The countdown to the highlight of the super election year 2024 is on: in about three weeks, we will find out who will be the next US president to steer the fortunes of the world’s largest economy over the next four years.
The election campaign has certainly created a few surprises. For the first time, an incumbent US president has dropped out of the race for the White House, and the switching of their candidate in the Democratic primaries has completely reshuffled the cards.
High volatility in the cleantech sector in the election year
In terms of topics, the election campaign is largely focused on the issues of migration, inflation, and the economy. The future the country is steering towards, not only ideologically but also in terms of energy policy and the economy, is the subject of heated debates. In this context, the role of renewable energies and cleantech (i.e. technologies for the green transformation of the economy) is entering the public eye.
Investors in this sector will have noticed that the impact of the US election campaign on cleantech equities has been particularly pronounced in the year to date, as exemplified by the shares of US solar company First Solar.
Signing of the Inflation Reduction Act
Sources: MANDEL NGAN / AFP / picturedesk.com
First, a look in the rear-view mirror: 29 June 2022 marked a significant decision during Joe Biden’s term in office. The coronavirus crisis had largely been overcome and a comprehensive package of measures, known as the Inflation Reduction Act (IRA), was signed into law. These measures are designed not only to boost the economy after the crisis but also to advance the green transformation in the USA.
Many shareholders also recognised the significant boost that could result from the measures for companies in the renewable energy sector – for example, First Solar’s share price rose by 30% the day after the IRA was signed! (Please note: past performance is no reliable indicator of future value development. Please refer to the long-term price chart at the end of the article.)
Biden vs. Trump
Source: ANDREW CABALLERO-REYNOLDS / AFP / picturedesk.com
Almost exactly two years later, on 28 June 2024, the first TV debate in the US presidential election campaign caused a stir. While the challenger, Donald Trump, was able to convey his usual messages, the performance of the incumbent, Joe Biden, left a lot to be desired. Trump, who had already been well ahead of Biden in previous polls, now seemed unlikely to lose the election.
This in turn fuelled concerns among investors in the cleantech sector that Trump could reverse the Inflation Reduction Act. First Solar’s shares fell 10% the day after the TV debate. (Please note: past performance is no reliable indicator of future value development. Please refer to the long-term price chart at the end of the article.)
Attack on Donald Trump
Sources: Evan Vucci / AP / picturedesk.com
The next dramatic event in the election campaign followed just two weeks later on 13 July. Donald Trump was the target of an assassination attempt during a speech in the US state of Pennsylvania, but he survived it largely unscathed. The global public was shocked. At the same time, the election campaign seemed to be finally decided, not the least in view of the iconic image that showed Trump with his ear bloodied after the assassination attempt. The prospect of a Trump presidency caused First Solar’s shares to plummet a further 10% the following day. (Please note: past performance is no reliable indicator of future value development. Please refer to the long-term price chart at the end of the article.)
Harris vs. Trump
Sources: Alex Brandon / AP / picturedesk.com
However, the big BUT followed in September: after Joe Biden announced his withdrawal from the election campaign and Vice President Kamala Harris entered the ring for the US presidency, the first (and probably only) TV debate between Harris and Trump took place on 11 September. The Democratic candidate left a good impression, and according to the polls of the following days, she was seen as the winner of the duel. This also had an impact on renewable energy shares: First Solar rose by 15% the day after the TV debate. (Please note: past performance is no reliable indicator of future value development. Please refer to the long-term price chart at the end of the article.)
Inflation Reduction Act drives investments
The reason for the high volatility of environmental equities around these events lies primarily with the aforementioned Inflation Reduction Act, which can be considered the most important law for renewable energies and cleantech in the USA. To highlight this, let’s stick with the example of First Solar: the following chart shows the company’s expected earnings (EPS, earnings per share) up to 2026, both inclusive and exclusive of the tax breaks from the Inflation Reduction Act. Developers of renewable energy projects also receive attractive tax breaks under the IRA, but only if they can demonstrate a sufficiently high level of domestic value creation. American cleantech companies in general and First Solar in particular benefit from this.
Please note: past performance is no reliable indicator of future value development. Forecasts are not a reliable indicator of future performance.
As the figures show, First Solar can still expect a good, albeit much flatter, profit trend without the measures of the Inflation Reduction Act. This means that a softening or repeal of the IRA would have a negative impact on profits in the cleantech sector. But how likely is this scenario?
Is the Act in danger?
To answer this question, let’s first take a look at the current polling data: in these, Kamala Harris is slightly ahead of Donald Trump (as of 23 October 2024). The data are based on the average of several major polls in the USA. However, with one and a half weeks to go, it is still much too early, and the gap between the two candidates is much too small, to derive clear tendencies for election day.
Due to the US electoral system, the so-called swing states will be particularly important. These are the states in which the two parties usually alternate in winning. Therefore, these states and their electors are traditionally fiercely contested. The candidate who manages to win the swing states has a good chance of moving into the White House. In these states, Donald Trump is largely ahead by a narrow margin in the polls as of October 23.
Even though the polls continue to predict a close race, the momentum has at least shifted in the past few months. With Biden’s withdrawal from the race, campaign donations to the Democrats skyrocketed – in other words, the candidacy of Kamala Harris triggered a sense of optimism in the Democratic camp.
At the same time, Trump had to forfeit his clear lead over Joe Biden, as Harris was able to quickly make up ground on Trump in the polls. That being said, the gap between the two has narrowed again recently, and Trump currently seems to have a narrow lead, especially in the important swing states.
“Red wave” unlikely
In addition to the decision on who will be the next president of the United States, the distribution of seats in the Senate and the House of Representatives is also regarded as trend-setting. The president does not decide the laws per se. He can sign them or veto them. However, a “red wave” would be needed to amend or even abolish the IRA, i.e. not only a Trump presidency but also a Republican majority in the Senate and the House of Representatives. The polling data suggest that the chance of this happening is only 30%.
From today’s perspective, the Inflation Reduction Act is unlikely to be completely abolished. Also, even if there were a Republican majority in both houses, this would not automatically mean that the IRA would be completely withdrawn – as illustrated by the figures in the Act…
Republican states are the main beneficiaries
Interestingly, traditionally Republican states are benefiting particularly from the Act, with a large proportion of the IRA’s previous investments flowing into states such as Texas, Florida, Ohio, Louisiana, and Alabama. In total, around USD 180bn of the funds have gone to Republican states, while only about USD 10bn has gone to predominantly Democratic ones.
These investments have created many new jobs (175,000 so far). The new jobs created primarily in Republican states are therefore also to some extent dependent on the measures and investments implemented under the Inflation Reduction Act.
This is also recognised by Republicans: at the end of September, a total of 18 Republican members of Congress sent a joint letter to the speaker of their own party in the House of Representatives, pledging not to abolish the IRA even in the event of a “red wave”.
Conclusion
A “red wave” is unlikely as the poll figures currently speak a different language. However, even if there were to be a Republican majority in both houses and a comeback for Donald Trump as US President, changes in many areas of the IRA are far from certain. The tax breaks and investments facilitated by the package have arrived in the US economy, creating many new jobs – especially in traditionally Republican states.
In our view, the billions of dollars invested in green technologies are not at risk. Building on this, the short-term declines in environmental equities in response to events in the election campaign also appear to have overshot the target. “Political stock markets are short-termed,” is an old stock market saying. Especially in politically uncertain and thus often volatile election periods, it is worth zooming out and looking at the big picture. Or, to resort again to our well-known example: despite the recent volatility, First Solar shares have gained more than 30% in the year to date and more than 300% in the past five years.
Please note: past performance is no reliable indicator of future value development. Please note that investing in securities involves risks as well as opportunities.
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