Profits can bloom
Generating power by using environmentally friendly fuels and developing new technologies may mean huge dividends for investors, writes Chris Davis
Politicians and business leaders around the world are becoming increasingly aware that how they manage energy can have long-term economic and social consequences. Investors are now looking for ways to reap rewards from this growing awareness.
To address future expanding energy needs, global warming, and energy supply and security issues, alternative energy sources (natural gas, solar energy, wind, biofuels, fuel cells) are being developed aggressively by the private sector and governments.
Lionel Kwok, Credit Suisse's head of products for private banking, North Asia, says that alternative energy themes are moving from a niche/experimental market to a mass market, prompting investment strategists to predict a rise in profitability. 'Harmful emissions are the key force behind alternative energy development and will further accelerate the growth potential for investment in alternative energy sources,' Mr Kwok says.
Clean energy projects could become multibillion-dollar investments over the coming years.
'Presently, alternative energy is not represented as an independent sector in its own right on major stock indices. However, there are selected alternative energy stocks that specialise in alternative energy sources. These types of equities are still fragmented across several sectors but are likely to emerge as an independent sector in their own right,' Mr Kwok says.
He believes strong market growth could lead to the emergence of larger companies in the alternative energy area. Financial institutions, such as Credit Suisse, have also constructed global alternative energy indices that permit worldwide exposure to all alternative energy sources.
Mr Kwok says: 'Clients can follow the indices and the development of alternative energy stocks. We can also create structured products and derivatives based on such indices, which would provide clients with exposure to alternative energy themes.'
He says specialised funds that invest in alternative energy concepts are also available to clients who want to benefit from growing environmental concerns and potential future changing energy markets. Investment advisers recommend that clean energy investments be treated in the same way as any other investment. Investors need to look at the management and structure of the companies they invest in.
They should also look at growth opportunities and the potential for sector dominance and unique qualities that prevent competitors from replicating their products or services.
'Clients have to understand the higher risk nature of alternative energy investment opportunities. The companies can be small- to mid-capitalisation names which may have limited ranges of products and are sensitive to economic cycles,' Mr Kwok says.
This alternative energy investment should be part of the alternative investment category (along with hedge funds, private equity, real estate) and should collectively represent no more than 10 per cent to 20 per cent of a balanced portfolio.
He says sharp declines in energy prices can also make alternative energy sources less cost competitive and impact overall profitability and performance.
'Of course, capital protection features can be added to structured products and derivatives to preserve investments.'
Bruce Schlein, Citigroup vice-president of environmental affairs, believes burgeoning demand for alternative fuels such as ethanol and biodiesel, offer positive opportunities for a range of sectors, from chemical companies focusing on crop production to biofuel producers.
'By using existing crop surpluses and emerging technologies to utilise cellulosic resources, it is quite possible that gasoline consumption could be increasingly supplemented with biofuels,' Mr Schlein says.
The European Union would also like to see greater use of biofuels - up to 10 per cent of the total amount of fuel used by 2020.
The United States government also intends to double the use of biofuels by 2012. In addition, countries such as Thailand, China, Malawi and Colombia are mandating the use of biofuels.
According to the United Nations global production of biofuels has doubled in the last five years and looks on track to double again by 2011.
A number of analysts confidently predict the alternative energy business will grow by 20 per cent to 30 per cent a year for a decade.
Such predictions might seem reminiscent of the dotcom bubble, but clean-energy advocates insist growth is sustainable due to a better understanding of the sector, and awareness being created by former US vice-president Al Gore and California governor Arnold Schwarzenegger. However, green or clean energy production has also created some well-publicised difficulties.
The amount of corn used to make ethanol in America has tripled since 2000. Ethanol distilleries account for about a fifth of the US corn crop.
Research by Goldman Sachs suggests that the price of biofuels (per unit of energy) has risen to that of petrol, and the price of corn and crude oil have converged to become what is known as 'agflation'.
Ananth Shenoy, managing director and head of managed investments, Asia-Pacific at Citi Global Wealth Management, says more than US$70billion was invested globally in clean energy and clean technology markets last year, a 43 per cent increase over the previous year.
'Investors are paying more attention to environmental issues given the wide-ranging ramifications of climate change and energy topics and their impact on the environment and the global economy,' Mr Shenoy says.
Awareness of environmental impact has created investment opportunities in a diverse range of industries. 'The obvious area would be the energy sector where investors could consider companies in alternative energy sources such as wind and solar power and biofuels.'
Investors could participate in the clean energy story via structured products with underlying assets consisting of baskets of shares in companies which are believed to be positioned to benefit as energy issues develop. They could also participate through investment funds focused on companies positioned to benefit from climate change technologies, water treatment and distribution, and alternative/clean energy sources.
Andreas Knoerzer, director of sustainable investments, Bank Sarasin, says contrary to a widely held prejudice, it is often the case that investments in sustainable solutions such as clean energy turn out to be more profitable and less risky over the long term than conventional investments.
'A far-sighted approach to sustainability management could create enormous growth and profit chances, and also give them a competitive edge over their rivals,' Mr Knoerzer says.