Trillions of dollars in green recovery flashes amber in market rout

All things green tech are seeing the light of day as the global economy digs its way out of the pandemic slump. Valuations have been skyrocketing, with makers of electric cars and solar glass panels the stocks du jour. But there’s room for skepticism.

Dubbed the Green-Shaped Recovery, the trend is projected to draw trillions of dollars of funding for more environmentally friendly projects and industry as well as climate mitigation jobs over coming decades. A lot rides on Joe Biden’s climate change plan. Victory for the Democratic candidate could take the global tally as high as $7 trillion. Regulatory guidelines on emissions that U.S. President Donald Trump rolled back would return in more stringent form. One outcome would be to incentivize the car market toward electric vehicles, away from internal combustion engine pickups and sport-utility vehicles.

A Trump re-election would vaporize some of those extra trillions, of course, but the green stimulus pile is still an impressive $1.71 trillion and growing, according to Credit Suisse Group AG analysts. Transport and infrastructure-related areas have received over $300 billion, mostly toward electrification. Wind and solar energy capacity will increase as the European Union’s Green Deal kicks in and the world, with or without the U.S., tries to reach decarbonization goals. That could mean an average 30 percent increase in valuations for companies that stand to benefit by 2035, Goldman Sachs Group Inc. has forecast.The flood of money has powered public markets to new highs, at least before last week’s rout. The prospect of the U.S., China and Europe all united on the green front has made a compelling case for investors. They should tread with care. Technology companies and their newer peers that have any “tech” have driven stock enthusiasm in recent weeks. Doubts around whether the rally has gone too far could hit the weakest link first. Backing companies that build solar panels and power grids, enabling energy generation and transmission, is one thing. Electric car companies that don’t even make cars yet are another.Consider the Chinese electric vehicle companies that went public in recent months. Five-year-old XPeng Inc., which sells itself as a smart EV manufacturer for the mid to high price segment, delivered 5,499 cars in the first six months of 2020, fewer compared to last year. Even allowing for the COVID factor, it continues to lose money. Guangzhou-based XPeng boasts full-stack autonomous driving technology, where, as Sanford C. Bernstein analysts put it, “success has so far eluded much larger rivals.” It managed to raise $1.5 billion in New York, more than hoped.

Li Auto Inc., which touts making “purely electric-driven” cars, has a solution to get around lack of charging infrastructure that sounds somewhat less pure. Here’s a description from the prospectus: “Its energy source and power come from both its battery pack and range extension system … (which) generates electricity with a dedicated ICE designed with high fuel consumption efficiency, an electric generator, and a speed reducer to connect them.” So, there’s an internal combustion engine, energy efficient or not.

No doubt, the Tesla Inc. effect has supercharged the hype, but such companies — if they even manufacture their own cars — don’t make enough to dominate in a single market, let alone surpass traditional vehicles. Manufacturers of good (though expensive) electric cars, like Audi AG’s e-tron and the Daimler AG-owned Mercedes-Benz EQC, haven’t gotten a pop on these models and are still struggling under broader auto sector gloom. A greener area to invest in might be recycling excess batteries based on older technologies still being manufactured and stockpiled, unable to be sold as the market anticipates cheaper and more efficient options. Meanwhile, mining for materials used in electric vehicles can cause considerable harm to biodiversity.

Clean infrastructure and utilities are less frothy, and may be a more fundamentally sound bet. National energy policies across Europe estimate €825 billion ($976.8 billion) of investment over the next decade. In China, less efficient operators with lower renewable generation like Huaneng Power International Inc. are adding new wind and solar capacity, presumably to generate more carbon credits to comply with an emission trading scheme. Despite the pandemic’s economic disruption, photovoltaic power capacity rose 20 percent and wind grew 11 percent in the first half from a year earlier. Solar energy product manufacturers like Xi’an-based Longi Green Energy Technology Co. have surged this year. So have renewable products like solar glass makers Xinyi Solar Holdings Ltd., up almost 70 percent, and sister company Xinyi Glass Holdings Ltd., more than 30 percent higher. They’re also benefiting from a demand-supply dynamic.Going green isn’t just a priority at this point; it’s a necessity given climate change and its impacts — floods, drought and wild fires to name a few — ravaging the world. A transition to new technologies boosting energy efficiency requires big public capital expenditure toward upgrading infrastructure, like grids and charging stations. Private investment is right to take opportunities.

The case for green is real, but not for all companies claiming the color. There’s still a lot of sifting through to be done.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

KEYWORDS

stocks, Climate change, Joe Biden, Donald Trump

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