Smart energy essentially comprises innovative technologies and business models aimed at generating, transporting and utilising energy more efficiently, cleanly and intelligently. This transformation of the energy sector will require huge investments of several thousand billion euros worldwide in the coming decades. On the one hand, it promises solutions to urgent environmental and climate problems and, on the other, it harbours considerable earnings potential. The fund Raiffeisen-SmartEnergy-ESG-Equities aims not only to utilise this potential but also to combine it with responsible investing. Naturally, there are also challenges and risks that need to be taken into account when investing.

Current strategy of the Raiffeisen SmartEnergy ESG Equities

The fund Raiffeisen-SmartEnergy-ESG-Equities is managed on the basis of an active, fundamental and structured bottom-up approach. The selection of securities is based in particular on the GARP principle (GARP stands for growth at reasonable price), i.e. the focus is on good growth at a reasonable valuation. The companies must achieve at least a certain minimum ESG score. Furthermore, exclusion criteria for certain sectors, activities or behaviours (e.g. nuclear power, coal mining, child labour, serious violations of labour and human rights, etc.) is considered.

The focus is on the trends in the energy sector that will characterise the next decade. Numerous companies are involved in the process of transitioning the global energy supply, not only making this possible, but also benefiting from the energy transition. These companies, which can be categorised as "smart energy", are selected by the fund management from the entire global equity universe. (For more information, see Heading into the future: smart-energy equities)

First a boom, then a hangover. After soaring for several years, equities in wind power and solar companies as well as electric cars came under heavy pressure last year. Of course, this was not because the issues of climate change and the energy transition were no longer relevant, but mainly because equity prices had in some cases outstripped fundamental valuations and the profitability of some renewable energy projects was called into question first by high inflation and then by the turnaround in interest rates. The once lofty expectations in the electromobility sector have also dimmed. After an initial boom, demand is currently falling well short of original forecasts.

New upswing in sight?

What’s the expression? “It is darkest just before the sun rises”. Equity prices in the energy transition sector have been trying to bottom out for several months now. The current equity valuations appear attractive in the long-term.

There is a lot to suggest that many companies in the energy transition sector are currently bottoming out or have already bottomed out and, at present, are laying the foundations for the next share price upturn. There is no guarantee of this, but there are a number of indications. For example, many companies in the wind power and solar sector have reaffirmed their forecasts from the spring, according to which a recovery in the sector should take place in the second half of the year. Manufacturers of wind turbines are now reporting good order intake again. Long-term power purchase agreements with sufficiently high minimum prices are putting the construction of wind turbines and solar power plants on a more solid financial footing.

Long-term tailwinds versus economic cycles

The fact that capital market yields are now falling again is helpful for the financing costs of energy projects. Although these are also partly driven by concerns about a weaker economy, economic fluctuations are only likely to play a relatively minor role, at least in some areas of the energy sector, particularly in the expansion of electricity grids and energy storage systems.

The picture is different in the electromobility sector. This sector is experiencing a slump in demand, which is also being felt by numerous suppliers, such as chip manufacturers like Infineon. Increasing competition and consumer reluctance are likely to keep the situation difficult for many car manufacturers in this area until at least next year. However, there are also positive aspects here: With higher production capacities and falling battery prices, manufacturing costs are falling. This enables price reductions and will make electric cars increasingly attractive compared to combustion engines. In addition, the temporary lull in the sales of electrics creates a window of opportunity to make the electricity grids fit for the future in good time. This is because the energy transition and power-hungry new applications such as e-mobility, heat pumps and artificial intelligence require huge investments in modernisation and capacity expansion.

Read also: Megatrend renewable energies

The fund Raiffeisen-SmartEnergy-ESG-Equities invests in the megatrend “energy transition” in a broad range of areas. Investments in this area are not a sure-fire success, but require careful selection, constant monitoring and, if necessary, adjustments by the fund management. There will also be winners and losers here and not every investment will ultimately fulfil the expectations of investors. Accordingly, the fund's positioning can also change at any time. The fundamental risks associated with equity investments naturally also apply to companies involved in renewable energies, more efficient energy utilisation and the technologies and components required for this. These include high price fluctuations and possible capital losses.

The fund Raiffeisen SmartEnergy ESG Equities exhibits elevated volatility, meaning that unit prices can move significantly higher or lower in short periods of time, and it is not possible to rule out loss of capital.