Asset managers bet on grid stocks to defy Trump's anti-ESG era

After watching wind and solar stocks plummet in the hours after Donald Trump's election victory, asset managers are zeroing in on a corner of the green transition they say will defy the president-elect's anti-ESG agenda: the grid.

One day after the election, analysts at TD Securities told clients that grids and the equipment needed to build them now represent one of "the best-positioned energy transition sub-sectors." 

It's a call that's already paying off. Since the Nov. 5 election, a key stock-market gauge of the equipment that goes into grids is up about 6%, while the broader S&P Global Clean Energy Index has lost roughly one-tenth of its value. In the same period, the S&P 500 is up about 1.5%.

Suppliers in Asia and Europe that get sizable chunks of their revenue from the American market also have rallied, with Japan's Hitachi up more than 6% since the election.

Money managers say investing in U.S. power and grids is a way to dodge the fallout of tariffs that will hurt other sectors. And as Trump's protectionist policies look set to force more manufacturing back into the U.S., American demand for energy is set to soar, adding to the investment case.

"We're really bullish on U.S. power demand," says Ran Zhou, portfolio manager at New York-based hedge fund Electron Capital Partners. "And associated with that is long-term carbon-free energy." 

Companies developing grid equipment that have seen their share prices rise since the Nov. 5 election include Eaton, Rockwell Automation and Ametek, which are all up more than 6%. Emerson Electric has added more than 7%.

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Companies tied to electrical grids were already outperforming other corners of the green sector well before the U.S. election, with the NASDAQ OMX Clean Edge Smart Grid Infrastructure Index up 20% last year. But a bigger U.S.-based manufacturing sector driven by Trump's tariffs looks set to trigger a new growth wave for U.S. grid stocks, according to asset managers interviewed by Bloomberg.

Trump has made clear he wants to rescind unspent funds from the Biden administration's signature climate law, the 2022 Inflation Reduction Act. And his pro-fossil fuel stance has fueled a panic among green investors that a Trump White House will stunt the development of renewable energy projects in the U.S. 

But at the same time, the president-elect has promised U.S. companies access to cheap electricity, something which analysts say isn't possible without building out renewables.

The changes underway in U.S. energy policy coincide with an historic surge in demand. Wood Mackenzie, a consultancy, estimates the U.S. is now facing the biggest energy consumption bump in several decades, with growth expected to be as high as 15% in some regions over the next five years.

Much of that demand will come from technology companies building data centers to fuel the development of artificial intelligence. Amazon, Alphabet's Google and Microsoft have each announced nuclear deals in recent months, with the aim of powering their operations with carbon-free generation.

And current estimates for the renewables market "don't yet factor in the coming step change higher in renewables demand from the data-center market," analysts at Morgan Stanley wrote in a note published the day after the U.S. election.

Under President Joe Biden, power grid development received more than $30 billion in government support. And in May, U.S. regulators finalized rules enabling the biggest sector reforms in at least a decade designed to speed up grid construction. 

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The world needs $215 trillion over the next three decades to transition to net zero, according to BloombergNEF's New Energy Outlook 2024. That money would go for everything from energy supply to building up power generation capacity, grid infrastructure and the hydrogen supply chain. On the energy demand side, it would put electric vehicles on the road and heat pumps in buildings.

Grid upgrades will benefit equipment makers globally for the next two to three years, says Jerry Goh, an investment director at Abrdn Plc. That's because production in the U.S. isn't enough and the equipment "backlog has increased further so that's quite an immense story," he added.

The Nasdaq grid index is currently trading at 20.3 times forward earnings. While that's high relative to a global benchmark of stocks, it's still close to the 10-year average, and earnings per share indicate a roughly 11% increase in the coming year, according to data compiled by Bloomberg.

Yi Shi, client portfolio manager at Pictet Asset Management, says the firm's Clean Energy Transition fund was already investing in companies that cater to the U.S. grid before the election, and has no intention of pulling out now. 

"We aren't looking at just the headline valuation, we are looking at the underlying earnings growth," Shi said.