus bill is “the sixth pandemic stimulus package in roughly 12 months to put off significant action on clean energy and climate change mitigation, yet another sign of what many advocates now conclude is an opportunity wasted,” reports Bloomberg

History and Regime Change Matter

This isn't a partisan statement, but in discussing renewable energy investments with clients, advisors should bring up the aforementioned “buy the rumor, sell the news” scenario because this industry can leave investors when a Democrat is in the White House. 

From January 2009 – the time President Obama was inaugurated – to Oct. 31, 2006 – just days before President Trump was elected – the S&P Global Clean Energy Index lost 53.% while the S&P 500 rose almost 169%.

Not to abuse the old saying “this time, things could be different”, but really, this time things can be different for clean energy investments due to the increasingly international scope of the asset class.

“The regime change in the United States has brought the climate debate front and center with President Biden making regulatory changes in earnest,” notes VanEck analyst Sunny Bokhari. “Within his first 30 days, President Biden has taken action to rejoin the Paris climate accord, revoke the permit for Keystone XL pipeline and committed to an aggressive carbon reduction policy in the United States. On the other side of the pond, U.K. Prime Minister, Boris Johnson has committed his country to the deepest greenhouse gas cuts in the G-20 with a goal to reduce greenhouse gas emissions 68% by 2030. Chinese President Xi Jinping has also acted, pledging to reach net-zero carbon emissions by 2060.”

For advisors and their clients, the global nature of the renewable energy industry is relevant for multiple reasons. First, many of the exchange traded funds asset allocators use to access this industry are mixes of domestic and foreign equities, defraying the funds' dependence on political happenings in the US.

Second, with many political prognosticators already saying it's likely the Democrats lose the House in the 2022 mid-term elections, the Biden Administration may oblige clean energy supporters and move swiftly to get enact clean energy legislation.

Moving Beyond U.S. Politics

It's easy to get wrapped up in politics when mulling clean energy investments, but there are other, longer-lasting themes that are relevant to clients. Those declining costs, which facilitate broader adoption. 

Currently, solar costs are declining in dramatic fashion. Wind power already has and ammonia, hydrogen and nuclear are in the midst of substantial production cost declines, too.

“The current global policy provides support to aid the transition towards a cleaner future and will require commitment of capital and intensive investment in clean energy infrastructure,” adds VanEck's Bokhari. “The policy momentum coupled with the falling costs of clean technology is setting the stage for growth potential for companies participating across the entire clean energy ecosystem.”

With the support of multiple tailwinds, clean energy stocks may yet prove that the rough start is a buying opportunity for clients that missed the 2020 rally and for those looking for virtuous investments.

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