While misconceptions regarding the state of clean tech investing have run rampant, we believe the long-term case for new and clean energy technology grows stronger by the day. The longer-term secular catalysts for clean tech and new energy infrastructure continue apace, driven by massive economic transitions in the emerging markets which are placing great stress on the world’s natural resources. The rise of the global middle class and associated urbanization will exacerbate what we believe is an emerging inflationary cycle, giving rise to higher global commodity prices. These trends will be enhanced and more severe given global climate change, as evidenced by the global hardened-wheat, corn, soy and sorghum harvests this past season, all victims of drought.
Indeed, while some of these issues are dire, we take an opportunistic approach in managing the Essex Global Environmental Opportunities Strategy (GEOS) to own the growth companies that provide solutions to these resource issues. A key example is the global water situation, which is under great stress. Emerging markets urbanization, in economic zones that in many cases are arid and dependent on water supplies for coal-fired power production, is causing increasingly dire water issues. The clean technologies represented by GEOS capture the opportunities that are economically viable today, allowing positive returns on investment, while improving energy efficiency or limiting natural resource demand.
While the traction for clean tech and new energy continues apace, despite the misconceptions, the best argument is a simple one: investing in clean tech allows much greater growth opportunity currently, at a more compelling valuation than that of the broad market. At a time when equity returns will be generated on a stock-by-stock, bottom-up and fundamentals basis, asset owners should take care to ensure their active equity allocations can generate strong relative growth during a period of inflationary pressure. For this, we would state clean tech should be considered for the near-term, as well as longer-term given the additional secular trends. The misconceptions are partially driven by the failures in the clean tech arena. Indeed, we have witnessed many bankruptcies over the past few years, a natural occurrence in an arena with rapid growth and strong incumbent competitive energy technologies. While broad clean tech returns have been poor, we point to our GEOS track record as demonstrative of our ability to execute in an area that requires active management and deep portfolio management experience.
Our outlook for the coming year is one that on a macro-front, we believe emerging markets economic growth will continue to outpace that of the developed markets. While this is consensus, we believe excess liquidity and our macro outlook coupled with commodity price pressures will lead to global inflationary pressures. Agricultural commodities should continue to experience pricing pressures, on the heels of yield issues in North America and South East Asia due to respective droughts and flooding this past harvest season. Thus, this is a backdrop for continued strong demand growth for many of the technologies we are leveraging across the GEOS themes, such as:
Agricultural Productivity and Clean Fuels – natural gas infrastructure, crop protection;
Clean Technology and Efficiency – LED lighting, recycling, efficient materials;
Efficient Transport – natural gas and electric technologies;
Power Technology – power conversion and efficiency;
Water – re-use, treatment, conservation, desalination and irrigation.
While the misconceptions regarding the state of clean tech investing have run rampant, we believe the opportunities are immense as energy demand is projected to increase globally by over 50% over the next six years, as projected by the International Energy Agency. This demand is driven mostly by China and India, as they seek to power their growing economies. Our job, at a time when there is little valuation differentiation between the clean tech winners and losers, is to find the technological winners.