The beleaguered clean energy sector is finally showing signs of life, as Citi analyst Vikram Bagri discusses in the new research report, Unexpected Rally in Renewables. Mr. Bagri sees four reasons the rally may continue: short covering, data centre demand, solar power development and new Chinese regulation.
Using the BMO Clean Energy ETF (ZCLN-T) as a proxy, the performance of the sector has been abysmal in recent years. The ETF fell 37 per cent between mid-January 2023 and the end of April this year. In the brief period since that time, however, the fund has jumped 13.5 per cent.
Mr. Bagri believes short covering is a major catalyst for the recent rally. The sector had been widely shorted as progress towards decarbonization was slower than many hoped. Research reports highlighting the massive electric energy requirements for artificial intelligence (AI) expansion, and AI providers’ commitment to meet this demand with renewable power, resulted in a rush to cover related shorts. It is possible that the speculative funds that shorted the stocks may now switch to long positions, according to the analyst.
The AI expansion is one reason Citi expects further strength in renewable power stocks. Microsoft CEO Satya Nadella announced last week that 100 per cent of the company’s AI-related data centre power needs will be met with renewable power by 2025. Microsoft will be among the five biggest players in the AI revolution.
U.S. Independent System Operators (ISOs), regional organizations that co-ordinate power transmission, estimate a large increase in planned solar power generation. Mr. Bagri reports that the U.S. solar pipeline has increased by one terawatt to 2.3 terawatts, “Hence, it appears, solar will play a key role in datacenter buildout in the U.S. and investors are looking to gain exposure to the theme through renewable stocks.”
The Chinese solar power industry is discussing reforms to manage aggregate capacity and establish intellectual property protections. These measures will help prevent global overcapacity and protect pricing power for Western solar power equipment providers, another boost to developed world renewable power stocks.
U.S. natural gas prices are also supporting renewable power demand after a recent 40 per cent rally. American households using natural gas are now more incentivized to switch to renewables.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown
Why it’s time to join the crowds leaving a former favourite parking spot for investing cash
Exchange-traded funds holding their assets in big bank savings accounts were a massive hit when interest rates were rising because their yields are directly influenced by the Bank of Canada’s overnight rate. Also, in uncertain times, these ETFs offered a refuge from stock and bond turbulence. Now, strong results from stocks and expectations of better bond returns are enticing investors to take on more risk, reports Rob Carrick.
The little-known sub-index that’s beating the TSX Composite
Many people have never heard of the S&P/TSX Completion Index, and, no, it does not consist of companies with a track record of finishing their projects on time. Rather, it’s comprised of the stocks in the Composite Index that are not included in the large cap S&P/TSX 60 Index. As Gordon Pape reports, it has outperformed the Composite this year and there’s an exchange-traded fund that follows it.
Inflation data, presidential debate could sink U.S. summer rally
Summer has historically been the slowest season for U.S. stocks. The benchmark S&P 500 has risen 56 per cent of the time between June through August. This summer brings extra headwinds, though, with ongoing uncertainty over the timing of rate cuts and the unknowns of the U.S. presidential election expected to drive some choppiness. David Randall of Reuters looks ahead to what could be a challenging summer.
Also see: Rising U.S. debt burden spooks some bond investors ahead of November election
A bet on copper has paid off. But what can investors expect now that prices are soaring?
The argument in favour of copper was straightforward when the commodity was in the doldrums last year: Copper is integral to a lot of modern pursuits, from AI to electrification to green energy, so it was just a matter of time before an investment would pay off. But with copper prices soaring this year, can investors hope to squeeze more out of the now-hot sector? David Berman shares his thoughts.
Speculative stock mania has returned. It’s not going to end well
Meme investing, after taking a couple of years off, is back in fashion again, driven by non-professional investors. Dr. George Athanassakos thinks retail investors will end up being poorer because of it. Because for him, investing is a business where the guy with the most patience, discipline and long-term perspective wins.
Others (for subscribers)
The most oversold and overbought stocks on the TSX
Monday’s analyst upgrades and downgrades
Monday’s Insider Report: CEO sells over US$1.7-million from this copper stock flirting with a record high
What investors expect from India’s election outcome
Globe Advisor
Three big mistakes advisors make when integrating alternative assets into client portfolios
New target-maturity bond ETFs speak to investor demand for stability amid uncertain rate outlook
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Ask Globe Investor
Question: Why aren’t Canadian banks going up like the big U.S. banks? JPMorgan Chase & Co. JPM-M-N, for example, is up about 17 per cent this year, and Wells Fargo & Co. WFC-N has gained about 22 per cent. Canadian banks are either down or have single-digit gains. Why is this happening, and what will it take for Canadian banks to move higher?
Answer: I ran your question by Rob Wessel, a former top-ranked bank analyst who is now managing partner of Hamilton ETFs.
“Historically, the Canadian banks have been very strong investments relative to their U.S. large-cap peers. That said, the U.S. banks have meaningfully outperformed the Canadian bank peers recently,” Mr. Wessel said in an e-mail.
There are several reasons for this, he said. A year ago, U.S. banks were trading at lower valuations than the Canadian banks. But thanks to the resilient U.S. economy, U.S. banks have enjoyed stronger growth in earnings per share, driven by rising net interest income, solid loan growth and strong capital markets for the largest banks.
“By contrast, a sluggish Canadian economy has weighed on revenue growth for our banks and contributed to large and sustained increases in loan-loss reserves, making it difficult for the Canadian banks to grow earnings, which has weighed on their stocks. Taken together, this has produced a surprisingly large divergence in performance, which will be difficult for the U.S. banks to sustain,” he said.
Problems specific to individual Canadian banks have also weighed on their share prices. Toronto-Dominion Bank TD-T, in particular, has been slammed by allegations that drug traffickers exploited its lax anti-money-laundering controls in the U.S. to wash hundreds of millions of dollars in illicit profits, sparking investigations by the U.S. Department of Justice and financial regulators. Analysts estimate that TD could ultimately face penalties of about US$2-billion.
TD kicked off second-quarter earnings season for the banks on Thursday, posting adjusted net income of $3.79-billion that was up slightly from last year and ahead of analysts’ estimates. The rest of the Big Six banks will report this week.
According to Mr. Wessel, potential catalysts for Canadian bank stocks include stronger economic growth, more favourable capital markets and improved credit conditions.
“In our view, analyst estimates for credit losses for next year – 2025 – are quite conservative and include continued reserve builds, which is a big assumption given that total allowances for credit losses have risen for seven consecutive quarters and are currently approaching highs reached during the COVID-19 pandemic,” he said.
“This conservatism offers the potential for credit losses next year to be lower than expected, resulting in better-than-expected earnings and increased consensus earnings estimates for 2025. Lastly, the sector is not terribly expensive on forward earnings, with an average multiple of about 10.3 times 2025 estimates, and dividend yields, on average, are close to 5 per cent, providing some downside protection.”
--John Heinzl (E-mail your questions to jheinzl@globeandmail.com.)
What’s up in the days ahead
Tom Czitron will have some fresh advice on where to place your bets in the current bond market.
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Compiled by Globe Investor Staff