Stockholm (HedgeNordic) – While renewable energy stocks enjoyed a great run in November and December, the sector encountered a different landscape in the first month of 2024. This shift was marked by a series of challenges, including profit-taking, waning optimism surrounding an early Federal Reserve rate cut, and notably, declining fossil-linked power prices in Europe. Proxy Renewable Long/Short Energy experienced a decline of 15.7 percent in January, while its counterpart Coeli Renewable Opportunities saw a decrease of 6.9 percent, with renewable indices falling by 11 percent to 21 percent in January.
Joel Etzler and Vidar Kalvoy, managers of Coeli Renewable Opportunities, point out several reasons for the poor performance of renewable energy equities in January. “The sector had a great run in November and December and was due for some profit-taking,” starts Etzler (pictured left). “A key driver for the year-end rally was the sharp fall in long-term rates triggered by expectations of a FED cut in March, followed by four to five more reductions the next 12 months,” according to Etzler. Long-term rates rose in early January as optimism on cuts was wound back and renewable energy duly underperformed.
“The sector had a great run in November and December and was due for some profit-taking.”
Joel Etzler
Jonas Dahlqivst (pictured center), lead portfolio manager of Proxy Renewable Long/Short Energy, corroborates these observations. “In January, rates mean-reverted back on worries regarding inflation outlook, and concerns about when, how and if central banks can start cutting rates,” says Dahlqivst. “This scenario is particularly hurtful for Capex-heavy energy transition technologies and companies,” he emphasizes. With the sector’s strong performance in the fourth quarter of 2023, reflecting gains of about 25 percent in U.S. dollars, “investors concerned about the future outlook seized the opportunity to unload,” Dahlqivst adds.
“Europe’s fossil-linked power prices, which had been declining through November and December, took another leg down in January.”
Vidar Kalvoy
Vidar Kalvoy (pictured right) of Coeli highlights another factor contributing to the decline: Europe’s fossil-linked power prices, which continued to decrease in January. “Europe’s fossil-linked power prices, which had been declining through November and December, took another leg down in January,” notes Kalvoy. This trend was attributed to factors such as a mild winter, high gas storage levels, and subdued industrial demand in Europe and China. While the profit-taking and reduced optimism of a rate cut put downward pressure on renewable energy equities, “the most important one for fundamental investors was the lower prices,” emphasizes Kalvoy.
Kalvoy illustrates the situation with an example from Austria’s largest electricity provider, VERBUND AG, which issued a profit warning citing “the rapid and massive drop in wholesale prices for electricity, caused by the fall in primary energy prices and the prices of emission allowances as well as lower earnings contribution in the Grid segment.” Jonas Dahlqivst of Proxy P confirms this trend, stating that “companies within the sector were reporting and providing guidance reflecting weak demand, high inventory levels, and a competitive environment.”
Optimistic On the Energy Transition and Renewable Energy Stocks
Despite these challenges, the teams at Coeli and Proxy P remain optimistic about the energy transition and renewable energy equities. “Despite all the gloom, the fundamentals are about to or have already bottomed in many sub-sectors,” says Vidar Kalvoy, who runs Coeli Renewable Opportunities alongside Joel Etzler. “Some sub-sectors in US solar will also bottom in the next couple of quarters and you will be late to buy waiting for the first positive quarter,” he continues. However, there are still sub-sectors facing significant downward pressure on revenue estimates. This underscores the importance of stock selection in 2024. “Like 2023, when our fund demonstrated the importance of stock picking, generating 3.2 percent return versus minus 22 to minus 24 percent for the indices, we think 2024 will be a stock pickers market as well.”
“As always, stock picking is key, because not all companies will reap the fruits of this turnaround situation.”
Jonas Dahlqivst
Jonas Dahlqivst, the lead portfolio manager of Proxy Renewable Long/Short Energy, echoes this sentiment, emphasizing the need for careful stock picking amidst potential downside risks and market turbulence in the first half of 2024. “As always, stock picking is key, because not all companies will reap the fruits of this turnaround situation,” says Dahlqivst. “But given our view on the second half of 2024, and in particular on 2025, we are very optimistic on the energy transition sector, but stock selection is crucial,” he emphasizes. “For example, not all electric vehicle (EV) producers will do well although the EV market is expected to do well in 2025. And not all companies can convert the tailwind into earnings growth.”
“In general, the bull story this year for renewable equities is quite straight-forward,” Kalvoy from Coeli concludes on an optimistic note. He explains that if interest rates in the US are cut 4-6 times in 2024, it would provide a significant boost to the sector, which was the worst performing sub-sector in 2023, according to Morgan Stanley thematic research. This tailwind could potentially overshadow the sluggish fundamentals observed in some sub-sectors. “We see tremendous opportunities finding stocks with step change improvement in fundamentals combined with high interest rate sensitivity,” says Kalvoy. However, he remains cautious, noting that the rationale behind rate cuts is crucial (inflation coming under control, not cuts to avoid a recession), emphasizing the importance of strong balance sheets and cash flows for their long positions to weather any challenges that may arise.
