Larry Berman

Berman's Call

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Over the past decade, we have seen two very dramatic trends in the return relationship between traditional energy markets (IXC – iShare Global Energy ETF) and the clean energy (ICLN – iShare Global Clean Energy ETF) markets. The longer-term outperformance trend favours clean energy. The relationship now suggests selling traditional energy and buying clean energy. The IXC could have a bit more upside here. We would not fight that argument too much. But you are buying close to the levels see pre fracking boom. If you believe we are going back to that then go for it, but if you believe clean energy is the future, it’s time to shift. While the Russian-Ukraine war has complicated the analysis to be sure, and that will be a consideration, we could see an end to the war any time. Russia will likely remain isolated to the West until it has a new leader and a change in its geopolitical views, which could be a decade or more from now. This global rebalancing energy dynamic will likely accelerate the use and need for green energy resources in Europe and the world in general. Solar appears to be the sector that wins the short-term battle. TAN is a pure solar play in the ETF space.

My style is to buy dips in stocks, sectors and ETFs where I see a good potential to outperform. From this lens I’m very statistical looking at the probabilities when making the timing aspect of the investment decision. I’m not talking about timing markets. That’s about trying to be all-in or all-out and I have yet to meet anyone that can do it consistently. I’m talking about spotting a trend and determining when the risk-return is favourable to join it. 

To be sure, the war in Ukraine and the dislocation of global energy supply, and demand, could push oil prices much higher. You get this impression listening to the oil bulls. It’s hard to refute that view for now. We could easily see the relationship between clean and traditional energy still favour traditional for a while longer. So with many decisions like this, it’s about timing. With a 5-10 year lens, I’m pounding my fist here. With a 1 year lens, I like it a lot. I have no clear view on the next few months. Clean energy are mostly early stage companies and get caught up in the growth trade and all will know that growth names have performed poorly as central banks fight inflation pressures. That clouds the next few months for sure.

For the yield seekers out there, the global clean energy ETF will yield about 1%, while the global energy ETF will yield more than 3.5%. New and less mature companies reinvest their profits to grow versus paying out a share of profits to shareholders. The traditional energy players are no longer reinvesting big money in finding new oil and gas like they used to. We may never see another oil refining plant built in the developed markets every again. We will see solar and wind farm capacity double every few years for as far into the future you want. In fact, some of the biggest investors in alternative energy is BIG OIL.

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