The Hedge Fund Betting Fed Cuts Can’t Survive ‘Failure’ Bets Green

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(Bloomberg) – It is wrong to expect that the cycle of interest-rate cuts from the Federal Reserve will suddenly revive the green transition, according to Barry Norris, founder and chief investment officer of the UK hedge fund Argonaut Capital Partners.

“For the past few years, energy transition insiders have believed that the problems in the industry stem from high interest rates,” Norris said in an interview. “Interest rates are now down, so logically the sentiment in this part of the market should be better. However, insiders will go back to the government asking for more subsidies.

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It’s a view that flies in the face of conventional wisdom now making rounds to the right of many Wall Street, with analysts at Citigroup Inc. and Goldman Sachs Group Inc. among those announcing that a turning point has been reached for green stocks. He pointed to examples like wind farm operator Orsted A/S, up 20% this year, and Siemens Energy AG, which gained 174%.

But there are also many green stocks that continue to struggle. Vestas Wind Systems A/S is down 30% this year, after higher costs from servicing installed turbines weighed on profits. Meanwhile, Vestas and other European turbine manufacturers are losing ground in the growing wind market, according to BloombergNEF. And the S&P Global Clean Energy Index has lost about 6% since the end of December, compared to gains of more than 20% in the S&P 500.

Find out more: Merryn Talks Money With Barry Norris: The ‘Moral Case’ For Fossil Fuels (Podcast)

Despite recent gains in some green stocks, the sector as a whole remains far from the heights it reached during the pandemic, when environmental, social and government investment ran amok amid the energy crisis and emergency interest rate cuts. From the peak reached in early 2021, the S&P clean energy stock index has since lost more than half its value.

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Norris said he was skeptical of the basic premise of the green transition and argued that if capitalism had been left to its own devices, most green companies would not have been born.

That view has led to a wider shift in rhetoric among private finance giants, as pandemic-era enthusiasm for a green transition is replaced by language focused heavily on turning a profit.

Meanwhile, there has also been a tendency towards slippage in the definition for green concepts such as “transition,” with some financial professionals now choosing to add coal assets to the mix.

Norris pointed to Europe as evidence that policies forcing the private sector to adopt a green transition are at the expense of the economy, with companies in the region consistently seeing lower costs than their US peers. The Stoxx Europe 600 has only gained half of the S&P 500 this year. And over the past five years, European stock valuations have grown by about a third more than their US counterparts.

“Look at what’s happening in the European car industry today,” Norris said. “It will end in hollowing out the industrial base of Europe.”

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He rejected the notion that increasing subsidies to help compete with China would make green investment more palatable in the West.

“If the energy transition creates better, more useful products,” then there’s no need for subsidies, Norris said.

In the US, the Biden administration’s landmark climate bill – the Inflation Reduction Act of 2022 – could cost $3.3 trillion in spending, analysts at Goldman Sachs estimate. The European Union has also pledged to pour money into the green transition, including plans to raise €1 trillion ($1.1 trillion) from public and private sources.

That’s still less than the subsidies channeled to the global fossil fuel industry, with International Monetary Fund figures showing that oil, gas and coal will receive $7 trillion in global subsidies by 2022, with $1.3 trillion coming from direct government support. .

Meanwhile, there is growing evidence that unless more private funds are channeled into the green economy, humanity will fail to curb greenhouse gas emissions, causing global warming to exceed the critical 1.5C threshold. And while asset owners such as pension funds and insurance companies are stepping up efforts to align their portfolios with global climate goals, there is little evidence that the rest of the global financial industry is doing the same.

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Norris says the main concern is that green companies only seem viable when they don’t have to contend with normal start-up costs.

“Anywhere and always the energy transition requires zero capital costs, government subsidies and forcing products that are better for life,” he said. “This leads to anemic economic growth because many national resources are misallocated to economically backward activities.”

He warned that the ongoing resource-to-green transition would backfire, leading voters to oust politicians who support policies favoring renewable energy.

According to Norris, “the energy transition has failed and will fail.”

If the green transition wasn’t so dependent on subsidies, Norris said “hedge funds would be more enthusiastic.”

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