CIO Strategy BulletinArticle17 Mar 2024

Renewed Interest in Renewable Energy

CIO Strategy Bulletin

As prices for new renewable power continue to fall, that threat will likely grow for other fossil fuels.

Key takeaways from this week's bulletin:

  • It will get easier being green: Due to its heavy use of leverage, the Renewable Energy sector is especially rate sensitive. It also could have a higher level of intrinsic growth than other equity bond proxies. As central banks around the world normalize rates, financing cost reductions will boost the profitability of many renewable energy companies. We expect as rates normalize and governments improve their policies, the industry can enter a more sustainably profitable phase beginning in the second half of 20241.
  • Solar powers ahead: Solar and wind power are in a phase of exponential growth where the likelihood of disruption is real. Solar installations in 2022 accounted for 56% of all new electricity generation worldwide, despite only accounting for 5% of the installed base.
  • Renewables could threaten fossil fuels in the decade ahead: Asset risk has already become a reality for coal-powered electricity production in the developed world. As prices for new renewable power continue to fall, that threat will likely grow for other fossil fuels.

Alignment Ahead of the Fed

The Federal Open Market Committee (FOMC) meets this coming week (March 20) and while markets are not pricing in cuts until July, we are likely to glean more about its thinking from an update to the Fed’s quarterly “dot plot”. Chair Powell may also provide additional color around progress towards the Fed’s goals following slightly higher inflation and mixed employment indicators so far this year. We believe the Fed will cut rates once disinflation resumes, though easing could be more modest than in previous cutting cycles. Despite a shallower path for the Fed Funds rate, and while always susceptible to short-term volatility, the stock market should continue to grind higher over the next 12-18 months on the back of nearly 15% EPS growth in 2024 and 2025.

Potential Portfolio Implications

Renewable energy investments are more impacted by interest rates and debt levels than market cycles. We believe this sector is poised to grow – and become a potential portfolio opportunity – as interest rates and inflation normalize. Over time, this will present a competitive challenge for fossil fuel energy production. Policy support from governments, scalability and unsubsidized price advantages are all firmly in the renewables’ corner. For the sector to mount a sustainable recovery in markets, however, evidence of profitability improvements across the solar, wind, and battery landscape will also be necessary.

1 Source: Bloomberg New Energy Finance as of March 14, 2024 

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