Chart of the Summer – A USD3 trillion investment opportunity for the energy transition

This economic shift is being referred to by many economists as “The New Industrial Revolution”. A glance at the chart presented by the International Energy Agency (IEA) clearly highlights the massive investment effort needed worldwide to decarbonize the economy. To visualize this investment opportunity, we embark on an imaginary journey where our guest will discover an array of interesting ideas and companies to invest in.

Mary turned on her Tesla, a marvel of electric car technology known for its eco-friendly design. The digital dashboard lit up, indicating a battery power level of seventy-five percent. Mary admired her vehicle, not just for its quick, quiet ride but also for what it symbolized – a step towards environmental stewardship.

She was accompanied by her co-pilot, a recent chemistry graduate. Together, they admired the sight of towering windmills dotting the landscape. These were Vestas windmills, renowned for their effectiveness in transforming wind power into clean electricity. The co-pilot noted that the motors and rotors of these windmills, much like those of their Tesla, relied on rare earth elements due to their unique magnetic properties.

Their journey took them past fields glittering with solar panels from First Solar, Canadian Solar and other manufacturers. These solar farms, managed by Iberdrola, captured sunlight and transformed it into energy. Amidst these farms were electrolysers, which used electricity to separate water into hydrogen and oxygen. This hydrogen was stored and later used to create ammonia, a clean and potent fuel. Some of this hydrogen was sent to a steel manufacturing company that use it to produce clean steel.

Nearby was a plant that used the ammonia to manufacture fertilizers, enriching soil to produce good crops. The ammonia was also loaded into ships, fueling their voyages across the globe without leaving behind a trail of pollution.

As the Tesla signaled the need for a recharge, Mary pulled into a nearby charging station. The station derived its power from a compact yet potent 200 MW mini-reactor nuclear power plant. The co-pilot explained how uranium, despite its contentious history, was critical for these nuclear reactors due to its immense energy-producing capability.

Upon reaching her modern, eco-conscious house in the countryside, Mary could see the solar panels adorning the roof. Connected to efficient Enphase inverters, these panels harnessed sunlight and converted it into electricity. Excess energy was stored in reliable Samsung SDI batteries, a crucial component requiring significant amounts of lithium, a light, yet energy-dense metal.

The house was also equipped with a state-of-the-art Johnson Controls heat pump system and a Schneider smart home system, providing not only comfort but also efficient energy usage.

This journey demonstrated several ideas to profit from this USD3 trillion investment opportunity. These opportunities will appeal to ESG investors, non-ESG investors, growth investors and value investors. Both developed and emerging countries are investing in these technologies, and current valuations do not yet reflect the expected growth.

Embark on a USD3 trillion investment journey, happy investing!

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request.
© NS Partners Group

Energy efficiency: a theme of the future

“Follow the money” – this principle can work just as well for investments as it does in police investigations.

Healthy and sustained increases in equity prices are always boosted by major investment or spending cycles. As examples, think of the bull market in steel at the start of the twentieth century, mass marketing and consumption in the 1950s-60s, or the notorious dot-com era, which fuelled a remarkable rise on the equity markets before the bubble burst.

Just under ten years ago, notwithstanding the current turbulence, a new sequence of significant rises was set in motion on the major equity markets, this time driven mainly by digitisation – as evidenced by the growth figures posted in recent years by the cloud businesses of the likes of Microsoft, Amazon or Alphabet. This investment cycle, which has been around for a while now, could continue for several more years, although probably with less spectacular growth rates.

We can also expect massive investments in two other areas. One area is security in general and more specifically the defence industry, where we have seen increased spending on armaments since the start of the war in Ukraine.

The other, much more broad-based area we want to talk about is energy efficiency and transition – a theme that will underpin the biggest investment cycle ever seen. Some ballpark figures give an idea of the scale: we estimate that carbon neutrality targets will require spending of at least USD 150 trillion by 2050, equivalent to more than 1.5x global GDP and close to 7x US GDP.

The chances of the funds being committed are very high for several reasons, such as:

The climate emergency, and with it the regulations and new obligations that individuals, companies and governments will have to respect.
Competition – as we are already seeing, companies are increasingly pointing up the sustainability and compliance of their goods and services in their marketing pitches, and may be awarded carbon ratings – which are likely to impact the less virtuous firms.
Productivity, since traditional energy resources will gradually become more expensive, making the benefits to companies of using “clean” energy increasingly significant, with the potential to boost margins.

The unique characteristic of this cycle around energy efficiency is the number of sectors it encompasses. While many people automatically think of producers of electric vehicles, solar panels and wind turbines, and “clean” utilities, the theme is so much more than that. It involves vast swathes of the equity markets and includes companies that will play an essential and integral role in the achievement of carbon neutrality targets. Paradoxically, mining firms are not considered to have environmental credentials, but the energy transition will considerably increase demand for many metals. Similarly, in terms of materials, the construction sector will have to use low-carbon products and insulation. In industry, there are vast numbers of companies active in transport and logistics, machinery manufacturing, continuous process control and optimising electricity consumption, to name just a few applications. And it’s also in the industrial sphere where most of the companies specialising in energy efficiency are operating, in sectors such as IT, semiconductors, computer-aided development software, etc.

It’s clear that building a high quality portfolio diversified by sector and region, while posting reasonable valuation multiples, is perfectly possible by investing in the energy efficiency and transition theme. Overall, the necessary conditions for long-term performance are already in place, and the considerable investments expected for the foreseeable future make for an even more compelling argument.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of the date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instruments referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the Finma cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request.