The start of ’22 has not been kind to water or clean tech stocks; or for that matter, most equities in general. This is a continuation of a rotation that began in November of last year. The S&P Clean Tech Index is already in correction, 23% from its high last year and down 7% year to date. This parallels similar price action in the Russell, the water indices and the Nasdaq as well as the S&P in the short year to date period. Cleantech stocks are taking it pretty hard, in the Clean Tech Index only 6 of 75 constituents have attained positive performance since November 1st of last year, the average return is -22.62%, and nearly a third are down 30% or more in that time frame. Removing the larger capitalized constituents makes this picture even more grim[i]. Water stocks have generally fared better since many companies involved in the water space are more mature industrial concerns.
Much the same can be said of the Nasdaq Composite. In fact, save Financials, Industrials and Energy precious little is up in the markets per the S&P as the market has rotated away from it’s previous leadership of technology stocks. This is also evident by the recent outperformance of value stocks in 2021 for the first time as the Russell Value Index, though not the S&P, outperformed their peer growth stocks for the first time since 2016. Though this did not occur for larger cap stocks in large part due to the prevalence of FAANMG outperformance it is happening year to date as tech stocks fall.
Risk appetite has decreased across the board indicated by declines in crypto, meme stocks, spacs, high yield and investment grade as well as treasuries across the curve. After a torrid run the past 2 years risk bubbles are deflating in large part to concerns about inflation and a more hawkish stance by the Fed. Consensus rate increases by the Fed for ’22 have moved from 2 in December to roughly 4 right now according to Fed Fund futures. The Atlanta GDP Now Index dropped substantially in the middle of January now forecasting 5% growth versus 7% before, and JP Morgan and a few other companies have recently reported large wage increases further stoking fears of inflation.
Value stocks just outperformed growth for the first time in 5 years. The Russell Value outperformed its growth peer in 2021 for the first time since 2016, though S&P value stocks did not fare as well. This did not occur for larger cap stocks in large part due to the prevalence of FAANMG outperformance it is happening year to date as tech stocks have fallen much more than their shorter duration cash flowing peers.
Odds and Sods
CA NEM 3.0 could be changed or decided during the back half of this month. In August 2020, for the 2nd time in four years, the California Public Utilities Commission (CPUC) opened up new proceedings change the state’s energy net metering (NEM) program. CPUC proposed a shift to Net Billing from net metering. The Net Billing Tariff will result in lower incentives than the previous net metering tariff though details have yet to be finalized if this initiative passes at all. CPUC is looking to adjust the state rooftop solar market in favor of lower income homeowners who currently cannot afford rooftop solar and subsequently end up bearing much of the cost for grid upgrades through higher transmission charges. Unfortunately, as will all things pertaining to utility regulations, the solution is imperfect at best and could potentially (disrupt upset upend) the market for residential solar service in its largest US markets and estimates presently place California as nearly 40% of incremental growth for the rooftop installers such as Sunrun and Sunnova let alone panel and inverter manufacturers.
According to the IEA cost to deliver power increased 65% 2010-2020 whereas generated power costs went down 32% in the same time frame. Costs up due to aging infra and different grid architecture to support net metering. This is concerning and, given the suboptimal state of most power grids, there is no end in sight.
Earlier this month Isabel Schnabel, a member of the ECB executive board and economist, argued that greenflation is very real and not transitory. Increases in fossil fuel prices particularly in Europe, potential conflict in the Ukraine, and higher shipping and production costs for everything from polysilicon used in solar modules to steel and resin used in wind turbines will add to this. Higher interest rates in the levelized cost of green energy projects will not help either.
Opinions are expressed are solely my own. Any investments mentioned do not constitute a recommendation to buy or sell anything. If you do act on the opinions of errant writings without doing your own research you might consider talking to an investment advisor, a psychologist, foregoing that third drink or reexamining your decision-making process. I do cite sources and use end notes but amidst other responsibilities and foci I apologize for any inadvertent plagiarism or regurgitation of other’s ideas though we all know that true originality is a rare commodity - Marcel Duchamp's dictum applies. If you disagree with my content or opinion don’t read it.
[i] Bloomberg Professional Data as of January 19, 2022
