The sector investors are backing to perform the best in 2020

One in three investors back this sector to soar over the next 12 months. But is it already overvalued?

The ETF provider conducted a survey of UK investors, asking where they would put their money into if they were looking to make a long-term gain over the next year. At 30%, renewable energy topped the poll.

Bullishness on the renewable energy sector held true across different ages, gender and investment styles.

Indeed, contrary to the view that millennial investors were more likely to be interested in renewable or ESG style investments, the renewable sector was most popular among those in the 55-64 age bracket, with 35% ranking the sector first.

In contrast, 31% of 25-34-year olds ranked renewables first. Renewables scored the lowest among those aged 35-44, with just 26% ranking it in top place.

Meanwhile, 29% of men ranked renewables top of their list and 33% of women. After renewables, technology (28%), property (25%) and gold (22%) were most popular across the whole sample range.

According to GraniteShares, this increased popularity of renewable energy investments is being driven by the increasing prominence of climate change concerns in 2019, such as the channel 4 leader’s climate change debate.

Others have also cited climate change activist Greta Thunberg and this year’s protests by Extinction Rebellion as driving investor towards ESG style investments.

However, as positive as that might be from the perspective of those concerned about the environment, investors should be cautious about their expectations for renewable energy returns. 

With the popularity of environmentally friendly investment and desire among investors to support clean energy, the sector is trading on relatively high multiples, at least if you look at the iShares Global Clean Energy ETF (LSE:INRG), which has a price-to-earnings multiple of over 20x.

Perhaps the future earnings of the renewable energy industry will come to justify those valuations. However, as Peter Garnry, head of equity strategy at Saxo Bank, recently pointed out, the clean energy industry still faces teething problems.

In his section of Saxo Bank’s 10 outrageous predictions for 2020, he noted:

“Investors must realise that for clean energy companies, the average return on invested capital versus the weight-adjusted cost of that capital is a terrible 0.5, meaning that the industry is actually destroying capital.”

In contrast, old, fossil fuel burning companies, are trading on very cheap valuations. The Vanguard Energy ETF, which includes large US fossil fuel producers, has a price-to-earnings of just 2.81x.

Those low valuations may be justified on the basis of the dim future prospects of fossil fuel producers whose product, many hope, will be phased out in the near future.

But that is not a given, at least not in the near future. Some investors have argued that the demand for oil, gas and coal will continue to grow, particularly in the developing world. At the same time, with years of underinvestment in oil production due to the bear market in oil after 2014, that demand may struggle to be met. That should, in theory, push up the price of oil and with the earnings of oil companies.

On top of this, several heavyweight investors such as Warren Buffett, Carl Icahn and Sam Zell have been gaining exposure to fossil fuel companies in 2019, believing it to be full of value opportunities. While these investors may be proven wrong (and they have been in the past), it is worth investors taking into account.

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