Back in 2017, we wrote about two trends that would interact to change the world. Declining costs of solar power generation, combined with declining costs of battery storage, would herald an energy revolution.
In a recent article, Bloomberg News suggests that solar and wind energy is more economical to build than coal or gas plants in two thirds of the world. Five years ago, this wasn’t the case anywhere.
New sources of energy have heralded remarkable periods of growth and prosperity in the past. Water and steam brought us into the modern era more than two centuries ago. Coal and petroleum pushed development beyond what anyone could have predicted, before their use became widespread.
The next energy revolution, solar and wind plus battery storage, will bring massive new opportunities – and threats to older technologies. We are thinking about ramifications for investors.
1. The demand for copper may rise, against a constrained supply.
2. Underdeveloped areas of the world may develop faster, since solar can be deployed on much smaller scales than big central generating plants using fossil fuels.
3. Cheaper electricity may encourage new uses, not yet dreamed of.
4. Incumbent electric utilities may find themselves with stranded assets in the form of obsolete plants and equipment.
No guarantees on any part of the future, of course. But it does seem to be unfolding as we expected a couple years ago.
Clients, if you would like to talk about this or anything else, please email us or call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
The gap between consensus expectations and reality as it unfolds is where profit potential lives. This is why we put so much effort into studying trends and the ramifications for investors.
Here are four trends we’ve been watching for some time:
1. The cost of solar electricity and battery storage, being forms of technology, are declining year by year. In some places around the world, this combination may already be the most cost-effective way to provide new electrification. We believe we will see the end of fossil-fuel-powered generating plant construction within the next decade or so. This will not happen because of environmental activism, but because of compelling economics.
The investment ramifications are manifold. There will be winners and losers, and we have been investing in accordance with our developing understanding of how this is going to play out.
2. The world’s most populous democracy, India, may be poised for decades of economic growth much like China experienced over the past thirty years. Moreover, by 2050 India is projected to be the most populous country in the world. China will be surpassed as a result of its short-sighted ‘one child policy’ that created a huge demographic challenge with an aging population.
By getting in early, even a small investment allocation may make for significant potential gains over years ahead. No guarantees, of course.
3. The airline industry, after nearly a century of cutthroat competition that resulted in wave after wave of bankruptcies, has consolidated into a handful of companies that compete much more gently, to their mutual profit. The energy revolution may result in lower prices for fuel in the future—a large part of airline operating costs. And continuing development around the globe bodes well for air traffic volume trends.
The consensus expectation in the market seems to be for a return to the bad old days of costly competition. But we believe the industry has fundamentally changed due to the dramatically lower number of competitors after years of mergers and consolidation. Consequently, stocks in some of the major airlines appear to be bargains.
4. The Federal Reserve and other central banks around the world are set to begin unwinding the interventions used to effect the so-called “zero interest rate policy”, the policy by which the Fed kept the effective federal funds rate close to 0% following the recession of 20081. While restoring returns on bank savings and certificates may be a good thing for savers, rising rates on bonds will cause the value of existing bonds to go down. When you think about it, a 2% bond cannot sell for its full face amount in a 4% world.
Many parts of the fixed income universe appear to be distorted by the central bank policies. We believe that massive amounts of money flowed into mispriced assets in an attempt to find safety.
Clients, these are the things that have caught our attention. We cannot know the future, but it makes sense to try to get a better handle on it than the average market participant. We can offer no guarantees except that we will continue to put our best effort into the endeavor. If you have any questions or comments or insights to add, please email us or call.
1Federal Reserve Bank of St. Louis, Federal Reserve Economic Data
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
No strategy assures success or protects against loss.
Stock investing involves risk including loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.