LONDON — The booming market in green finance faces a test this year as more investors balk at lofty share price tags even on loss-making companies and a gradual economic recovery from the pandemic boosts returns on conventional energy assets.
Driven by government promises to deliver a low carbon recovery, flows into funds investing on environmental, social and corporate governance (ESG) principles doubled last year from 2019 to $326 billion, Morningstar data showed.
But that has also made ESG one of the most crowded trades, BofA’s latest investor survey released on Tuesday found, while the supply of green securities has failed to keep pace with demand.
Emmanuel Cau, head of European equity strategy at Barclays, has warned of a “regime change” if the cycle were to turn in favor of value sectors, which benefit from economic recovery, and away from high-quality, high-value assets that are more sensitive to higher bond yields.
Cau last year cut his overweight recommendation on ESG utilities and last month upgraded conventional energy stocks to overweight, citing depressed investor positioning and the sector’s ability to capitalize on a post-pandemic recovery.
While most investors see the green investing trend as here to stay, they have grown wary after the huge price run-up.
Advertisement
Story continues below
This advertisement has not loaded yet, but your article continues below.
Article content
“Valuations in the (green) sector are significantly higher than what we want to pay so we won’t allocate as much as we’d like to,” Justin Onuekwusi, fund manager at Legal & General Investment Management, said.
Supply of clean energy assets, meanwhile, shows signs of becoming less tight.
Refinitiv data indicates equity raising by sustainable companies totalled $6.6 billion year-to-date, a 28% increase on year-ago levels, although it is still only 2.5% of total activity.
In the green bond market too, there are hints of a strong increase in supply this year after last year’s scarcity brought into focus the so-called greenium – the extra premium investors have to pay to secure a green bond.
Following last year’s heavily oversubscribed green bond issues, Nordic bank SEB predicts green bond sales will double this year to $500 billion. France tapped green markets on Tuesday, while the European Union and Britain are prepping deals.
Cumulative green bond issuance, used for funding projects such as clean energy, surpassed $1 trillion in December, according to the Climate Bonds Initiative, though Spain’s BBVA estimates this is under 1% of the global bond market.
Such has been the supply-demand imbalance that the market value of renewables developer EDPR rose in January above that of its parent EDP.
The picture, says NN Investment Partners senior portfolio manager Oskar Tijs, is best described as euphoria.
“Companies, which in many cases have been lagging for years because their earnings were low or negative, have performed… Money flows have been so strong that in some cases, you can question if it is still reasonable,” Tijs said.
Advertisement
Story continues below
This advertisement has not loaded yet, but your article continues below.
Article content
HARD TO SUSTAIN
At the height of the pandemic last year, more than 80% of sustainable equity indices outperformed non-ESG peers, the Institute of International Finance estimates.
Rising prices led one-year forward price-earnings multiples on a basket of 35 green stocks to expand by 24 points in the last year, analysis by Morgan Stanley found. Multiples at non-green peers expanded by two points.
Yet Refinitiv IBES data going back to 2016 shows two of last year’s top performing green stocks – fuel cell makers Plug Power and FuelCell Energy – have never turned a profit and are not expected to do so for years.
Carmaker Tesla enjoyed its first profit in 2020 and solar firm Enphase has been profitable for two years.
Yet these shares have rallied between 400% and 1000% in the past year.
Sharon Bentley-Hamlyn, investment director at Aubrey Capital Management, has 2%-3% of her portfolio in green energy.
“We’d love to have more but it’s difficult to find stocks that meet valuation criteria. We like to buy at 1.5-times PEG ratio or less but many of them are trading near 2-times,” she said, referring to the metric measuring share price, earnings and future growth prospects.
“You don’t want to bet the ranch on these types of businesses which are still loss-making.”
THE CRAZY GREENIUM
Investors often have to pay extra for green bonds, especially in sectors in which such issues are scarce and this greenium applies even when a green bond has a longer maturity than mainstream issues.
Advertisement
Story continues below
This advertisement has not loaded yet, but your article continues below.
Article content
Dutch mail carrier PostNL’s 2026 green bond offers 41 basis points over swaps – a measure of a bond’s credit risk – 5 bps less than a mainstream bond maturing two years earlier. .
Daimler’s 2030 green issue pays 10 bps below a conventional bond due earlier that year.
“This is crazy. You move along the curve, you take more risk, you get paid less,” said Shanawaz Bhimji, senior fixed income strategist at ABN AMRO.
Green issuers in the euro investment-grade market last year conceded an average 8 bps “new issue premium,” ABN AMRO estimates, less than half that paid across the broader market.
And investor demand exceeded issuance 5.5 times on average in 2020, versus four times on non-green bonds, ABN said.
For all the mounting caution, James Palmer, BofA’s head of EMEA equity capital markets sees supply-demand mismatches supporting prices for a while yet.
He is busy discussing with companies that own sustainable businesses “whether they can and should separate them to get the valuations that the market is prepared to afford.”
(Reporting by Joice Alves and Yoruk Bahceli; editing by Sujata Rao and Barbara Lewis)
Share this article in your social network
Advertisement
Story continues below
This advertisement has not loaded yet, but your article continues below.
The StarPhoenix Headline News
Sign up to receive daily headline news from the Saskatoon StarPhoenix, a division of Postmedia Network Inc.
By clicking on the sign up button you consent to receive the above newsletter from Postmedia Network Inc. You may unsubscribe any time by clicking on the unsubscribe link at the bottom of our emails. Postmedia Network Inc. | 365 Bloor Street East, Toronto, Ontario, M4W 3L4 | 416-383-2300
Thanks for signing up!
A welcome email is on its way. If you don’t see it please check your junk folder.
The next issue of The StarPhoenix Headline News will soon be in your inbox.
We encountered an issue signing you up. Please try again
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.