Artificial intelligence and the shift to a lower carbon economy will be the big trends to boost productivity over the long-term, says AXA IM Investment Institute.
According to Chris Iggo, chair of the AXA IM Investment Institute and CIO of AXA IM Core, the benefits of AI are already starting to be seen, while lower and more stable energy costs will be beneficial to businesses and households in many economies.
Despite this, the performance of AI and renewable energy-related stocks has been vastly different. Technology has outperformed while the NASDAQ Clean Energy Liquid Series index has underperformed since oil prices rose in the wake of the Russia/Ukraine conflict.
Iggo said: “It might be a question of time horizon. AI technology is being delivered right now, while the returns on renewable energy production are still hindered by significant upfront investment and financing costs and an uncertain pricing environment as renewable energy secures a growing market share for electricity generation. However, the picks and shovels approach to equity investing around the ‘green theme’ is paying off as increased investment in the carbon transition takes place.”
According to Iggo, financing costs around renewable energy generation should fall as interest rates come down. The International Energy Agency estimates that electricity demand will grow by 3.4% per year to 2026, with better global growth, policy incentives and targets and the electrification of transportation all key drivers.
The build out of data centres to power AI is also creating rapid growth in demand for electricity, with big technology firms committed to using 100% renewable energy and securing renewable energy generated electricity to power their data centres and broader corporate operations.
Iggo said the demand is increasing the share of renewable energy in power grids and improving the competitiveness of renewables pricing. As the cost of wind and solar comes down even more, the share of renewable energy generated electricity will rise rapidly, with this trend already seen across some stocks.
US solar panel manufacturer First Solar is up 33% this year, while American Superconductor Corporation has seen its share price rise by 150% this year.
Politics are also likely to play a key role in the investment landscape going forward, says Iggo. While the UK general election results were expected and France’s inconclusive election result has seen its impact limited to French government bonds, the US election has the potential to provoke greater volatility.
Iggo added: “US President Joe Biden appears determined to remain the Democratic candidate, but there is clearly a desire in some quarters to replace him before November – throw that into the mix with heightened recession risk. Many market commentators are already saying that a Donald Trump victory means higher interest rates and inflation. Volatility is not likely to remain as low as it currently is.”
