Hedge funds are increasingly betting against green stocks – especially in the US. The reason given is the Inflation Reduction Act, which was supposed to support this market segment in particular.
A number of hedge funds have started shorting renewable energy stocks. They are betting that government climate incentives will plunge debt-dependent green companies into the abyss by fueling inflation and triggering even higher interest rates. Renaud Saleur, CEO of Geneva-based Anaconda Invest, believes that the enormous sums of money pumped into the U.S. economy by the Inflation Reduction Act (IRA) will make the lives of many companies it was supposed to help even harder in the short term.
“People have forgotten” that many green companies are still “project-funded and therefore extremely sensitive to interest rates and extremely sensitive to discounted future cash flows,” he said in an interview. “And extremely sensitive to the cost of the raw materials used to build the turbines or offshore wind farms.”
According to analysts at Goldman Sachs, the IRA, which was signed into law by President Joe Biden just over a year ago, could funnel up to $3.3 trillion into renewable technologies and other green assets in the coming decade. That’s almost ten times the amount originally reported by the U.S. government.
Investors get cold feet
The huge financial injection has been hailed by environmentalists as a program that will help limit global warming to 1.5°C. The financial industry has also been quick to see the stimulus as an opportunity, with analysts and bankers at Goldman, UBS, and JPMorgan, among others, betting that Biden’s IRA will drive a significant expansion of green investment.
However, some green stocks give investors cold feet. Shares of California-based SunPower have lost about 30 percent since late July, partly due to fears of rising U.S. interest rates. And SunPower module supplier Maxeon Solar Technologies, which recently announced plans to build a $1.2 billion polysilicon solar panel factory in the U.S., has declined by about half over the same period. This is partly because consumers are reluctant to invest as they respond to the immediate impact of inflation and higher borrowing costs.
“It could more truthfully be called the Inflation Acceleration Act,” said David Allen, head of long-short strategies at Australian hedge fund Plato Investment Management, which manages about $11 billion ($7 billion) in assets. “Maybe it will bring inflation down in the long run, but certainly not in the short and medium term.”
And according to Anaconda, it is now clear that climate incentives have contributed to the correction in the solar sector. “Solar companies were completely inflated by the IRA, and because there weren’t many liquid, good companies, people put money into them and valuations became way too high,” Saleur said.
Short selling also in European equities
According to data from IHS Markit, short-selling interest relative to Maxeon Solar’s outstanding shares is about 6 percent, up from 3.5 percent in June. For SunPower, short interest has risen to 10 percent from just under 25 percent at the beginning of the year.
According to Argonaut Capital Partners, based in the United Kingdom, there are opportunities to short green stocks not only in North America. Barry Norris, founder and chief investment officer of Argonaut, says that in addition to shorting U.S. solar stocks and some electric vehicle manufacturers, he is also considering wind turbine manufacturers and hydrogen stocks in Europe.
“In the UK, virtually all new wind projects that are currently being built will be unprofitable without very high electricity prices,” Norris said. According to Argonaut, the cost of debt for UK offshore wind projects is rising by about 500 basis points on average. According to BloombergNEF analyst Chelsea Jean-Michel, global cumulative offshore wind capacity is on track to increase eightfold by 2035. However, countries installing the technology face several obstacles, including rising costs and supply chain bottlenecks, she said.
Meanwhile, clean energy companies are seeing their free cash flows turn negative, according to a recent analysis by BNEF. BNEF estimates that even industry giants continue to increase their spending. Chinese electric vehicle maker BYD’s capital expenditure has increased by 2019 percent per year since 113; At Tesla, capital expenditures have increased by 75 percent over the same period, BNEF says. Nevertheless, according to BNEF, such investments can help green companies succeed in the long term. And, of course, the MSCI ACWI IMI Renewable & Energy Efficiency Index is up 17 percent this year, outpacing the 13 percent gain of the MSCI AC World Index.
Analysts at Goldman say investors shouldn’t underestimate the IRA’s potential to boost valuations of green stocks over time. “While an increase in debt can increase a company’s risks, it can also lead to a prudent growth strategy if the debt is used for productive purposes,” BNEF analyst Ryan Loughead said in an Aug. 16 report. But for now, “high interest rates have definitely made life difficult for many companies,” said Plato Investment’s Allen.