Head of Equity Strategy
Summary: Our renewable energy basket is the worst performing basket over the past week down 5.1% with Brookfield Renewable Partners being the worst performing stock in the basket down almost 21% last week. The bad performance is despite the industry players reiterating their outlooks and analysts remain extremely bullish.
The worst performing theme basket the past week is our renewable energy basket down 5.1% as the meltdown across green transformation stocks continue. Our renewable energy basket is down 28% year-to-date. The biggest contributor to last week’s decline was Brookfield Renewable Partners down 20.8% following the company’s Investor Day a week before reiterating its strong outlook and that growth was looking stronger than ever. A return target of 12-15% was reiterated and capital deployment targets were increased.
While analysts have broadly brought the entire message from Brookfield Renewable Partners and increased their price target (consensus price target is now $33.84 or 64% above the last close), investors are getting increasingly worried about the outlook, multiples and return dynamics amid higher bond yields for longer and high commodity prices. At 16x EV/EBITDA, Brookfield Renewable Partners (BEP) is still priced considerably above the global equity market and given the green transformation a growth premium is expected, but if profitability is getting squeezed the question is whether it makes sense with these valuation multiples.
Bloomberg’s default risk model still has BEP at investment grade which is also confirmed in BEP’s corporate bonds with its Jan 2030 bond trading at a yield-to-maturity of 5.79% which is still a small credit spread on the same USD government bond maturity.
If we take a look at the stocks in our renewable energy basket then it is remarkable to see how high consensus price targets are in this segment. It is actually becoming a bit laughable because it almost feel like analysts covering these stocks will not admit that there have been a regime shift in valuation of green transformation assets. The big disconnect between consensus price targets and the current stock prices of renewable energy stocks does not help on investor confidence. Actually, quite the opposite.
In Europe, the poster child for the decline in green transformation stocks has been Orsted which is down another 3% today taking the drawdown from its all-time-high to 74% and down to levels not seen since 2018. Here the downward pressure on the stock price has been amplified by what the market thinks is breakdown in management’s integrity and company’s lack of ability to guide investors in key factor sensitivities to their wind projects.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
