OPINION: Local markets have been relatively quiet over the Christmas break, with stockbrokers lingering at their baches.
Sharemarkets are another matter, with unprecedented activity heating up the exchange, even in their absence.
Clean energy provider Meridian, normally a safe, sleeper stock, jolted brokers off their loungers, as massive trading levels saw Meridian’s share price shoot up more than 90 per cent in less than four months.
The last time Meridian attracted this level attention was in 2013 when it went to IPO (initial public offering).
At the IPO Meridian shares were priced at $1.50 per share. At Friday’s close, Meridian shares were trading at $9.14 each, valuing the company at $23 billion – more or less the same size as A2 Milk, Fletcher Building and Spark combined.
Investors who have stayed the course have experienced stellar returns. If you had invested in Meridian at IPO (assuming all dividends were reinvested) you would have made 1500 per cent since 2013, at an annual rate of 47 per cent per annum.
So with brokers on holiday, what exactly was driving this frenzy?
Without a doubt, United States president-elect Joe Biden’s incoming reign, and support for clean energy, has been a major catalyst for investors’ buying spree in renewable energy stocks. But the story is bigger than Biden.
In a word, ETFs; Exchange Traded Funds.
Since the November US election, the surge in Meridian shares has been largely been driven by inflows into clean energy exchange-traded funds.
The iShares Global Clean Energy ETF’s listed in the US and UK have swelled from US$2.5 billion (NZ$3.5 billion) to over US$11 billion over the last two months as investors pile into the fund.
Unlike active funds, ETFs are passive investment vehicles, and will buy shares regardless of the price as they follow market indices.
Meridian bats well above its global weight as a top holding (approximately 5 per cent weight) in the iShares Global Clean Energy ETF, meaning there will be a significant flow of money into Meridian from the ETF in line with its own investment flows.
Investors in Australasia are on board this global trend. One report identified about four out of five Australasian asset managers claim they already are, or are considering, setting a net-zero emissions target for 2050.
In New Zealand, the valuation of Meridian (which prides itself on 100 per cent renewable energy generation) has massively decoupled in terms of share price performance and is trading at a significant premium to peers such as Genesis Energy, which still uses oil and coal assets.
The rise of passive investment strategies, combined with the ease of investment and accessibility to stock markets, means that there have been huge share price moves which do not always reflect business fundamentals and are often euphoric.
ETFs don’t care if the share price valuation is cheap or, in the case of Meridian, very expensive. They just keep buying as money continues to enter the sector.
The risk at the current juncture is that investors sell out of the Clean Energy ETF, or Meridian’s weighting gets reduced. If this occurs, given the funds are passive they will sell just as indiscriminately as they bought, irrespective of the price at which the ETFs have to sell Meridian shares.
Regardless of ETF-driven activity, the trend towards renewables with a greater focus on ESG (Environmental, Social and Governance factors) and the carbon footprint of stocks is here to stay.
Having an exposure towards the sector has paid off massively in recent months, although investors need to be fully aware and cautious of the “non-fundamental” trends at play, and stay nimble in such an environment.
Hamesh Sharma is a portfolio manager at ethical investment manager Pathfinder Asset Management, and ethical KiwiSaver provider CareSaver.