Supersized gains in share prices on wind, solar and other renewables companies may be the silver lining of 2020 rather than the norm of 2021, according to some analysts.
Despite the economic trials that faced businesses in the wake of the coronavirus pandemic, investors still had the potential to do tremendously well in 2020. Benchmark indices like the Dow Jones and S&P500 gained 7.25% and 18.37% respectively by the year’s close, and Nasdaq shone with an impressive leap of 43.6%.
Yet with people hunkered down in home offices and abandoning the luxuries of global travel, it was environmental stocks – and specifically green energy stocks – that were the geese which laid the proverbial ‘golden eggs.’ Industry stock indices like the Invesco Solar and Invesco WilderHill ETFs soared more than 200%. With investors now sitting on significant gains, many are wondering whether this bull run is set to last or whether valuations have simply become too rich.
There are certainly grounds for thinking that the run will continue. The Trump administration, which steadily supported the use of fossil fuels and in particular coal, is today being replaced by that of incoming President Joe Biden, who has put forward an ambitious climate plan totalling $2 trillion to generate a carbon pollution-free power sector by 2035. Although the details are yet to be released, it is understood that the plan focuses on tax breaks and investment incentives to stimulate growth which will underpin stock valuations.
There is also no doubt that renewable energy stocks’ most recent successes have been based on solid fundamentals; they are already enjoying steady demand growth and there remains significant potential for renewables to increase their share of the energy market, driven by the dramatic improvements in the affordability of renewable energy.
Solar energy, for example, has dropped in price by as much as 90% in the last decade. With oil behemoths like Royal Dutch Shell signalling shifts away from fossil fuels to future-proof their businesses, there is also likelihood of accelerating capital investment into the sector from well-resourced companies, which may impact the competitive positions of existing market leaders.
Yet these aspects seem insufficient in allaying the fears of some institutional investors. Susquehanna recently downgraded Enphase and SolarEdge Technologies Inc., claiming that the external catalysts boosting the sector have already come to fruition and been priced in, according to Bloomberg. A Raymond James analyst similarly cautioned investors in a note to clients to lock in profits while they can, after downgrading five alternative energy and clean technology stocks in recent weeks.
Indeed, with most of the recent surge in prices coming from news that Democrats had won in Senate elections, these analysts may be acting prudently. With only a slim majority in the House, Democratic leaders could find it difficult to overcome a filibuster against major environmental legislation in order to push through Biden’s planned green policy changes.
With Biden’s energy plan facing a steep uphill battle, the recent rally in renewables may turn out to be a bubble – and the returns witnessed in recent months might not be replicated in the months ahead.