Policy Cant Live Without Them
Remember our first commentary last quarter? We highlighted the many announcements from the U.S. and Europe on the heels of the 26th Annual Conference of Parties of the United Nations (COP26) in Glasgow. It was clear that the most influential actors on the global stage were united in their pursuit of net zero greenhouse gas emissions. The euphoria seemed to have dissipated in just two months. The long-awaited Buildback Better bill in the U.S. was halted in Congress. A draft proposal on net electricity metering policies by California utilities (NEM 3.0), was revealed. This made it clear that Europe was experiencing an energy crisis. These factors combined have impacted the environment sustainability landscape to the detriment relatedequities.
In the fourth quarter, equities whipped around amidst policy and broader macro uncertainty, including inflation and potential earlier-than-anticipated rate hikes in the U.S. Investors spent some time digesting the information and are taking a cautious stance heading into 2022, as uncertainty lingers around Build Back Better and other legislative and regulatory outcomes. In a fast-growing industry, where decades of policies and players are being replaced, high-level policies can have a significant impact on short-term sentiment. This underdeveloped landscape is prime for disruption. Technologies and services that can demonstrate bankability and the ability generate profitable, sustainable growth should be the ultimate losers, in our view.
Volatility is almost inevitable and could be seen as a blip on the road to energy transition investment opportunities. The pledges made at Glasgow represent a major step forward for major companies, governments, and institutions towards their net zero targets. We believe we are at an important point where the market can accelerate in the development and deployment technologies and services that address the cause of net zero as long as they are kept.
A Look Back on theQuarter
TheVanEck Environmental Sustainability Fund, ENVAXThe fourth quarter of 2021 saw a return of 1.98%, which was below the broad-based MSCI All Country World Index’s 2.18%.1(ACWI), which grew by 6.77% during the same period. Unfavorable regulatory policy pushed certain sectors, while inflationary and interest rates risks kept growth stocks in check.
EV continues to drive performance in advancedmaterials
Infineon (3.80%) and Tesla (3.95%) led the quarter’s performance. This speaks to the growth of the EV supply chain and the importance delivering on key performance indicators. Infineon remains a favorite stock due to its 40% exposure in EV power semiconductors. We believe that pricing could provide incremental upside to margins. Freyr, which licenses the 24M lithium-ion manufacturing process, was validated by Volkswagon Group. They announced a partnership agreement with 24M. We expect Freyr will find significant offtake for its batterycapacity quickly, given the growing demand for batteries.
Smart Resource Management – Healthy Capex, Strong Pricing: All SystemsGo
As a result, most holdings in the semiconductor and industrials sector were able to benefit from healthy global end markets. This was evident in Teradyne’s performance (1.38% of fund assets), a semiconductor test equipment manufacturer. We also believe that Teradyne is well-positioned in secular trend such as the increasing complexity and industrial automation. It is a leader for collaborative robot (cobots) technologies. Infrastructure GPS solution provider Trimble (3.09% of fund assets) continues to weather supply chain issues well, and remains focused on delivering on its software subscriptionmomentum.
Mixed Bag inAgri-Tech
The quarter saw significant weakness in food-based, consumer-facing holdings as part of the wider pullback in equities. The deceleration in strong growth expectations did not support high valuations. This was partly offset by Bunge’s strength in biofuels (1.78%) continuing to execute well. Bunge has a strong environment for oil-seed crushing and successful management restructuring work as they continue to refine their business.
Renewable Energy Everything, except the KitchenSink
California’s net metering proposal addressed earlier pressured solar names. Residential solar project developers were the hardest hit (Sunrun, 1.52% of fund assets, Sunnova, 1.54% of fund assets). Growth prospects and project returns were also questioned, due to the new rates proposed, which would ultimately be penal for solar homeowners. Although evidence is mounting to suggest that the proposal in its current form won’t pass, the subsector remains in risky territory until more clarity is available. We believe the assets have been oversold. The project developers have already moved away from a single-seller model for solar to an integrated approach that includes EV and battery channels. But the macro environment will continue to be a larger driver of the stocks near-term.
The relative strength of inverter manufacturers (Enphase 2.31% of assets, Solaredge 1.99%) partially offset the negative residential solar performance. Despite greater solar volatility, their global diversification, ability to weather supply chain shortfalls better than peers, led to them ending the quarter higher.
These are the 2022 and Beyond Themes We Are Excited About
Software and Artificial Intelligence (A.I. at theWheel
We believe that the pace of energy-transition enabling technologies will accelerate in this year. As the demand for electricity is growing rapidly, so does the need to have interconnected and predictive technology. It is worth noting that California’s NEM 3.0 draft can be viewed as being blatantly hostile to solar standalone.HighlySupportive of battery storage, as echoed by Governor Newsom’s recent budget proposal2toward climate change initiatives.)
We are especially focused on smart grid management solutions. These solutions help to connect supply and demand between producers and consumers more efficiently. The key role of battery storage in grid decarbonization is its ability to store and distribute energy in a way that reduces costs and smooths out consumption curves. Software developers like Fluence (0.16%) and Stem (1.83%) use A.I. With the goal to predict future usage and reduce demand surges, software developers such as Fluence (0.16%) and Stem (1.83%) are using A.I. to analyze consumer consumption patterns. This technology could have prevented events like the Houston power crisis of last year, where three consecutive severe winter storms and unprecedented energy demands led to the devastating failure of the city’s power grid.
The 1.2 Trillion HourOpportunity
The next few years will see a tight race between automobile OEMs and their suppliers of battery supply chains in order to achieve their EV growth goals. However, there is another opportunity that all OEMs have for pole position further into the decade. Morgan Stanley estimates that the average human spends 600 billion hours a year in a vehicle, with that number likely to double by 2040.3The number is not important to us, but the opportunity to reimagine the hours that humans spend passivefocusing.
EVs and autonomous vehicles (AVs), go hand-in-hand. While EVs address a large chunk of the carbon emissions from transportation (cars & trucks contribute to 80% overall share of transportation’s carbon emissions), an efficient AV is even more efficient. Platooning is a method in which vehicles travel in tight formations to reduce aerodynamic drag. It also eliminates traffic avoidance and random start/stops. While deployment at scale is still several decades away (Morgan Stanley again estimates that it will not be until 2050 until fully autonomous vehicles account for some 47% of miles traveled), the technology is emerging today, in a variety of differentapplications.
All autonomous systems are not created equal. There are different levels and applications for different vehicles. The current level 2 (L2) of passenger cars is still the norm. Tesla, the world leader in automation, plans to make autonomous vehicles L4 in 2022 through the development and deployment of full self-driving (FSD).
Trucking has a unique set if challenges. Tusimple, which holds 0.45% of fund assets, is a pioneer in this space. They are piloting driver-out tests that fully autonomous semi-trucks can navigate traffic signals, on-off ramps, emergency lanes, and highway changes.
Deere, which accounts for 2.3% of all agricultural machinery assets, recently introduced the 8R, an autonomous row crop tractor that is ready to be used in large-scale production. Six stereo cameras allow for 360-degree obstacle detection. The machine can also process captured images to determine whether it should stop or continue. Geofencing, which is GPS-enabled programming, can be used to ensure that the machine’s position is accurate down to an inch.
Although we are still early in deployment and not yet at scale, it is clear that autonomous tech offers significant opportunities for productivity and operational efficiency. As new technologies are developed, there will be bumps in this road. We are monitoring this space closely.
Original PublishedVanEck, January 27, 2022
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