Opportunities on the Horizon: Investing Through a Slowing Economy

Thematic updates | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 55 Competition between renewables and carbon energy is intensifying The global transition to greener energy sources presents a significant challenge for Middle Eastern hydrocarbon exporters, which are heavily dependent on revenues from fossil fuel extraction. The need for large-scale investment in renewable energy infrastructure, coupled with the growing vulnerability of their existing business models, has led some observers to question whether the energy transition could provide the impetus for improved trade and reformwithin the region. The United Arab Emirates and Saudi Arabia’s ambitious renewable energy targets, such as the former’s aim to achieve 30% renewable energy by 2030 and the latter’s goal of 50% by the same year, signal a growing awareness of the need for change. By investing in renewable energy projects and infrastructure, these countries are securing their own energy futures and contributing to the global push toward a cleaner, more sustainable energy mix. As the world continues to grapple with the challenges posed by climate change and the need for a more sustainable energy future, the actions of OPEC+ and major oil-producing nations will play a crucial role in shaping the trajectory of the global energy market. Consolidation will accelerate the adoption of renewables Renewable energy is becoming more economically attractive as the price continues to decline and demand increases. Even in the relatively energy-rich US, electric heat pump installations are growing rapidly, and electric passenger vehicle sales grew by 65%, compared with a 14% decline for those with internal combustion engines. OPEC’s production cut means that energy prices will likely remain higher than in previous downturns. Relatively high oil prices will impact the renewable energy sector unevenly. Established energy firms that already have substantial revenue will have the opportunity to gain market share and acquire valuable human and patent resources from firms less well-positioned to weather the coming downturn. We see conditions for a round of consolidation in the renewable energy sector, much like we’ve seen with railroads and oil at the beginning of the 20th century and again in the tech sector at the beginning of the 2000s. We view this sort of creative destruction as a feature, not a negative, that is likely to help accelerate the green energy transition. For investors, selectivity will be key. Businesses with a valuable product or intellectual property asset but no good way of executing on it may be absorbed by entities with access to capital and strong execution capabilities. It’s likely the clean technology (cleantech) sector will end up bigger, though with fewer firms. What should investors do now? Investors should consider investing in firms that are cash flow positive and well financed. As access to capital is currently constrained, companies with capital can more rapidly develop and dominate their respective markets. Battery, metals, and oil & gas companies that are slowly evolving their business models in a diversified manner may be safer than startups at this stage in the economic cycle. Startups are typically more reliant on government policies that focus on grants instead of consumption stimulus. But as the green energy industry matures, government funds are shifting from research to consumption stimulus. Larger electric vehicle companies are focusing on vertical integration, which could lead to some consolidation. As battery companies try to secure mineral supply, some startups may fail, and their assets will get sold off. For better or worse, in this cycle the winners will be able to compound their returns. Large companies are facing meaningful challenges, such as carbon taxes. Firms that can either generate offsets or reduce carbon emissions create more value. For example, a tax