Green Alpha Advisors’ Market Commentary – Q3 2017

The global economy is evolving to new levels of efficiency, while minimizing some of the primary systemic risks that threaten to undermine our ecological underpinnings, and thus economic growth. These threats are myriad, but can largely be placed within three major risk groups: climate change, resource scarcity and degradation, and widening inequality. Green Alpha’s investment portfolios provide allocations that decisively move assets away from material downside risks and toward the fastest growing, most innovative areas of the global economy.

Performance in Green Alpha investment portfolios has been strong across the board in 2017. We are pleased to see outperformance generated by our investment processes’ rigorous research and careful stock selection. On a top-down basis, risk-causing industries are losing market share to their more innovative and efficient Next EconomyTM competitors. On a bottom-up basis, careful stock picking within this pool of innovation-driven competitors leads us to buy companies for clients that, on average, are driven by seasoned and diverse management, proven sales growth, and faster expected growth than their peers. The price you pay matters, too. We “spring-load” our portfolios by seeking companies that are trading at low prices relative to their proven and expected sales growth.

In the third quarter of 2017, here are a few highlights of what drove portfolio outperformance.

Our holdings gained market share.

For the Q2 earnings period, reported in Q3, ~86% of companies held in our portfolios grew faster than the average Wall Street sell-side analyst was expecting, meaning only ~14% of the companies in our invested Next Economy universe either missed consensus earnings estimates or were in-line. This was often the result of innovation in new products gaining market share from older competitors. Wind and solar energy were no exception; in 2015 and 2016, wind and solar combined outpaced growth of natural gas two-to-one, steadily growing their share of the electric energy market. Other sectors among our holdings where we observed greater-than-expected market share gain were: biotech and pharma, machine learning and connectivity, digital security, and zero emissions vehicles.

Ability to gain market share via innovation leadership and economic competitiveness is a key component of our stock selection criteria, and seeing it bear fruit during the quarter was a nice (if very short time frame!) development.

Solar grew more rapidly than any other source of power for the first time.

The International Energy Agency reported in Q3 that 165 gigawatts (GW) of renewables, dominated by wind and solar, were brought online worldwide in 2016. Solar in particular saw an amazing advance in installations, growing 50% in 2016, and projected to add 100 GW more in 2017. Responding to this, Fatih Birol, executive director of the IEA, wrote, “What we are witnessing is the birth of a new era in solar PV,” and added, “We expect that solar PV capacity growth will be higher than any other renewable technology through 2022.”

Why is this tipping now? Renewables-based power generation is becoming too cheap for fossil fuels to compete. Solar module production costs have fallen 80% since 2008, and solar power can be generated for as little as 2.42 cents per kilowatt-hour—half the price of new coal-based electricity generation. The cost-savings edge that tech-based energy generation (wind and solar) has over commodity-based energy (oil, coal and gas) will only grow in the future as modeling of solar PV generated electricity predicts a 59% cost decline by 2025.

Speaking of rapid, transformative change…

Global drive for Electric Vehicles is accelerating.

The global EV market has taken off in a big way. There are a handful of pure-play EV makers leading the charge, but traditional, mainstream automakers are seeing the transition as inevitable and are investing tens of billions into converting their fleets to zero-emissions vehicles, mostly plug-in EVs. In addition, Germany, the UK, France, Holland, Norway, and India have passed or are considering bans on all internal combustion engines in the next decade, and the European Union says all new homes must have EV chargers in 2019.

Most significantly, China announced in Q3 that it intends to ban internal combustion vehicles. We cannot overstate the importance of this development, and what it means for investors. China is the world’s largest and fastest growing automobile market. With this move, China has put global car makers on notice – they must evolve toward exclusive production of zero-emission vehicles (ZEVs) or risk irrelevance in the coming couple of decades. (We also saw indications in Q3 that California is considering following China’s lead, with its own ban on combustion-engine cars.) Existing ZEV makers now have a key first-mover advantage, and there is plenty of market for new players to earn significant growth. Moreover, this means there are a lot of opportunities in the various supply chains necessary in bringing these vehicles to market. Before long, internal combustion engines are going to look clunky, unacceptably dirty, and old-fashioned. Being early to these trends will have been and will continue to be a major plus for shareowners.

None of this is good news for fossil fuels.

Between renewable electricity generation replacing coal, oil, and ultimately gas-fired generation, and non-fossil-fuel burning cars becoming the everyday norm, it’s hard to see where new demand for fossil fuels can come from in the 2020s and 2030s. Based on current evidence and projections, it is highly probable that fossil fuel commodities’ use will shrink as a result of declining cost competitiveness. Holding fossil fuels securities for the long-term looks increasingly hazardous. We’ve always believed that fossil fuels cause far too much global systemic risk to endure as a primary source of energy, and increasingly we’re seeing clear and present indicators that they can no longer represent a reliable source of risk-adjusted returns.

We are proud to report such strong results to clients!

Investing is a long-term endeavor, but we enjoy reporting on short-term progress as the transition to the Next Economy unfolds and gains increasing momentum. For portfolio-specific performance and characteristics, please see our portfolio fact sheets.

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Important Disclosures:
Past performance is no guarantee of future results. It should not be assumed that the recommendations made in the past or future were or will be profitable, or will equal the performance cited in this document. Nothing contained within this commentary should be considered to be individualized investment advice. You may request a list of all investment recommendations made by Green Alpha in the past year by emailing a request to info@greenalphaadvisors.com. Please read additional important disclosure information here http://greenalphaadvisors.com/about-us/legal-disclaimers/.