James Smith, manager of the Premier Miton Global Renewables Trust, shares what’s on his mind as 2024 hurtles into view.
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
One thing I’m thinking about in 2024
The global energy environment remains volatile with conflict in both Ukraine / Russia and also now the Middle East. While the war in Ukraine appears to be moving slowly, the situation in Israel is developing and at present it is impossible to know how it will evolve in 2024.
Both these regions are very important for global energy markets. A deterioration has the potential to have serious consequences for energy supply and pricing. Global instability is never in investors’ interests, but all else equal, renewable energy can act as a secure domestic source of energy, with the potential to benefit from a higher pricing environment.
One thing I’m looking forward to in 2024
The performance of the sector has been dominated by movements in interest rates and yields on government debt. Rising interest rates over 2022 and 2023 has led investors to sell renewable energy companies as they switch investment into cash or bonds. A reversal of this position in 2024, as interest rates plateau and begin to fall should, by the same token, lead to a more positive environment.
Downward pressures on inflation will be a pre-requisite to falling interest rates. However, I am optimistic that the higher interest rate environment over the past two years will cause inflation to be substantially lower in 2024.
One thing I’m watching out for in 2024
Offshore wind has had a difficult year with the UK’s auction for the award of offshore wind contracts failing due to the maximum price offered being unattractive for bidders. In addition, there have been high profile losses in both turbine manufacturers and the US business of Orsted (a leading offshore wind development company). While the Trust does not own shares in Orsted, its difficulties have been a headwind to share prices in the renewables sector.
I believe the situation could be reversed in 2024 with the UK conducting another auction with, I anticipate, a more realistic price cap. Recent awards of offshore price contracts in the US have been made at much improved prices, and the EU has increased its targets for offshore wind development, indicating that 2024 could be a much better year.
One thing I’m worried about in 2024
One thing that is always at the top of my list of concerns is political risk. Political support has generally been good for the sector; however, European politicians have also imposed windfall and other additional taxes, leading to lower profitability and uncertainty. In the US, some politicians appear to see the sector as a threat rather than an opportunity, so the 2024 Presidential election in November also presents possible risks.