Equities.com hosted a webinar on Nov. 19 focused on investing challenges and opportunities in the midst of potential policy changes expected when President-elect Donald Trump takes office on Jan. 20.
The four-hour event, titled “Investment Strategies Under a Trump Administration,” unfolded with Thomas Kuh, Head of ESG Strategy, Morningstar, giving a keynote talk, and three additional sessions focused on the environment, social and real estate.
Winners and losers
Kuh kicked off the keynote talk noting that the “U.S. is more susceptible to the kinds of policy swings we’re about to experience when administrations change, with climate policy being a case in point.”
On climate change, Kuh said: “First, it’s hard to fight physics. Second, the global economy is decarbonizing as we speak. Third, businesses hate uncertainty and value stable policy regimes. With regard to physics, the science is clear that carbon dioxide from burning fossil fuels has accelerated climate change, but it’s happening faster than even most scientists predicted.”
Kuh warned that the effects of climate change are becoming evident everyday with hurricanes, flooding, wildfires and droughts.
“The global economy, according to what most scientists say, is way behind its carbon reduction goals. The urgency is greater now than ever,” he said.
The good news, Kuh added, is that the global economy is decarbonizing.
The implications for investors, Kuh said, is there will be winners and losers, or what he calls “climate transition investments” and “climate solutions investments.”
Climate transition investments focus on “taking steps to transform their business models to operate profitably in a low carbon economy.” These funds typically offer “broad diversified portfolios that are designed to track the market closely so they can serve as core holdings,” Kuh explained.
By contrast, climate solutions funds “invest in companies providing technology products or services that support the mitigation or adaptation to climate change,” he added. Their portfolios typically include small and mid-cap companies that are less diversified and more volatile.
Energy transitions
Session one highlighted the demands facing the energy grid, the shift to nuclear energy and how water is more valuable than gold in some areas of the country.
Moderator Jeff Gitterman, partner at Gitterman Wealth Management, asked each member of the panel how the changing hydrological cycle is impacting their investments.
“More money has been invested in energy transition than fossil fuels over the last eight years. This year, energy transition investments will be at their highest level ever,” Ron Pernick, managing director at Clean Edge, Inc., replied.
Pernick added that it is critical that the aging water infrastructure be replaced. “There’s this huge need for grid infrastructure to meet all of that load growth,” Pernick said.
Sprott Asset Management CEO John Ciampaglia added that one of the biggest drivers of grid growth is air conditioning. “As the world gets hotter, millions of people will want air conditioners, which creates grid growth,” he said.
Shift to nuclear
Ciampaglia said that nuclear energy should be included in the conversion as nuclear is a “perfect complement to renewable energy.”
Over 20 nations pledged to triple their nuclear power by 2050, Ciampaglia said, which has been a tremendous change in energy policy around the world. Ten years ago, the sector was “pretty much left for dead. Governments didn’t really care about it.”
For a lot of science-based reasons, Ciampaglia notes, there’s been a hard shift back to nuclear technology.
Water Asset Management CEO Marc Robert and his company have been investing exclusively in water since 2005. Robert said that although there is a lot of demand for water, it’s “very difficult to move water large distances to take advantage of pricing inefficiencies or pricing differences.”
‘Huge underinvestment’
From a financial viewpoint, Robert said, there has been a “huge underinvestment” in water.
Few people are talking about moving water to communities that have no access to water or sanitation, he said.
“We’re also seeing increasing demands for water from lots of power development and increased housing demands,” Robert added.
Robert notes that, historically, investors have been able to “outperform most market indices by investing in water in companies that are well-managed and well-capitalized.” He notes that compared to other expenses, such as cable and the internet, water bills “are still relatively affordable.” He believes that water is a very compelling story. “The new administration will create even more compelling reasons to continue to invest in water.”
“We’re not running out of water, but we’re running out of water in places that people want to live. A lot of people have thought through the power side, but not a lot of people have thought through the water demands. Suffice it to say, a lot of growth is happening in areas which are quite dry,” Robert said.
AI accelerator
Gitterman raised how artificial intelligence has “thrown gasoline on an already burning fire of energy usage.”
“We traditionally have had 2% energy growth demand annually. Now we are looking at numbers between 6% and 10%,” he said.
As energy demand increases going forward, Gitterman said, “that means building more data centers. Many people don’t realize how much water and energy they are using every time they use ChatGPT on their phone. There’s a big disconnect between some things we do on our phones and the environmental impact.”
Ciampaglia noted that an estimated 2% of electricity demand is used by data centers in the U.S.
“The numbers forecast for 2030 is somewhere between 7% and 10%, and the reason is the data centers are evolving,” he said. Big tech companies, Ciampaglia noted, want clean power so they are doing deals with renewable energy companies on a very large scale.
“Everything from funding the restart of a nuclear power station that’s been closed for five years as well as financing power purchase agreements, or doing equity investments in companies that are developing new technologies, which are called ‘small advanced modular reactors,’” Ciampaglia said.
Much-needed capital is coming to a sector that’s been starved for capital for a long time, Ciampaglia added.
Remember, “nuclear power has zero greenhouse gas emissions, which is why many technology companies with self-imposed net zero targets are focused on it,” Ciampaglia said. He added that a lot of younger employees have embraced climate change and are concerned about it.
“Amazon AMZN , Apple AAPL , Oracle ORCL , and Microsoft MSFT have all announced [nuclear] deals in the last six months,” Ciampaglia said. “It’s really shining a spotlight on it.”
Growth on the grid
Pernick pointed out that in addition to AI-related computational demands and the onshoring of manufacturing, electrification of both heat and transportation is playing a key role in energy demand.
“This means more investments in transmission lines, power controls, substations, smart meters, and all of the things that we track in our thematic grid coverage,” he said.
Pernick doesn’t believe that the grid will necessarily be negatively impacted by the Trump administration. But he admits that clean energy may be more constrained.
“Under the last Trump administration, every one of our indexes in clean energy and infrastructure was up. Clean energy was up 447%, global wind was up 133%, and the grid was up by 128%. HHO, our water index, was up 100% during the last Trump administration. Grid and water did well under the Biden administration, too, but perhaps counterintuitively, oil and gas were up dramatically during Biden while down during Trump,” Pernick said.
Pernick said a lot of companies are beginning to use AI to improve the grid and optimize operations. “For example, Schneider Electric (SU.PA) is working with Nvidia (NVDA) right now to optimize supercomputer data center design for their AI chips,” he said.
Ciampaglia said that the Biden administration was “incredibly pro-nuclear as well as with a lot of other clean technologies.”
“Historically, Republican administrations have been pro-nuclear and the reason the Biden administration has been pro-nuclear is because of their climate-focus goals. We don’t see any wholesale changes happening with the incoming administration,” he said.
This is the first article in a two-part series on an Equities webinar focused on the second Trump administration. You can watch that webinar are learn more about the guest speakers here.
