Tag: Renewable Energy

Economic Themes for the 2020s: 20/20 Vision May Not Be Perfect

Economic Themes for the 2020s: 20/20 Vision May Not Be Perfect

Since 2020 marks the beginning of a new decade, we focus on themes we expect to play out over the next ten years.

  1. Emerging Markets continue to take over the world. Population growth and younger demographics in emerging markets will continue to drive growth through the 20s, as the population in developed market economies continues to age. We expect emerging & developing market GDP growth to stay above 3% for the decade.
  2. Autonomous Vehicles in our neighborhoods. A confluence of various technologies has made it possible for drones and self-driving cars to pilot themselves. The coming decade will see millions of autonomous vehicles take to our roads and skies. Our vision of the robotic future has been heavily influenced by sci-fi representations of humanoid robots. The reality is that the robots of our future are more likely to be a pizza delivery drone.
  3. Genetic testing becomes commonplace. The cost of genetic testing has fallen dramatically over the past few years. By the end of the decade, we expect genetic testing and sequencing to be commonplace and most healthcare facilities in the developed world to offer full-genome sequencing to all patients. This powerful technology raises enormous ethical and moral questions which will make the road bumpy, but won’t materially slow the growth.
  4. Blurring the line between reality and games. We expect the 2020s to be the decade where augmented reality, virtual reality and the line between games and real life will become blurred. These advanced functions will require ever more powerful graphics processing units (GPUs). We expect software and hardware companies in this space to grow especially as their products become more affordable to a wealthier, growing population in emerging markets.
  5. Business opts for computing as a service. The biggest change in commercial computing over the past decade has been the rise of central, shared datacenters operated by the largest tech companies. We expect this trend to accelerate over the coming decade, with self-managed datacenters becoming increasingly rare.
  6. Climate Change is here. The 2020s are shaping up to be the decade where climate change begins to impact large swaths of the population. We’ve already seen an increase in the incidence of extreme climate events (such as the enormous wildfires in Australia), a trend that has not gone unnoticed by the insurance industry. Over the course of this decade, we expect this conclusion to become almost universally accepted in the US. This will have an impact on the fortunes of the energy industry and many others. A number of our other long-term trends will focus on aspects of climate change.
  7. Water, water everywhere / Nor any drop to drink.  As rainfall patterns change and we experience hotter and drier weather for longer, obtaining potable water will become harder for much of the world’s population. We expect the market share of water-related technology and infrastructure companies to grow as communities across the world work to use fresh-water resources more efficiently by recycling, desalination and gains in efficiency. 
  8. Renewable Energy as the sole growth area. By 2030, we expect conventional power sources to begin sunsetting.  Renewable power sources will account for over 150% of net new power capacity as conventional power generation facilities are mothballed (renewable capacity was 75% of net new power capacity growth in 2018). 
  9. A plant and lab future. We expect plant-based and lab-grown meat substitutes to displace significant amounts of meat consumption in the US and Europe by 2030. This will result in lower meat consumption across the developed world and slower growth in global meat consumption.
  10. Tech enters banking in force. As the technology sector matures and ever larger companies look for areas of growth, we expect focus to shift to commercial and retail banking services. This is an industry already seeing significant disruption from advances in technology. Major technology companies have begun to dip into the waters with credit card and peer to peer payment offerings. By 2030, we expect over 15% of payment/banking services by value to be provided by companies that were not banks in 2020.
2019 Economic Themes: Return of the Bear – Reviewed

2019 Economic Themes: Return of the Bear – Reviewed

  1. Bear Market Comes out of Hibernation.  […]  We contend this reversal gains steam this year as stocks globally will finish 2019 in firmly negative territory.  […] –  We were flat out wrong on this one. After being down 4.45% in 2018, total return on the S&P was an eye-watering 31.29% in calendar year 2019. The MSCI world index was up 24%.
  2. Peak Interest Rates.  […]At the start of 2019, the effective target rate stands at 2.25%-2.50%. While the Fed has signaled a continuation of rate hikes this year and into 2020, we think rates will peak in 2019 and the Fed will pause before potentially cutting rates if/when a recession materializes. […] – We were right on this. The Fed cut rates a bit earlier than we expected, but 2.5% marked the high point for short term rates in this cycle. 
  3. Unemployment Rises.  2018 saw the US unemployment rate reach a 49-year low of 3.7%. […] this expansion cycle looks due for a reversal and we expect the unemployment rate will climb back over 4% in 2019. […] –  We were wrong here. Unemployment dropped slightly over the course of 2019, ending the year at 3.5%. A Brookings institution study released in November noted that 53 million workers in the US are making low wages, with median annual earnings of $17,950. Under such conditions, it is questionable whether unemployment is a good estimate of economic prosperity.
  4. Investors Want Value.  […] We believe value will outperform growth this year as economic expansion slows and investors shift investment capital into more defensive sectors. […] – We were right here, barely. While stocks rose indiscriminately in 2019, The S&P500 Value index was up 31.93% while the S&P500 Growth index saw gains of 31.13%.
  5. The Unwinnable War.  […]We see 2019 ending with some measure of tariffs still in place, continued global hostility towards the Trump administration and ongoing damage to the US reputation and economy. – We were right here. Despite numerous announcements of progress or deals, the trade dispute between the US and China remains unresolved.
  6. Real Estate Reckoning.   […] The S&P/Case-Shiller 20 City Composite Home Price index peaked in April 2006 and didn’t reach a bottom until March 2012. […] We think this streak comes to an end in 2019 and the index will finish the year lower. – We were wrong here, the Case-Shiller index remained largely flat. It stood at 212.66 in December 2018 and the latest data for Oct 2019 has it at 218.43, up 2.7%.
  7. Oil Prices Flounder.  […] we believe Brent Crude will dip below $50 per barrel and finish the year under that level as global trade slows and energy consumption slackens. – We were wrong here too. Brent closed the year at $66/barrel.
  8. High Times for the Cannabis Industry.  […] We expect 2019 will bring more legislation to expand the recreational market and more investments from multinational conglomerates (2018 saw Altria and Constellation Brands invest in the space).  We expect publicly traded marijuana stocks will outperform consumer discretionary stocks in 2019. – We were partially right here. Legalization continues to gain steam, with NY state on track to legalize marijuana in 2020. Though there is no index for Marijuana related stocks, the largest ETF ended the year down significantly.
  9. China Stumbles.  […] we  believe 2019 will continue to be a flat to negative market for Chinese equities. The Shanghai Composite remains around 2,500. This is less than half the 5,178 level reached in 2015, which was lower than its all time high of 5,800 in 2007. – We were wrong here, the Shanghai composite ended the year up at 3,050.
  10. Battery Power.  […] We expect EV sales to continue to grow in 2019, and global liquid fuels growth to be below 1.3%. – We were right on this one. Global electric vehicle sales were up 46% in the first half of 2019, then slowed due to expiring subsidies in China. EV sales for 2019 are expected to still be above 2018.  Global liquid fuels consumption was 99.97 million barrels/day in 2018. For 2019, the figure is estimated at 100.72 million barrels/day, or under 1%.
2017 Q1 letter: Renewable energy in the Trump era

2017 Q1 letter: Renewable energy in the Trump era

Dear Friends,

The first quarter of 2017 was full of eventful news for markets. We saw a Fed rate hike, record low unemployment rates, all time highs for US equity markets and a new administration sworn in, with Republicans now in full control of Congress. In our view, this likely marks an inflection point for the current business cycle and market levels.

Since the election, we have received several queries from our socially responsible investors about the fate of environmental and climate change regulation under the Trump administration. We understand and share many of their concerns. We hasten to add, however, that infrastructure spending and projects are usually undertaken with long time frames in mind. Enterprises making decisions about what kind of power plants to build will consider the costs over a long term. They are well aware that the current administration and its policies are not set in stone.

We do not expect a raft of coal plants to be built over the next four years — in fact, 2017 has seen an acceleration of the closure of several legacy coal plants. Large plants typically take 3-5 years to build and operators have to factor in the possibility that they will face a changed regulatory environment just as the plants come online. Natural gas prices are likely to play a much larger role in determining what resource mix generates our electricity. The cost of utility scale renewable solar power continues to fall, and though it is not yet competitive with cheap gas, it is not far off either. The IEA estimated the average capital costs of photovoltaic solar plants under construction to be 35-45% higher than natural gas plants per unit of energy produced. An array of tax credits make solar competitive with gas. though the precise economics are driven by regional factors and weather. Wind and hydroelectric power are already competitive with natural gas.

At the risk of appearing sanguine, we think that technological advances, consumer preferences, and the economics of scale have brought us to the point where renewable energy will be competitive with conventional electricity generation going forward. Installed renewable capacity will continue to increase, with or without incentives. If fuel costs move higher, renewables will be become very attractive.

In our view, purchasing certain sectors based on the administration’s stated policy preferences is unlikely to lead to consistent gains. Our reasoning is based on the Trump administration’s penchant for changing direction at the drop of a hat, and secondly on the opposition to various aspects of their policy agenda from either side of the aisle in Congress. In the medium and long-term, valuations and the business cycle will determine investor success. Neither looks particularly fortuitous at the moment for risk assets (equities, or long-term/lower-quality bonds). We continue to recommend a defensive shift for clients based on these factors.

Regards,

Subir Grewal, CFA, CFP Louis Berger