Essex Global Environmental Opportunities Strategy (GEOS) December 2022 Update
The global equity market continued with positive performance for the month of November 2022 following the trend set in October. The market was appeased by lower global commodity prices along with less hawkish Federal Reserve commentary signaling the prospects for lower interest rate hikes in December. On the environmental investment front, as our global population hit over 8 billion people mid-month, the case for resource efficiency and new energy grew louder, with still elevated logistics costs, geopolitical conflicts, elevated commodity prices and even tighter energy supplies.
GEOS invests in commercial clean technologies with strong growth opportunities that are not dependent on future policy support. However, certain policies can create catalysts and help companies create economies of scale that lead to higher growth and faster technology adoption. The recently announced Inflation Reduction Act (IRA) should catalyze growth for clean technology and represents a key step forward for U.S. climate action. The IRA provides at least $369 billion to support the energy transition, primarily through tax credits, with key areas of focus including renewable energy, electric vehicles and charging infrastructure, low carbon hydrogen, biofuels, and carbon capture, utilization, and storage (CCUS). The IRA is the most significant federal effort to support climate action and decarbonization in U.S. history and is expected to drive significant progress towards meeting the 2030 U.S. climate goal to reduce greenhouse gas emissions between 50-52% below 2005 levels. There is detailed emphasis throughout the IRA on developing the U.S. supply chain for energy transition technologies including domestic manufacturing and assembly for battery modules and cells, wind energy components, and solar technology.
We believe the IRA strengthens the case for low carbon technology adoption and view IRA policies as particularly supportive for green hydrogen and renewable energy. The 45V tax credit for hydrogen production will significantly bring down the costs of green hydrogen production and help decarbonize hard to abate sectors of the economy such as industry. Experts estimate the $3/kg credit for green hydrogen will make it the cheapest form of hydrogen in the U.S. and position the U.S. as the global leader in low carbon hydrogen production. The IRA should also supercharge renewable energy production, as key investment and production tax credits have been extended or upgraded to last until at least 2032. Wind and solar energy are already the cheapest forms of energy in many areas of the U.S. and renewable capacity represents most of the new power capacity. The additional IRA support will make renewable energy the backbone of the U.S. power sector and help us move rapidly towards the 2035 decarbonization goal for the power sector.
As we enter the last month of 2022, it could feel good to close the books on a year fraught with turmoil both geopolitically and economically. The volatility of the capital markets certainly reflected world events. As we look to 2023, never have we experienced most every market participant uttering the word recession. Whether a ‘V’ or a ‘saucer’, a soft or hard landing, very few speak with any sense of optimism, nor provide much in the way of earnings guidance with conviction. And why should they? The overall market is hyper focused on earnings delivery to the decimal point, and companies that miss by fractions are punished with severity by a myopic market. Fear has ruled all, with market prognosticators fiercely adhering to the belief that equities are overvalued and will compress further as the forthcoming recession unfolds. We believe this period is one of historic opportunity for long-term investors – investors who look well beyond the next quarter or two – or three and wish to invest in growth megatrends. As we look at the past decade in the equity market, performance has been led by high tech companies providing platforms for consumers to buy experiences – from media to stuff. These tech platforms have done little to power the production of real things, such as public infrastructure, from transportation to energy. That is changing. At this point in time, the real engines for domestic economic growth are smaller companies that enhance utility with fewer resources. We invest GEOS in businesses providing solutions to most of our challenges today, represented by our portfolio of stocks. These solutions are at valuations relative to growth rates as well as the broad market that are historically low. Long term, thematic and solutions-oriented investing seems so clear and simple to us in theory and philosophy. This unwavering investment objective provided clarity amidst the storm of 2022, as investors sought some sort of flight to quality, or just panicked and sold stocks. We believe our portfolio of solutions to environmental and social problems is the essence of quality. The key we believe to 2023 will not be much different for us. Companies that can execute over time, providing solutions to the world’s problems will generate better growth than the broad market. We watch their profitability, capital efficiencies and execution – all extremely important in these times.
Very best to you into year-end.
This commentary is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. The opinions and analyses expressed in this commentary are based on Essex Investment Management LLC’s (“Essex”) research and professional experience and are expressed as of the date of its release. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is intended to speak to any future periods. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.
This does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product, nor does it constitute a recommendation to invest in any particular security. An investment in securities is speculative and involves a high degree of risk and could result in the loss of all or a substantial portion of the amount invested. There can be no assurance that the strategy described herein will meet its objectives generally or avoid losses. Essex makes no warranty or representation, expressed or implied; nor does Essex accept any liability, with respect to the information and data set forth herein, and Essex specifically disclaims any duty to update any of the information and data contained in the commentary. This information and data does not constitute legal, tax, account, investment or other professional advice. Essex being registered by the SEC does not imply a certain level of skill or training.
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