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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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The ESG Bubble Has Finally Burst

Back in January, we warned that the green energy sector was in danger of overheating after massive runups by clean energy stocks in 2020. The momentum remained strong early in the year after Joe Biden ascended into the Oval Office in hopes that his ambitious clean energy plan would be a tailwind for investors in the so-called sustainable or ESG funds.

It was not long, however, before cracks began to appear in the clean energy bull camp.

After emerging as the hottest corner in the clean energy universe in 2020, solar stocks began to let off steam in January, with leading solar names such as First Solar Inc. (NASDAQ:FSLR), SolarEdge Technologies (NASDAQ:SEDG), Enphase Energy Inc. (NASDAQ:ENPH), SunPower Corp. (NASDAQ:SPWR), and Canadian Solar Inc. (NASDAQ:CSIQ) selling off in double-digits

And now everything has finally come unstuck.

Clean energy has so far been the worst-performing sector, with investors yanking cash from the sector at the fastest pace in a year.

The iShares Global Clean Energy ETF (ICLN), a catch-all bet on clean energy, has sunk 26.7% in the year-to-date while the market’s only pure-play solar ETF, Solar Invesco ETF (NYSEARCA:TAN), has cratered 32.7% over the timeframe.

Since the beginning of May, investors have pulled $154 million from clean energy ETFs such as ICLN and TAN. Assets in the category have dropped for the past three months in a row and are now at $18.1 billion compared to their peak of $22.3 billion at the end of January.

ICLN is the biggest clean energy exchange-traded fund with $5.2B in assets under management (AUM), while TAN boasts $2.6B in AUM.

Other leading clean energy funds have not been spared: First Trust NASDAQ Clean Edge Green Energy Fund Index (QCLN), with $2.1B in AUM, has lost 21.8%. The Invesco Wilderhill Clean Energy ETF (PBW), with $1.7B in AUM, has crashed 29.4%.

ICLN, TAN, and QCLN are all at five-month trading lows.

Related Video: COVID Threatens Oil Sands Supply from Canada

Source: CNN Money

Rotation to cheaper shares

There are several key catalysts behind the wide selloff.

First off, President Joe Biden’s $2.25 trillion infrastructure plan has failed to elicit the kind of enthusiasm that many analysts had hoped for. The plan includes hundreds of billions of dollars to bolster the nation’s electric grid as well as $400 billion in clean-energy credits on top of the $2.25 trillion in new spending.

Second, clean-energy funds took a hit late last month after Enphase Energy Inc. (NASDAQ:ENPH)—a popular holding—reported major semiconductor shortages and supply-chain issues. ENPH went through one of its biggest one-day crashes after dropping nearly 10% a day after reporting better than forecast Q1 earnings but issuing downward guidance for Q2 due to semiconductor shortages and supply-chain issues that have been worse than anticipated.

A global shortage in semiconductor chips has been wreaking havoc on the tech sector, clean energy, automotive industry, consumer electronics industry, and everything in between. After years of tepid demand, the COVID-19 pandemic spurred a huge tech buying spree, with manufacturers of personal computers, tablets, laptops, and gaming consoles­ caught off guard.  Related: Panic Buying And Gas Shortages Sweep The East Coast

Indeed, the PC industry has been enjoying a major revival thanks to the work-at-home phenomenon, with computer sales in 2020 exceeding 302 million units, good for a 13% Y/Y increase and the most since 2014. At the same time, webcam sales surged almost 360%, with video conferencing becoming the new buzzword of modern communication.

The trade war between the United States and China has only served to make a bad situation worse.

In a decision announced last fall, the U.S. Commerce Department declared Chinese chip manufacturer Semiconductor Manufacturing International, or SMIC, persona non grata after determining the company supplies the Chinese military with chips, thus making it a threat to national security. The federal government restricted SMIC from obtaining some U.S.-regulated chip-making equipment leading to U.S. buyers cutting backorders from the company. SMIC is one of the largest manufacturers of semiconductor chips, accounting for about 5% of the global semiconductor supply.

The fact that only a handful of chip manufacturers actually own chip-making facilities has made the situation even more dire. Currently, only Taiwan Semiconductor Manufacturing (NYSE:TSM), Samsung (OTCPK:SSNLF), Intel (NASDAQ:INTC) own cutting-edge chip foundries.

But the biggest reason why clean energy stocks are selling off is simple: They are too expensive.

As money rotates away from those emerging growth themes and into the more economically sensitive areas of the market, clean tech has become a source of funds,” Dan Russo, portfolio manager at Potomac Fund Management, has told Bloomberg.

With their heavy-tech exposures, clean-energy funds could come under even more pressure.

Last week, JPMorgan Chase & Co. strategist Marko Kolanovic warned that big allocations into growth and ESG strategies may leave money managers vulnerable to inflation, and many might be forced to shift from low-volatility plays to value stocks.

This line of thinking appears to hold some water: After running roughshod over the entire U.S. market, the tech sector has been a notable laggard this year, with the Technology Select Sector SPDR Fund (XLK) up a mere 1.03% YTD vs. 8.17% by the S&P 500.

That said, clean energy ETFs are unlikely to be down for the count for too long.

With the shift to renewables still in full swing, clean energy stocks remain a strong long-term bet. Smart investors might want to use the selloff to gain fresh entry points.

By Alex Kimani for Oilprice.com

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