Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Chief Macro Strategist
Chief Investment Strategist
Summary: Our renewable energy basket is the worst performing basket over the past week down 5.1% with Brookfield Renewable Partners being the worst performing stock in the basket down almost 21% last week. The bad performance is despite the industry players reiterating their outlooks and analysts remain extremely bullish.
The worst performing theme basket the past week is our renewable energy basket down 5.1% as the meltdown across green transformation stocks continue. Our renewable energy basket is down 28% year-to-date. The biggest contributor to last week’s decline was Brookfield Renewable Partners down 20.8% following the company’s Investor Day a week before reiterating its strong outlook and that growth was looking stronger than ever. A return target of 12-15% was reiterated and capital deployment targets were increased.
While analysts have broadly brought the entire message from Brookfield Renewable Partners and increased their price target (consensus price target is now $33.84 or 64% above the last close), investors are getting increasingly worried about the outlook, multiples and return dynamics amid higher bond yields for longer and high commodity prices. At 16x EV/EBITDA, Brookfield Renewable Partners (BEP) is still priced considerably above the global equity market and given the green transformation a growth premium is expected, but if profitability is getting squeezed the question is whether it makes sense with these valuation multiples.
Bloomberg’s default risk model still has BEP at investment grade which is also confirmed in BEP’s corporate bonds with its Jan 2030 bond trading at a yield-to-maturity of 5.79% which is still a small credit spread on the same USD government bond maturity.
If we take a look at the stocks in our renewable energy basket then it is remarkable to see how high consensus price targets are in this segment. It is actually becoming a bit laughable because it almost feel like analysts covering these stocks will not admit that there have been a regime shift in valuation of green transformation assets. The big disconnect between consensus price targets and the current stock prices of renewable energy stocks does not help on investor confidence. Actually, quite the opposite.
In Europe, the poster child for the decline in green transformation stocks has been Orsted which is down another 3% today taking the drawdown from its all-time-high to 74% and down to levels not seen since 2018. Here the downward pressure on the stock price has been amplified by what the market thinks is breakdown in management’s integrity and company’s lack of ability to guide investors in key factor sensitivities to their wind projects.
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