Green Equities Under Trump
Harry Thomas, Co-portfolio Manager of TT International’s environmental solutions strategy, argues that opportunities abound in the US and beyond.
Many investors appear to agree that the environmental equity trade is dead with Donald Trump in the White House, but what if they’re wrong? In this piece we offer four reasons why we believe they are.
Dismantling the IRA unlikely to be as bad as feared
The new US administration has wasted little time in taking aim at former president Joe Biden’s flagship climate change initiative, the Inflation Reduction Act (IRA).
However, the benefits from this act were always a relatively small part – typically 10-20% – of the value of many energy transition-focused US businesses. Moreover, most prudent investors had already applied haircuts to the present value of these incentives, recognising the risks that future administrations might try to curtail them.
Despite this, exposed stocks are down 50-70% from their peaks, more than discounting the impact of the US policy volte face. What’s more, we believe that a selective pruning of the IRA rather than a full-scale repeal of the act is most likely.
The parts related to electric vehicles and offshore wind will probably be scrapped. But many of the IRA tax credits are designed to incentivise domestic manufacturing in areas such as solar power or battery storage, where the only viable alternative is to import these components from Chinese companies. Clearly such an outcome would run counter to the aims of the powerful nationalist element of the US conservative movement.
For this reason, we believe that some aspects of the IRA are likely to be preserved and indeed protection for domestic industries in the US is likely to be enhanced through tariffs and targeted measures, such as those against companies with exposure to Xinjian.
Looking beyond the IRA
Secondly, irrespective of what happens to IRA subsidies, we believe that many environmental technologies will continue to be adopted globally based on a simple economic truism that they are fast becoming the cheapest way of producing and storing energy.
Solar and battery prices continue to fall precipitously, making it highly likely that the world will move to a solar-grid-plus-battery-storage solution in the long run. Even with Trump in the White House, the US will likely install 30-40 gigawatts of utility-scale solar capacity per year and the technology will account for the overwhelming majority of incremental global power generation because it is the lowest cost source.
Meanwhile, a nuclear renaissance looks increasingly likely as the ‘magnificent seven’ tech firms look to secure reliable, zero-carbon power for their energy-hungry AI data centres. We note that there has been a flurry of deals between nuclear power providers and the likes of Amazon, Alphabet and Microsoft in recent months.
Outside the US, the adoption of environmental technologies appears to continue unabated. Last year, electric vehicles hit 50% of the new sales mix in China, and this year they look set to become the majority, while grid-scale battery storage continues to grow at an extremely rapid pace.
A broad, cheap universe
Thirdly, even if we were to hypothetically accept the premise that President Trump will have such a disastrous impact on the energy transition that 50-70% sell-offs in exposed stocks are justified, environmental investing is about so much more than the energy transition in the US. Other critical global themes include recycling, water, forestry and agriculture, responsible consumption and energy efficiency.
Regardless of whom is in the White House, the world still needs to solve problems such as scarcer water resources, a growing population that must be fed in more efficient ways, and how to efficiently recycle the vast amounts of plastic that are produced every year.
Despite having exposure to these structural growth opportunities, companies in large swathes of our own investment universe outside the US are very cheap simply because they are listed in Europe and emerging markets, are mid-cap names, or aren’t tech-related. Against this backdrop, we continue to find investment opportunities with substantial upside.
Among the largest ten positions in our strategy are a German seed-technology company, a European buildings insulation manufacturer and a Dutch listed ingredients company specialising in food preservatives and algae-based Omega-3s. Each of these is innovating to solve pressing climate and biodiversity challenges, which will likely only increase in the coming years.
Amongst the frenzied reaction to the current US administration’s policy choices, investors risk wholesale abandoning themes that should remain areas of significant structural growth.
Private markets awakening to the new reality
Finally, it is instructive that we have had two portfolio holdings bid for in the last few months, and we believe that more of our investee companies could be subject to bids over the next 12 months. These bids have come in areas as diverse as Indian renewables and Benelux recycling.
Having management teams and private equity firms signal that public markets are misguided highlights that valuations are extremely compelling within the environmental universe.
Indeed, our most pressing portfolio construction challenge is not the struggle to find a sufficient array of interesting investment opportunities, but to adjudicate how to allocate capital between the many attractive claims on it.
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