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PETER SWITZER: Investment megatrends and the stocks to watch

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    2. Renewable energy

    Renewable energy is not just for the greenies. We all know the world is starting to move away from a reliance on fossil fuels to renewable energy, and stocks that are in the “clean tech” sector will be perfectly positioned in that transition.

    There are also some big global forces at play. Developing countries such as India will speed up their use of renewables. Much like India’s telco industry bypassing the expensive infrastructure for mobile telephony, the country’s energy consumption looks set to bypass traditional energy infrastructure models.

    On OECD forecasts, there will be another 3.1 billion middle-class consumers by 2030 – two-thirds from Asia, who will all drive higher demand for energy in the region.

    Even China, which is grappling with its pollution, is investing heavily in renewables and implementing initiatives to control carbon emissions.

    There is a good case for getting exposure to renewable energy companies to benefit from future growth. The question is how to best invest in this megatrend.

    To be honest, clean-tech stocks have not been on the radar of many investors, and looking at the Australian market it is not hard to see why. The market is scattered with micro-cap stocks that are too small and illiquid for most investors. To put it in perspective, the combined market capitalisation of 62 stocks in the Australian Clean Tech Index was $16.2 billion in January 2016.

    The Australian Clean Tech Index, however, has outperformed the broader sharemarket. You have to be mindful that the index is weighted by market capitalisation and therefore can be skewed to few of its biggest constituents. But over the three years to January, the index delivered a cumulative return of 30.6 per cent. The S&P/ASX Small Ords Index lost 13.1 per cent in that period.

    Offshore indices also highlight that the sector has been improving over the past few years. The S&P Global Clean Tech Index, which includes 30 of the world’s largest clean-tech companies, has a three-year annualised return of almost 8 per cent to February 2016.

    If investors want exposure to large renewable energy stocks they need to look overseas. For example, solar companies are represented in the NASDAQ but only a few solar providers exist on ASX, and they are all micro-caps.
    Investors can consider the iShares Global Clean Tech ETF, which is listed on NASDAQ. It aims to replicate the price and yield performance of the S&P Global Clean Tech Index. The index is invested in the large US and Chinese clean-tech companies, so it is a good way to get exposure to the biggest stocks in the sector.
    By investing in this ETF, investors can get exposure to some big names, such as First Solar Inc in the US and Enel Green Power in Italy.

    Investors can also go local with this megatrend. Listed fund manager Australian Ethical Investment focuses on investing in environmental and socially responsible investments. It has delivered a terrific one-year return of 48 per cent and over three years around 51 per cent.

    Although the fund focuses on clean energy, its mandate extends to investing in other sectors, such as healthcare. Its well-run unlisted international shares fund focuses on investing in global smart energy companies with a focus on energy efficiency.

    Last edited by Thesi: 12/05/16
 
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