07 Feb 2025
Deirdre Cooper, Head of Sustainable Equity
The fast view
The return of Donald Trump to the White House had an immediate impact on financial markets, with clean-tech stocks hit particularly hard. We consider the outlook for investors in decarbonisation at the start of a new Trump presidency, and in light of the recent White House announcements on tariffs.
Election outcomes vs. market outcomes
Markets tend to overestimate the impact of presidential transitions on equities. Historically, US elections have been poor predictors of equity sector returns over the duration of a president’s term. For example, Biden implemented the largest piece of climate legislation in US history, the IRA, while Trump pushed an agenda of US energy dominance. Contrary to these policy stances, oil & gas was the top-performing sector over Biden’s term, but the worst during Trump’s time in the White House.
Simply put, company fundamentals, interest rates and the broader economy have a much bigger influence on asset returns than the occupant of the White House.
Key policy risks: IRA changes and tariffs
The two most significant policy issues for decarbonisation investors are potential adjustments to the IRA, a landmark piece of US clean-energy legislation, and the possible introduction of new tariffs.
IRA
Following Trump’s election win, the market began discounting a wholesale repeal of the IRA into clean-tech stock prices. While we expect changes to the IRA, full repeal is very unlikely. Written to withstand political shifts, the act’s provisions last until US emissions are reduced by 75% (unlikely any time soon) or 2032. And even among Republicans, there is substantial support for retaining parts of the IRA as clean-infrastructure investments have delivered employment benefits in many red states.
For all the headlines on cuts to clean-technology loans, tax credits constitute most of the IRA’s spending. These are much more difficult to scrap as they require new legislation. That said, we think it is possible that their duration may be shortened to around the end of the Trump administration. These moves are targeted at improving the US’s fiscal position (optically, at least), as one of Trump’s highest priorities is to renew the tax cuts implemented in his prior term which expire later this year.
Given the US’s unsustainable fiscal position, with debt at 126% of GDP, the only way for Trump to get more spending passed, given the Republican’s slim majority in the House and the Senate, is to try to balance the cost with cuts elsewhere. The IRA, among other areas of government spending such as healthcare, is therefore in the crosshairs. However, the way the IRA was constructed, and its backing from a number of Republicans, mean this essential framework of US clean-energy incentives appears robust for the foreseeable future.
There could even be a boon for renewables developers if a reduction in the duration of tax credits leads to demand for wind turbines and other clean technologies being brought forward. The IRA also contains provisions that allow renewables developers to ‘pre-buy’ equipment ahead of tax-credit expiry, so a project does not necessarily have to be completed before the credit itself ends. This is a potential boost for the likes of wind-turbine manufacturers. The potential for permitting deregulation may also spur renewables development, as happened in the last Trump presidency. More importantly, power demand – and willingness to pay for power – is at a decade high because of artificial intelligence and reshoring.
Consequently, we still see tailwinds for US renewables developers and select international businesses that sell into that market. We continue to hold some of them in the Global Environment portfolio with high conviction.
Electric vehicles and other clean-tech manufacturing sectors
From a sector perspective, while (as noted) we see a continued positive environment for US renewables developers, the outlook for other clean-tech manufacturing is more mixed. We expect the EV roll-out in the US to slow, which would impact both US domestic and international firms that sell into the US EV market, directly or indirectly. It is likely the EV tax credit – US$7,500 for a new vehicle – will be scrapped, further reducing US EV demand. There is an outside chance that the robotaxi market could take off, which would be a big win for US EV growth, but that is a ‘tailevent’ probability at present. Our base case is that US EV growth declines.
We think the rest-of-the-world export opportunity for Chinese EV (and other clean-tech) supply-chain companies is being significantly underestimated. In many emerging markets, there are strong incentives to go electric in terms of cost (imported Chinese EVs are often cheaper to run and no more expensive to buy) and economics/geopolitics (reducing reliance on oil imports). In Europe, the EU’s upcoming 2025 emissions standards increase the regional auto sector’s reliance on the Chinese EV chain – a fact highlighted by recent joint ventures between European carmakers and CATL, the Chinese battery giant. So we expect the already-large Chinese EV supply chain companies to continue growing.
The impact of Republican policies on other clean-tech manufacturing is unclear. Some of the US-listed pure-play clean-tech firms are on the edge of profitability as it is. They also tend to be dependent on regulation, rather than having regulation as a tailwind. Consequently, we do not have exposure to pure-play US clean tech in the portfolio at present, but we do have positions in large players that operate in the US market and that are not dependent on regulation.
Tariffs
As we suggested earlier, the impact of tariffs will depend partly on whether the Trump administration really intends to implement and maintain them, or just use them as negotiating levers. That remains to be seen.
In any case, it is important to note that the new administration’s proposals merely amplify the protectionist measures initially implemented by Trump and reinforced under Biden. Average tariffs on Chinese goods were 17% before the latest news from Washington, DC, and exceeded 100% on some clean-tech imports. Next to no Chinese EVs were being sold in the US. Already, Chinese clean-tech exporters have re-oriented to other markets, notably the likes of Mexico, Thailand and Vietnam. Partly, this reflects tariff circumvention, with Chinese components being assembled into final products in intermediary nations before shipping to the US. But emerging economies are also genuine new markets for China’s clean-tech sector – one of the most surprising datapoints to emerge last year was that EV penetration in Thailand now exceeds that of the US.
Meanwhile, Chinese EV and other clean-tech companies have a vast domestic market to sell into, with EVs for example now accounting for about half of car sales. These two trends – the growth of ex-US clean-tech markets and of China’s own vast domestic decarbonisation market – will continue regardless of the new US administration. The Global Environment portfolio has significant exposure to Chinese companies that are focused on their domestic market and other non-US countries, and we continue to see a strong growth runway ahead for them.
This is not at all to say that higher tariffs would have no impact. The most significant would be stoking inflationary pressures, which could increase the cost of capital and consequently slow the pace of decarbonisation. Of course, if interest rates go significantly higher, that would be a major threat to all risk assets
Valuations
The starting point for equities is that markets generally are priced at a level that allows for very little bad news, with a heavy concentration in the big tech companies. It is a very different story in clean-tech sectors, which in some cases have already priced the risk of negative outcomes that exceed our worst-case scenarios. At these valuations, we see good opportunities for long-term investors to own businesses with stable return profiles and strong growth prospects.
General risks: The value of investments, and any income generated from them, can fall as well as rise. Costs and charges will reduce the current and future value of investments. Past performance does not predict future returns. Investment objectives may not necessarily be achieved; losses may be made. Target returns are hypothetical returns and do not represent actual performance. Actual returns may differ significantly. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
Specific risks: Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Derivatives: The use of derivatives is not intended to increase the overall level of risk. However, the use of derivatives may still lead to large changes in value and includes the potential for large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Concentrated portfolio: The portfolio invests in a relatively small number of individual holdings. This may mean wider fluctuations in value than more broadly invested portfolios. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems. Sustainable strategies: Sustainable, impact or other sustainability-focused portfolios consider specific factors related to their strategies in assessing and selecting investments. As a result, they will exclude certain industries and companies that do not meet their criteria. This may result in their portfolios being substantially different from broader benchmarks or investment universes, which could in turn result in relative investment performance deviating significantly from the performance of the broader market.
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