Return to growth

The alternative energies market has not escaped unscathed from the economic crisis. Substantial cuts in solar subsidies in Spain and a reduction in project financing saw the markets for wind and solar energy decline slightly. But a new surge in the sector is upon us and we expect to see clear growth in 2010.

Growth will come from many sources. We expect numerous subsidy programmes for alternative energy in the US, China, Japan, Italy, Korea and numerous other countries. We expect to see improved availability of project financing.

While alternative energies have so far been primarily a European theme, growth is now likely to be driven by the US and China. Finally, a reduction in costs for solar modules and wind turbines will encourage demand.

However, strong growth does not always lead to positive share price performance. The solar sector in particular is characterised by low entry barriers and overcapacities, as is partly the wind sector. For these sectors, investing in cost leaders and companies in less competitive niche areas is preferable.

In the solar industry, solar panel manufacturers are facing huge overcapacity and Chinese manufacturers are expected to gain significant market share growth in 2010. With this in mind, we favour selected Chinese companies, equipment suppliers and project developers.

In the wind industry, we expect the US stimulus programme to reignite the market. We remain cautious on wind turbine manufacturers and prefer wind park operators and turbine component manufacturers as they operate in a less competitive market.

We see promising returns from investing in power transmission and smart grids. Power grid infrastructure is old, overloaded and not designed to integrate decentralised renewable resources. This will most likely be the recipient of the most investment over the next 20 years, creating opportunities for returns.

Although alternative energies will enjoy strong growth, they will remain relatively insignificant in the global energy mix in the next two decades as fossil fuels will continue to hold sway. Here, the most promising investment opportunities are in companies that have access to large resources, and service and equipment companies that can facilitate access to fossil fuels.

Orders for service and equipment virtually ground to a halt last year although, against the backdrop of recent rises in oil and gas prices and the large number of proposed projects, we expect to see greater demand in months to come.

Roberto Cominotto is a fund manager at the Julius Baer Energy Transition Fund. The views expressed here are his own.