Nikko: how to invest in the future of energy
Where should investors invest in energy? To use the old California Gold Rush advice, not in the mines but in the miners’ supplies – pickaxes, shovels and the like. So says Nikko Asset Management.
Energy has been a terrific investment this year. Up nearly 67% in 2022, it’s the only positive sector in the S&P 500, according to Yardeni Research. The problem is that energy values are very volatile. They soared in the middle of the last decade, then crashed in 2019 before the pandemic, and since 2021 they have been on the rise. “There have been 11 energy cycles since 1967,” Iain Fulton, a Nikko portfolio manager, said in an interview.
Yet energy may not always be such a cyclical yo-yo. With an impetus fueled by climate change, there is a strong movement towards renewable energy, as well as a trend to increase the electrification of the economy (think electric vehicles). This means many more energy investment opportunities. A McKinsey study puts the tab at $9.2 trillion by 2050. Other estimates are higher.
The question then becomes: what to invest in? For Nikko, the answer is to acquire shares in what he calls “broadband energy infrastructure”. In other words, the companies that will help the great energy transition, but not the energy producers themselves, argues the investment company in a research document.
First, it means avoiding oil companies, which are susceptible to a windfall tax, Nikko argues. President Joe Biden has threatened to impose such a tax on oil producers, whose revenues have surged due to shortages and rising crude prices. He may struggle to do so, given a GOP-controlled House of Representatives next year, although you never know: the likes of Exxon Mobil are unpopular among a large segment of the Republican and Democratic voters.
Also, skip the utilities, says the paper, written by a Nikko portfolio manager, Johnny Russell. Reason: Regulators can cap their returns. Also, pass on commodities, advises Nikko, as the energy future has long defined volatility.
Let’s move on to pickaxes and shovels, then. Nikko recommends Worley, an engineering services company, which it says is experiencing double-digit growth. Another is Emerson, which specializes in methane detection and natural gas leak prevention. “Gas is ‘the transition fuel’ to bridge the gap between today’s reliance on fossil fuels and the era of renewables,” the study says.
Then there is KBR, which has a unit that has a method of providing green natural gas, which is not from carbon-based sources. “Hydrogen energy can be stored,” Fulton said at one point.
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Tags: Iain Fulton, Johnny Russell, Nikko Asset Management