In developed markets, more than three hundred companies lined up at the start of this race.
A coup de milliards, les plans de transition énergétique se succèdent et se répandent d’un continent et d’un pays à l’autre, chacun essayant de créer chez lui le plus de valeur ajoutée possible dans ce domaine stratégique. En bourse, ce thème majeur peut conduire assez naturellement à choisir une approche internationale diversifiée, à conditions de bien choisir sa méthode.
After the BRICS in the 2000s, then digitization in the 2010s, the energy transition is emerging as the major theme of the 2020s. In addition to climate considerations, there are strategic issues that cannot be ignored, as we have seen with the war in Ukraine. The OECD estimates that at the global level, the annual amount of investment in green energy could rise from 1400 billion dollars in 2022 to 4600 billion in 2030. This would represent 3% of world GDP (compared to 1.3% in 2022), and more than 10% of world investment (compared to 4.8% today).
TWO COMPLEMENTARY APPROACHES
A large number of countries and companies are now competing on this theme. The United States, Europe, Japan and China are vying with each other to attract capital, patents and know-how. This battle concerns many sectors of activity: raw materials, transport, electricity production, technology, etc. On the stock market, out of a universe of international stocks in developed markets with a capitalization of more than 2 billion dollars, an estimate puts the number of companies lined up at the start of this race at more than three hundred.
Each stock should be given the same weight in order to avoid ending up with a basket of stocks outrageously dominated by a few large stocks.
Faced with this major theme, investors have two main options, which are complementary. The first option is to follow each of these stocks, or a part of them, and to choose those that seem the most promising. This method is called “stock-picking”.
The second approach aims to capture the theme in the most diversified and global way possible, without prejudging the specific performance of each company, country or region. However, this apparently simpler method also has its requirements. For example, each stock must be given the same weighting in order to avoid ending up with a basket of stocks overly dominated by a few large stocks, such as Tesla, Toyota or Microsoft. This “equal weighting” method gives each company the same chance and considerably reduces the specific risks.
Secondly, it is important to make sure that this basket of stocks represents as many countries and sectors as possible, again with a view to maximum risk diversification. Finally, only select companies that have the best ratings on extra-financial criteria, including above all the quality of governance. In total, the “green recovery” basket of Dorval AM’s international management has included some 40 stocks since its implementation began in April 2020. Today, it is divided between Europe (40%), America (32%) and developed Asia (28%). In terms of sectors, industrial goods and services dominate (43%), followed by commodities (27%), utilities (16%), infotech (7%) and consumer discretionary (7%).
This highly diversified approach is producing good results. This “green recovery” basket clearly outperformed the benchmark MSCI World Equal Weight Index. Importantly, the basket’s broad diversification allows it to maintain a much more reasonable valuation than many funds or ETFs that focus on the often very expensive “clean-tech” stocks. At the end of February, the basket was valued at 15 times expected earnings for 2023, in line with the MSCI World Equal Weighted average.
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Source: Allnews | 9 Mar 2023 | François-Xavier Chauchat, Dorval Asset Management.
François-Xavier Chauchat is Chief Economist at Dorval Asset Management. With 28 years of experience, he brings an economic vision of the financial markets that goes beyond stock market indexes to include concrete themes and strategies. He graduated from Sciences Po Paris and then from the Sorbonne in monetary economics.
Dorval Asset Management is a management company recognized in the fields of flexible asset management strategies and stock-picking in European equities. It implements a conviction-based asset management approach, characterized by active management, away from indices. Dorval Asset Management has €2.2 billion of assets under management.