After a relatively rough year across global equity markets, investors may be looking for greener pastures in more ways than one.
At Global X, we are taking a longer-term approach to our thematic outlook and believe clean-energy infrastructure and technologies have investment-quality tailwinds which – as part of a balanced portfolio – could provide long-term growth potential.
Here are four opportunities inspired by future-focused trends:
[Do further research of your own or talk to a licensed financial adviser before acting on themes in this article. Investing on the basis of emerging global themes has higher risk. Thematic ETFs can have higher stock concentration and higher fees. By focussing on a specific theme, thematic ETFs can also be volatile. By their nature, emerging investment themes have greater uncertainty and typically there are more stock losers than winners in these themes over time. Thematic ETFs can also have currency risk because they are unhedged for currency movements].
Global X believes hydrogen is well on its way to getting a green makeover and has significant growth potential to replace fossil fuels in key areas of the economy.
The trick is ensuring that you’re investing in the right “colour” of hydrogen. Green hydrogen is the cleanest because it uses a process called electrolysis to zap water with electricity to split it into hydrogen and oxygen.
The electricity used to make green hydrogen comes from renewable sources such as solar or wind power – meaning it does not produce any greenhouse gas emissions. Whereas other varieties of hydrogen like brown, grey and blue still require coal or natural gas inputs.
Green hydrogen can be used in a number of traditionally carbon-heavy industries including steelmaking, ammonia production and shipping. Therefore, governments and businesses alike are investing in green hydrogen, according to the International Energy Agency (IEA).
For all its merits, green hydrogen has two downfalls, in Global X’s opinion – high costs and storage challenges. At the moment, green hydrogen production costs are too high to be competitive with fossil fuels.
However, investment in supporting technologies means it will be possible to reduce costs to a scalable level in the coming years. Storage issues are also being overcome by turning the gas into its liquid which can be used in instances were electrification is not an option.
Speaking of electrification, battery technology has a range of applications, particularly when it comes to clean energy.
Global X notes two areas that are seeing large growth are: battery storage for renewable energy sources like solar and wind power, and for electric vehicles (EVs).
Lithium is vital for both uses and has therefore seen a dramatic increase in capital allocation in recent years as investors expect battery storage and EVs to increase in popularity.
Globally, lithium prices have soared in the past two years. Lithium producers, rather than explorers, have capitalised on rising lithium demand. Miners such as Pilbara Minerals (ASX: PLS), Mineral Resources (ASX: MIN) and Allkem (ASX: AKE) have benefited from the historically high lithium price, in Global X’s opinion.
Exchange Traded Funds (ETFs) that aim to capture the full value chain of battery tech have also been popular among Australian investors who want to leverage growth in the industry, according to Global X.
Green metals broadly refer to critical minerals which are required to make the clean energy transition a reality. Demand for metals such as lithium, copper, nickel, cobalt, and rare earth elements has steadily been increasing, alongside investment into clean energy infrastructure and technologies.
In Global X’s opinion, the opportunity lies in the dislocation between rising demand and supply constraints which is set to create advantageous market conditions for the miners, producers, and processors in the space.
The transition to clean energy is largely being driven by worldwide initiatives to help fight climate change – such as the Paris Agreement.
As a result, governments and companies alike are committing capital in areas such as green metals to reach net-zero carbon emissions by 2050.
Exponentially larger amounts of green metals – compared to fossil fuel alternatives – will be required to facilitate the switch to renewables, according to the International Energy Agency.
The challenge for investors will be capturing growth across all the critical minerals. Hence ETFs on ASX provide an accessible vehicle for diversified exposure to this theme, in Global X’s opinion.
Carbon allowances are tradeable permits that allow polluters to pump one tonne of carbon dioxide into the atmosphere per allowance they hold. They act as another mechanism to help control carbon emissions – particularly of heavy corporate emitters.
The European Union (EU) has the most robust and regulated carbon allowance scheme in the world, but there are also established schemes in the United Kingdom and California.
The EU works to cut greenhouse gas emissions by holding an annual auction for heavy emitters to bid on the allowances, and by enforcing hefty fines for emitters who exceed their emissions limit. Each year the number of allowances up for grabs is reduced – effectively driving up the cost of carbon emissions.
Here is where the investment opportunity lies. Previously, investors could not access the carbon credit market, so the introduction of ETFs that track carbon-credit futures has opened a new avenue for investors. Carbon credits can also act as a unique asset class diversifier, in Global X’s view.
It is worth noting that carbon future markets have been turbulent so far this year.
However, Global X believes there are advantages in taking a longer-term view on carbon allowances to leverage structural tailwinds from growing adoption of these schemes around the globe, as well as broader commitment to net-zero policies.