Portfolio managers must increasingly be aware of geopolitical considerations and macroeconomic trends when constructing portfolios from energy companies.

Donald Trump’s re-election to the White House might at first glance not seem an optimal outcome for investors in the transition to a more sustainable economy. Since taking office, the president has made clear his opposition to everything from energy-efficient lightbulbs to paper straws. However, he has been most vocal against the energy transition, with shares in renewable power companies falling sharply on the day of his victory.

Some wealth managers and their clients have even been tempted to write off this investable theme, if not permanently, then perhaps for the next four years. However, to do so underestimates structural drivers which underpin the long-term trend, as well as the range of investable opportunities it creates.

It is important to think of this in the round. While renewable energy can feature portfolios, it is important to have a much broader investable universe which — through focus on resource efficiency and environmental risks — includes many areas such as water infrastructure or digital solutions. These will continue to thrive.

According to the International Energy Agency (IEA), global energy demand is expected to double by 2050. This is the natural result of population growth and economic expansion, particularly in emerging economies. At the same time, digitalisation, growth of data centres and ongoing drives for efficiency, mean most of this power will be electric. Electricity’s share of final energy consumption has already risen sharply, from 18 per cent in 2015 to 20 per cent in 2023.

Renewable demand

Radical improvements in cost and speed to build mean this additional demand will almost all be met by renewables. Solar photovoltaic costs have fallen by 90 per cent in the last decade, onshore wind by 70 per cent, and batteries by more than 90 per cent. In the developed world meanwhile, ageing infrastructure is deteriorating and in need of replacement. For example, large power transformers handle close to 90 per cent of US electricity flow, yet most are 40 years old, the age at which malfunctions escalate.

The consequence of this is that in 2024, global investment in the energy transition exceeded $2tn for the first time. These spanned four key areas: electrification of transport ($757bn), renewable energy ($728bn) power grids ($390bn) and energy storage ($54bn). These investments span sectors and regions, from European industrials to US tech.

The job of portfolio managers is to use these trends to identify profitable companies that can deliver robust earnings growth. Crucially, we must also buy them at share prices which do not yet reflect those characteristics. Macroeconomic conditions and President Trump’s re-election have created a fertile ground for such opportunities.

Renewable energy companies are considered by many investment managers, but generally at reduced weightings. Since 2021, share prices have been hit by a rapid move to higher interest rates, supply chain issues and — at the margin — investors reallocating into bonds. Mr Trump’s re-election and subsequent withdrawal of federal lands for wind energy projects, has further weakened sentiment.

While US 10-year treasury yields may dictate near-term performance, some renewable names now trade at valuations below the book value of their operating assets. For equity investors this creates not only a margin of safety, but also upside optionality through pipeline projects, particularly in Canadian-listed companies such as Boralex or Northland Power, which can be used to reduce reliance on US growth.

Moreover, developers are increasingly prioritising greater profitability and pipeline consolidation over portfolio expansion. This was evident most recently when Denmark received zero bids for the first part of its largest ever offshore wind tender.

Together in electric dreams

As renewables supply ever more of global energy, battery storage becomes essential for dealing with intermittency. Electrification is also putting batteries at the heart of our lives, in personal devices, machinery, and transportation. Contemporary Amperex Technology, headquartered in Ningde, along the north-eastern coast of Fujian, remains the world’s largest producer of batteries. Despite investors questioning resilience of the Chinese economy and the EV sector, the company has shown its ability to grow in Europe and Asia can more than offset weaker US demand.

Electrical grids are the threads which tie these systems together. As well as needing maintenance investment, the introduction of renewables and battery storage means grids must also become larger and more flexible. This entails everything from building out transmission and distribution lines, to digitalisation of the grid. Companies such as Milan-based multinational Prysmian are well-positioned to benefit from these trends. With leading positions across high, medium and low voltage, this Italian producer of electrical and fibre optic cables is transforming from a cyclical business reliant on commodity pricing, to one harnessing structural growth, boosting margins and delivering cash flow.

Geopolitical developments will doubtless continue to influence equity markets of all stripes in the short-term. Despite this, the structural trends driving the energy transition remain robust and compelling for wealth managers and their clients. By focusing on long-term opportunities, investors can navigate temporary headwinds and capitalise on the sector’s enduring growth potential.

Thomas Morris Brown, portfolio specialist, Impax Environmental Markets