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Biden’s infrastructure plan – A golden egg from the Easter bunny?




Valuations of clean energy equities, as represented by the iShares Clean Energy Index, (an Exchange Traded Fund (ETF) that we view as a proxy for the clean energy equity sector), are now up around 16% from the lows they reached in early March.

It was at that time that we highlighted what we saw as a significant opportunity for our energy transition strategy. We argued that the selloff in February/early March presented investors with an outsized opportunity to add to positions amidst the:

  1. Rise in interest rates with nervousness around US Treasury auctions and reflation;
  2. Rebalancing of the iShares Clean Energy ETF that would create potential flow back;
  3. A general sell off in equity momentum / growth sectors as the US yield curve steepened.

However, with the underlying investment universe down 25% since the highs in January and underperforming the broader equity markets by 26%, we think this is a great time to be adding to the clean energy sector in our strategy.

Exhibit 1 - Performance of Clean Energy stocks relative to MSCI ACWI and NASDAQ

Here is a piece of news that we think means it now makes sense to increase allocations to clean energy stocks:

Biden’s infrastructure plan

Announced by President Biden in Pittsburg, Pennsylvania on 31 March. This infrastructure package, called the American Jobs Plan, is, in our view, a very significant development. We expect substantial follow through in equity markets, which we see as the main asset class benefiting from the measures in this plan.

The American Jobs Plan is a USD 2.4 trillion investment in the country’s infrastructure, designed to improve the quality of infrastructure, create jobs and “out-compete China”. The plan includes a USD 621 billion allocation for transportation infrastructure, USD 580 billion for American manufacturing, and USD 650 billion for other initiatives such as water infrastructure, electric grid upgrades, and high-speed broadband.”

  1. Solar and Wind: a 10-year extension and phase down of investment tax credit (ITC) and production tax credit (PTC) for wind, solar and hydrogen fuel cells. This is a significant extension beyond the current 2 year period. It helps by providing a long runway for high growth in wind, solar and hydrogen fuel cells – these tax credits reinforce the already favourable economics for these technologies, and can result in greater customer (and regulator) confidence in long-term decisions that favour rapid growth in clean energy.
  2. Energy Storage: a direct pay of tax credits: big boost to the growth rate, and returns, on energy storage deployment – and this is an asset class with the highest growth rate among the clean energy technologies on which we focus.
  3. Carbon Capture and Sequestration (CCS): As mentioned in Biden’s plan “to accelerate responsible carbon capture deployment and ensure permanent storage, President Biden’s plan reforms and expands the bipartisan Section 45Q tax credit, making it direct pay and easier to use for hard-to-decarbonise industrial applications, direct air capture, and retrofits of existing power plants”
  4. A “path” to 100% carbon-free electricity by 2035: create a more resilient grid, lower energy bills for middle class Americans, improve air quality and public health outcomes, and create good jobs, with a choice to join a union, on the path to achieving 100 % carbon-free electricity by 2035
  5. Significant support for Electric Vehicle (EV) deployment and EV infrastructure: The plan shall enable US automakers to spur on domestic supply chains in supplying raw materials and parts. Under the plan US factories are to be retooled to compete globally and support American workers in making batteries and EVs

(ii) To “give consumers point of sale rebates and tax incentives to buy American-made EVs, while ensuring that these vehicles are affordable for all families and manufactured by workers with good jobs,”

(iii) To “establish grant and incentive programmes for state and local governments in the US and in the private sector to build a national network across America of 500,000 EV chargers by 2030,”

(iv) To “replace 50,000 diesel transit vehicles and electrify at least 20% of the US yellow school bus fleet through a new Clean Buses for Kids Programme at the Environmental Protection Agency, with support from the Department of Energy. These investments will set us on a path to 100 % clean buses, while ensuring that the American workforce is trained to operate and maintain this 21st century infrastructure,”

(v) To “utilise the vast tools of federal procurement to electrify the federal fleet, including the United States Postal Service.”

Higher interest rates?

Whilst the rise in interest rates in first quarter 2021 does somewhat increase the cost of capital in our modelling of companies’ current and future cash flows, what the market seem to be forgetting is that those cash flows are expected to ramp up significantly. In addition, costs on renewables are coming down. Not least after the announcement of the details in the Biden Infrastructure Plan.

In our opinion, it is worth noting that companies raising financing in the fixed income markets have been realising some of the lowest rates achieved despite the rise in headline interest rates.

Rebalancing mostly behind us

The rebalancing of the iShares Clean Energy ETF sent shockwaves through the passive investment community that started pre-positioning for what was estimated to be significant flow back as the constituents in the iShares ETF would be up for consultation and indeed, increase the number of constituents from 30 to 100. Much of this positioning and flow back is now behind us and indeed, the market is now looking at being underweight of potential additions that could create a significant reversal of the ETF and indeed in new constituents that would enter the portfolio. The new constituents were announced on 1 April. We expect a significant reaction in markets after the Easter holiday.

World Earth Day, 22 April 2021

We expect that ‘World Earth Day’ will be used by the US government as an occasion to make public further detail and new announcements regarding their environmental policy.

Valuations of clean energy stocks

The selloff has created an attractive entry point for investors already invested, but having waited for better timing or a pull back to add to positions. We would argue that the investment universe is in an incredibly strong positions with multiple upgrades from sell-side analysts, stronger balance sheets than a year ago having raised capital through 2020 and a reset in valuations that on a price/earnings to growth multiple are close to a 50% discount to Nasdaq today.

In conclusion…

We expect the clean energy investment universe to recoup all if not more of the underperformance relative to the broader markets.

…and the risk

The risk we see to our views here in the shorter term could be some market “hang over” on implications for higher corporate taxes in the US and onshoring of profits. Management calls with companies we have attended ahead of earnings indicate that first quarter earnings will be very strong for the universe. We expect to see some pressure on the supply chain on the semiconductor and battery cell side as well as companies reaching capacity levels as a result of strong demand.

That said, the market is well aware of these supply issues and will likely look through this as we expect these supply constraints to dissipate over the summer.

Other recent posts from Ulrik Fugmann and Edward Lees that may interest you:

On 18 March 2021: What you need to know about the UN Decade on Ecosystem Restoration

On 12 March 2021, read: Renewable energy stocks look set to rally

On 9 March 2021, read Environmental strategies – An opportunity is knocking!

Full details of the American Jobs Plan are here

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

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