The bright side of green

It is easy to be sceptical of politicians promising 'change', be they David Cameron, Nicolas Sarkozy or – most topically – Barack Obama. But one area where the 44th American president does seem likely to make a clean break with the past is the environment. Alongside the economy, healthcare and schools, energy use was one of the “gathering clouds and raging storms” he pictured as darkening America in his inauguration speech on January 20. He went on to promise: “We will harness the sun and the winds and the soil to fuel our cars and run our factories.”

Inauguration speeches are one thing; policy is another. But the prospect of a sequel to the Great Depression has given Mr Obama a very concrete mandate to stimulate industry. He is in an unusually strong position to deliver on promises that relate to economic renovation, such as infrastructure spending and – more specifically – help for what is known as the 'clean-tech' sector.

This is a boost of epic proportions for companies that, for example, manufacture wind turbines or design energy-efficiency packages. It is also a huge boon for their investors.

“Politics aside, we were all incredibly relieved and delighted Mr Obama won the campaign. He has always indicated that the clean-tech sector was going to be a really important plank of his administration,” says Steve Mohan, chief investment officer at Low Carbon Investors, a venture capital manager focused on renewable energy.

The inauguration of Mr Obama is all the more welcome to investors like Mr Mohan because green stocks were badly hit in the second half of 2008, both in absolute and relative terms. Having gained 72 per cent over the preceding 24 months, the FTSE ET 50 index - a basket of the 50 largest 'pure play' environmental equities globally, put together by the FTSE with the help of Impax Asset Management - fell by 48 per cent in the second half of 2008. The broader stock market, as measured by the FTSE Global All Cap index, lost 36 per cent over the same six-month period.

Ian Simm, chief executive of Impax, which runs a series of green stock funds, attributes this poor performance to the high share of solar-power companies in the index. “It sold off in the summer because sentiment around solar stocks is highly correlated with the oil price,” he explains. A barrel of oil, which cost more than $140 last July, is now trading at roughly $50. This makes the case for investing in expensive alternatives such as wind turbines or solar panels less attractive. As the chief executive of Eon UK, one of the investors behind the Array project to construct a wind farm in the Thames Estuary, told the Financial Times last week: “The economics are looking pretty difficult.”

But Mr Simm defends the sector by stressing that only 20 per cent of what Impax defines as the broader universe of environmental stocks is affected by oil price volatility. The rest are industrial conglomerates with business interests in areas such as waste management or pollution technology.

These too were sold off heavily in October and November, however, when fears of a protracted global recession began to entrench. They have bounced slightly since, and Mr Simm is keen to point out most environmental sectors are anti-cyclical, as growth is underpinned by regulatory targets set by governments. But since it is impossible to split the green elements out of a broad-based stock, and with preliminary data showing a 1.5 per cent contraction in UK GDP last quarter, the medium-term prospects for these industrials are not rosy.