The second collapse of green vs traditional energy

Equities 8 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  Green transformation has gone from the winning equity theme of 2020 to experiencing its second collapse relative to the oil and gas industry in just 18 years. We remain optimistic on the green transformation but the speculative fever had gone too far and the green trade will likely separate into green quality and junk with a lot of volatility in the coming years. The key underlying driver of future returns is still the massive political capital invested in the green transformation which will create extraordinary opportunities in this theme.


Risk came back in many speculative equity pockets yesterday on a higher volume than the average volume from the day before yesterday suggesting investors are still in favour of buying dips in technology stocks. However, there was one outlier yesterday, and that was green transformation stocks which were down 1.1% underscoring that investors are getting second thoughts on equity valuations on green transformation.

The chart below shows the S&P Global Clean Energy Net Total Return Index as a ratio of the MSCI World Energy Sector Net Total Return Index. What we see is that global clean energy companies had strong relative outperformance back in the years 2004-2007 when solar and wind turbine makers were a hot commodity that investors chased. This was the first wave of speculation in green energy. At the time the political compass was distorted, and the negative consequences of climate change was not consensus yet, and then the Great Financial Crisis hit the world economy and the world’s priorities shifted away from clean energy to that of saving the financial industry and subsequently the Euro. Funding dried up for clean energy companies that were mostly not profitable.

Source: Bloomberg

Starting in early 2019 the second wave of clean energy started, the potential classification of a second wave in 2013-2015 was more driven by the oil decline than speculation on green energy itself, with governments changing their policy goals on carbon reductions as consensus among the population had shifted massively in favour of acting on climate change. Over the subsequent two years an increasing number of elections in Europe were decided on climate change issues over immigration and more governments were announcing aggressive carbon emission reduction targets driven by support for electric vehicles. Investors were starting to bet heavily on green transformation companies.

In 2020, the pandemic hit, and a tsunami of retail investors joined the equity market all engaging mostly in technology and ESG (with an emphasis on the E) investments. This combined with huge uptake in green bonds in Europe, rising carbon emission prices, more aggressive targets on carbon emission reductions from China combined with the later Biden victory in the US election fueled a stunning speculative fever.

However, in 2021, fears of rising inflation and interest rates are causing investors to re-evaluate their green transformation exposure. For one thing, higher commodity prices mean that it is more expensive to manufacture wind turbines and other type of green technologies lowering the competitive advantage in the short-term. These companies also heavily depend on access to capital and cheap financing because their investments require a lot of debt financing. A higher interest rate would increase the cost of debt and the discount rate on future cash flows. Sentiment has for now changed so much that global clean companies are down 45% relative to oil and gas majors.

The speculative fever was not seen more rampant than in Plug Power which rose 2,805% from early 2020 to the peak in January 2021. However, results could not deliver on expectations and the company turned out to have certain accounting errors have since fallen 70% from the peak. It is a stark reminder of the volatility in green technology. Our view is that the green transformation is still in its infancy, something like where the computer industry was in 1995 with the launch of Windows 95 and the humble beginning of the Internet, and that the next three decades will see blistering growth rates for this industry. Investors should in our view be exposed to this theme, but investors must diversify across many names as it is too early to predict the big winners.
Source: Saxo Group

Most climate conscience people believe that by buying green transformation companies they make the world better, but in fact it is a zero-sum game, because they are buying the shares of someone that is existing their green exposure. The real game changer has been in rising equity valuation on green companies because it sends a price signal to venture capital and private equity firms that by investing in green technology a highly valued IPO is a potentially a lucrative end destination.

The table below shows our green transformation basket which is our take on how to best get exposure to the green transformation.

NameTechnologyMkt Cap (USD mn.)Sales growth (%)EPS growth (%)Diff to PT (%)5yr return
Panasonic CorpBattery & energy storage27,429-10.6-25.627.749.0
Ganfeng Lithium Co LtdBattery & energy storage21,04418.93.321.7368.5
Albemarle CorpBattery & energy storage18,734-7.9-24.41.7127.4
Alfen Beheer BVBattery & energy storage1,53132.191.625.0NA
CarbiosBioplastic39013.3-45.023.5254.8
Avantium N.V.Bioplastic183-28.63.975.9NA
Good Natured Products Inc (*)Bioplastic19465.5-57.674.5665.5
Symphony Environmental Technologies PLCBioplastic4618.746.4NM221.7
Aker Carbon Capture AS (*)Carbon capture1,007NANA48.5NA
Tesla IncElectric vehicles594,56838.12617.1-0.11,386.4
NIO IncElectric vehicles57,135202.337.966.6NA
XPeng IncElectric vehicles20,005151.8NA102.5NA
Zaptec AS/NorwayElectric vehicles37940.4NA86.4NA
Blink Charging CoElectric vehicles1,303125.8-60.660.155.4
Waste Management IncEnvironmental services59,6040.7-4.80.5155.1
Veolia Environnement SAEnvironmental services17,890-4.3-50.119.253.1
TOMRA Systems ASAEnvironmental services7,0163.836.0-3.1366.7
Cleanaway Waste Management LtdEnvironmental services4,470-1.142.0-5.6305.6
Plug Power IncFuel cells & hydrogen11,85955.0-292.5125.31,218.4
Ballard Power Systems IncFuel cells & hydrogen4,374-14.2-35.164.6997.0
Bloom Energy Corp (*)Fuel cells & hydrogen3,57719.067.858.1NA
NEL ASA (*)Fuel cells & hydrogen2,98912.0NA65.0362.1
ITM Power PLCFuel cells & hydrogen2,755-82.3-37.2100.82,325.6
Ceres Power Holdings PLCFuel cells & hydrogen2,70423.5-33.478.21,016.3
China Yangtze Power Co LtdHydro69,81117.418.022.692.4
Verbund AGHydro30,181-35.427.7-22.0554.6
Brookfield Renewable Partners LPHydro16,8652.5-182.820.9195.8
Meridian Energy LtdHydro9,916-2.4-56.13.0173.8
Enphase Energy IncSolar16,47719.341.361.46,759.9
Xinyi Solar Holdings LtdSolar12,38935.482.954.2335.7
Sunrun IncSolar8,75719.6NA84.4549.6
SolarEdge Technologies IncSolar11,328-9.6-35.535.21,144.7
First Solar IncSolar7,643-2.632.721.448.0
Scatec ASASolar3,97342.2NA34.8477.5
Orsted ASWind59,872-27.2-86.322.8307.5
Vestas Wind Systems A/SWind38,24815.0-24.41.5178.0
Siemens Gamesa Renewable Energy SAWind21,7271.3NA22.081.1
China Longyuan Power Group Corp LtdWind10,4934.118.635.8115.6
Northland Power IncWind7,18624.220.437.7113.0
Boralex IncWind3,0116.517.043.1131.2
Aggregate / median values1,189,06213.33.335.2305.6
Source: Bloomberg and Saxo Group
* Peter Garnry has personal holdings in these companies

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Head of FX Strategy

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Head of FX Strategy

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.