London’s inaugural Climate Action Week may have brought the subject of decarbonisation to the fore, but this is a trend that shrewd investors have been quietly tapping into for some time.
Since 2009, the cost of solar panel energy production has decreased by almost 90 per cent. Meanwhile, the up-swing in popularity of alternatives was proven in the US last year where the amount of energy produced by renewable sources stood at 22 per cent, surpassing coal’s annual production levels for the first time ever. This is especially impressive considering the backdrop of a presidential office which has continuously refused to address climate and green issues with any seriousness.
“We believe the market is underestimating the magnitude and persistence of the trend towards renewables,” said Liontrust’s sustainable investment team. “And we continue to look for opportunities through our ‘increasing electricity-generation from renewable sources’ and ‘improving the efficiency of energy-use’ themes.”
Below the team has identified seven stocks that could not only make a positive contribution to decarbonisation, but also add value to your portfolio in what it believes is an underestimated market.
Siemens Gamesa
The first of the opportunities tipped by Liontrust is wind turbine manufacturer Siemens Gamesa.
While the stock has been volatile over the past few years, underperforming recently due to the falling price of wind turbines, the investment team said it still believes the company is well placed to capture profitable growth in turbine sales, driven by demand for cheaper wind power.
Performance of stock since IPO
Source: Google Finance
It added that the sheer scale of the wind turbines acts as a competitive advantage: “The blades are 170m in diameter, meaning it would take Usain Bolt nearly 16 seconds to sprint across them,” the team explained.
“These huge offshore wind turbines are harder for Asian manufacturers to copy and compete with, meaning the company’s margins are relatively safe.”
Ørsted
Next is a recent portfolio addition, Danish utility company Ørsted.
Denmark is a long-term leader when it comes to sustainability, as demonstrated by an increased contribution of 30 million Danish kroner to the UN in 2019 to help it meet its 17 sustainable development goals.
This national agenda towards supporting sustainability is reflected within the Ørsted franchise: at the recent Bloomberg Sustainable Business Summit in London, UK head Matthew Wright said: “Switching to 100% renewables is the only feasible business model for the future and companies failing to make the switch will not survive.”
The Liontrust team said Ørsted started its strategy of changing to become a green energy company in 2017, with the divestment of its oil and gas business.
“At the end of last month, it announced the former coal-fired Studstrup Power Station near Aarhus in Denmark would run on straw and wood pellets,” it added.
Verbund
Liontrust’s investment in Austrian power company Verbund is based on a continued increase in the EU Emission Trading System carbon price: this had traded below €5 per tonne of CO2 for years but recently breached the €20 level for the first time since 2008 and the team believes it can keep rising to €25, €30 and beyond, which in turn will inflate the power price in Europe.
“As a hydro player with relatively low costs, Verbund is highly operationally leveraged to an increase in power prices and the resulting cash flows from selling its own product, which emits very little carbon, at a higher price,” it said.
“With its low-carbon electricity generation, Verbund is a beneficiary of decarbonising the grid. Despite strong performance from the stock, we believe the predicted appreciation in carbon prices is not currently priced in.”
Kingspan
The theme of investing in companies that work to improve the efficiency of energy usage is a major theme across the Liontrust Sustainable Future Managed fund. One example of this is Kingspan, which produces thermal insulation to cut the energy usage in buildings and homes.
“Starting life in the mid-1960s as a small engineering and contracting business, Kingspan now has more than 10,000 employees across five continents and continues to innovate to create products and tech for every type of building, from panels to ducting to architectural facades,” said the team
“We think this Irish business is well placed to profit from increased demand for its energy efficient products.”
Daikin
Since the Fukushima disaster eight years ago, energy production has been a sensitive subject. While the clear-up is over, people’s trust in nuclear power has been broken, a difficult fact to face in a country that has scare natural resources for energy production.
This has meant people have consciously become more conservative about their energy use in their day-to-day lives, a field where Japanese air conditioner manufacturer Daikin has found its niche.
Performance of stock over 5yrs
Source: Google Finance
“Many would point to air-conditioning as a key source of energy usage and therefore of carbon emissions but, while this is true, Daikin’s products can cut both drastically,” said the Liontrust team.
It added Daikin’s technology needs 50 per cent less power, fitting in with the ‘improving the efficiency of energy use’ theme.
Equinix
Called a “key player in the emerging digital economy” the company provides a gateway into “key digital infrastructure in the public cloud computing networks”.
Liontrust said that Equinix stands out as the only global player in the co-location data centre market.
“Its centres have become an integral part of the plumbing for the modern digital economy. Its assets are almost impossible to copy, creating an important competitive advantage,” it added. “On top of this, its business is addressing critical environmental impacts of the technology industry.”
The team said Equinix is a leading player in reducing carbon emissions in tech – an industry in which they are notoriously high, especially in the US.
“For these companies, power is their biggest cost, giving further incentives to design and run data centres more efficiently,” it added.
Everbright
Seven countries are now at significant risk of running out of water this year and Liontrust’s final stock-pick tackles this issue in China.
Although not at risk of a national drought, water scarcity is still a major concern. According to Liontrust, one of the major challenges the Chinese government faces is maintaining economic growth without destroying rivers and making air quality worse.
Filling this market demand, China Everbright International is a global leader in environmental resource management, according to the team.
“The company is generating growth in its core businesses as China looks to use technologies that can ensure streets are clean and waste is used to provide energy.
“This is forgoing the need for dirty fuels such as coal. There is also huge demand for cleaning waterways given the amount of pollution dumped in rivers and lakes across China over the last 20 years. The government has a simple slogan, ‘Beautiful China’, and China Everbright International is a leader in making this idea a reality.”
The £1.1bn Liontrust Sustainable Future Managed fund has outperformed against the IA Mixed Investment 40-85 per cent shares index over the past decade, making 199.24 per cent.
Performance of fund vs sector over 10yrs
It has an ongoing charge of 0.92 per cent.