Mainstream media is calling it ─ the projected seismic shift in spending from fossil to renewables ─ the greatest reallocation of capital in the history of mankind.
Is there a headline number to this G.O.A.T capital reallocation?
Yes, indeed. And it’s staggering.
To achieve net-zero emissions by 2050, the estimated annual average (source: McKinsey & Company, 2021) spending on physical assets is $9.2 trillion. Aggregate that annual average spend until 2050 and you have a staggering amount of $275 trillion.
Now when you see a figure like that, as a Portfolio Manager, you are hard-wired to think: Follow that staggering dollar trail. This appears to be a long-term trend straight into the orbit. What’s my allocation weight to ‘Renewables’ going to be?
And yet, I admit this is the one question that I have dreaded facing from any client over the last couple of years:
How about we open an allocation to Renewables? (and that other elephant in the room now, after the SEC’s ETF grants: Bitcoin. But that’s a story for another day!)
The space hasn’t done too badly.
The S&P Global Clean Energy Index has returned a 10-year annualized USD total return of 5.17% (no doubt aided by the eye-popping 142% return in 2020)
The allocation question occasionally sees us (the client and me) meander in the direction of a ‘nibbling weight’. And that ‘nibbling weight’ is the truth that sets us free!
All portfolio managers routinely use nibbling weights to drop anchor on a security/sector.
And why do you use a nibbling weight?
For an obvious reason. The PM has little or no idea about the underlying security and is biding time for his or her ‘information coefficient’ related to this security/sector to expand.
Thats precisely the problem with Renewables now.
There is very little information coefficient to it, with investors in renewables stymied by a combination of muddle-through governmental policies (the EU considering import tariffs of Chinese EVs) and a mainstream media that often obfuscates facts.
So while the spotlight is on the US (on the back of the IRA) and on the EU (for stepping up the tempo on Solar, Onshore and Offshore Wind), the biggest actor on the renewables stage remains China.
Here’s why:
1. The Clean Energy Index spell this out in clear terms: Chinese firms make up 31% of the index constituents, with a total market cap of $267 bio (Vs. 17% of the constituents and a total market cap of $85 bio by US).
2. The IEA projects annual global wind energy capacity additions to increase from 75 GW in 2022 to 350 GW in 2030. China alone contributed 37 GW of that 75 GW targeted increment.
3. The story is no different when it comes to Solar Energy. China now controls 90% of the world’s polysilicon capacity.
4. There is an estimated 100+ pure-play EV manufacturers in China.
So there.
Its China with its chokehold on the renewables supply chain that will decide the narrative ─ and the portfolio weights ─ from hereon.
