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May 19, 2021
  • What’s behind the alternative energy correction?
  • Rising inflation expectations benefit companies with high pricing power

Our special focus this week: What’s behind the alternative energy correction?

Alternative energy stocks enjoyed a stunning performance in 2020, rising sharply at the back end of the year. But since reaching a peak in early January 2021, the market has sharply corrected. The leading clean energy index has dropped 38%, with solar and wind energy stocks hit particularly hard. This week, we’re digging deeper to understand what’s behind alternative energy’s poor start to 2021.

The primary reasons for the drop are undoubtedly macroeconomic. Investors categorise alternative energy as growth stocks and, thus, their valuations are much more sensitive to financing concerns and the prospect of higher interest rates. Amid rising inflation expectations, clean energy stocks have been caught up in a broader rotation into value.

Supply chain pressures have also hit the sector, particularly in solar. The global shortage of semi-conductors is impacting upon companies’ ability to meet demand, which is otherwise displaying healthy growth. Meanwhile, rapid rises in the price of essential components, including polysilicon and solar glass, is also hurting demand for solar panels.

Despite macroeconomic and sector-specific issues in the short to medium term, this newsletter remains heavily optimistic for the sector. The main drivers for clean energy and the sector’s regulatory fundamentals remain intact.

There is global government support for energy transition, and strong alignment with companies and utilities. China and the US, the two largest markets for clean energy, signed a climate cooperation agreement in April. The Biden administration has refocused the US on climate leadership. China, in particular, has set strong decarbonisation targets, with capacity expected to grow by c. 20% p.a. for the next 30 years. Moreover, in both countries, there is a strong likelihood that capacity targets will be expanded and timelines shortened to meet climate commitments.

Despite the volatility in clean energy stocks, there are many attractive buying opportunities for long-term investors.

China’s industrial production remains strong as domestic demand weakens

China’s industrial production continues to perform strongly, with April figures up 9.8% year-on-year, buoyed by strong exports and the property market. Yet domestic demand appears to be moderating. Retail sales disappointed in April, up 17.7%, well below the consensus of +25% and down from+34.2% in March. Despite concerted efforts to stimulate domestic consumption since the pandemic struck, the data have looked more subdued since the turn of the year.

Policymakers will, however, find some consolation in China’s household savings rate, which reached 32.2% in Q1, above pre-pandemic levels of around 30%. We can expect those savings to eventually fuel consumer demand –but the question for the Chinese government is the timing and the extent of that boost.

Mixed picture for US recovery as inflation concerns rise

After last month’s disappointing job figures, April figures for US retails sales (unchanged) and industrial production (+0.7%) still appear to be less dynamic than expected, both marginally underperforming the consensus. One month does not a trend make – it’s quite possible April’s figures may simply be a blip – but economists will be monitoring closely for further signs of the recovery plateauing.

On the price side, April saw the biggest monthly jump (+0.9%) in CPI figures in almost 40 years. Covid-sensitive components associated with the opening-up of the economy appear to be driving the jump, with car rentals (+16.2), airline fares (+10.2), used vehicles (+10%) and lodging (+7.6%) all recording sharp price rises. The mixed macroeconomic picture gives food for thought ahead of next month’s Federal Reserve meeting, amid vocal concerns in some quarters, notably from Larry Summers, over rising inflation expectations.

Looking across the pond to Europe, there is brighter news to report. The European Commission struck a more upbeat tone in its spring forecast, expecting the EU economy to grow by 4.3% in 2021 and 4.4% in 2022, a markedly improved picture since the winter forecast of 3.8% in both years. The implied expectation of stronger Q2 growth in Europe will provide a welcome boost to the global economic recovery.

  • 21st May: German Manufacturing Purchasing Managers' Index (PMI) is expected to sign further sign of strengthening in Europe’s economic recovery
  • 25th May: After consumer confidence rose sharply above consensus last month, Conference Board(CB) Consumer Confidence figures for May will give a further indication of US consumers’ appetite to support the recovery.

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