Energy crisis creates promising investment opportunities
Given the urgency of the latest crisis, the energy transition is moving center-stage again at a global level. In addition to mobilizing capital, the race to come up with the best ideas has begun worldwide. The prospect of innovations also creates promising investment opportunities – what investors need to know.
Energy crisis accelerating transformation of energy infrastructure
The current energy crisis is the largest global crisis of its kind since 1973 or 1979. Back then, it was mainly the global West that was affected, whereas this time round it is the whole world. This is giving renewed impetus to the energy transition. But as well as involving a move away from fossil fuels in favor of renewable energy, it is also about global electrification and developing the necessary infrastructure. Electricity consumption is likely to double as a result – even on the most conservative assumptions.
Driving this transformation at the desired pace calls for a huge mobilization of capital by 2050: Management consultants McKinsey estimate the cumulative capital requirements at the equivalent of CHF 255 trillion – and yet the investments made to date seem vanishingly small.
Urgency of energy transition means race to come up with best ideas is under way
The quality of the ideas developed is just as vital as the financial resources – if not more so. Answers are needed to the key questions: Where will energy come from in the future, what it will be used for, and how? The energy transition is the new buzzword globally, and brings major potential for disruptive innovation. The variety of options available ranges from new materials, through artificial intelligence, hardware and software, to commodities and efficiency improvements.
This is interesting from an investor's perspective too, because successful innovations usually create exponential growth. The cost of capital and capital markets are still at historic lows – even after the recent rate hikes. Such investments are not easy, however: They require courage, foresight, and risk capacity.
What investors should consider with respect to potential investment opportunities
- The potential offered by energy demand, on the one hand, and the transformation of energy production, on the other, do not seem to be priced into valuations yet. The MSCI World Energy Index, for example, is trading at a 49% discount to the MSCI World.
- It's about more than just energy: The expansion of infrastructure is becoming a competitive process. Building materials are not getting any cheaper, labor markets are unlikely to ease much, and the trend toward strategic regionalization and industrial policy will continue in response to supply-chain bottlenecks. The implementation of the infrastructure supertrend through regional instruments is likely to prove effective, with the firms that benefit in China likely to differ from the ones that benefit in the US or Europe.
- Commodities may well be trading at excessive prices in the longer term, with these continuing to rise. Equities appear more attractive by comparison – they are usually cheaper in valuation terms, and also offer annual cash dividends. Companies often have pricing power and create added value thanks to the power of better ideas. These are all good reasons for upgrading equities – particularly in the US as well as China – to "Overweight."