Trump is back. Will renewable energy stocks tag along?

If you listen to U.S. political noise, Donald Trump’s return to the White House looks like a very good reason to stay clear of renewable-energy stocks. Tune out the noise, though, and you may be surprised by what a bet on wind and solar might do.
Admittedly, after Mr. Trump’s resounding victory in the U.S. presidential election this week, clean-energy stocks – already in the dumps – took a turn for the worse.
The iShares Global Clean Energy ETF ICLN-Q, an exchange-traded fund that provides one-stop exposure to 101 stocks and acts as a decent barometer for the sector, sank 7.3 per cent on Wednesday. The selloff looks even worse when you consider that the S&P 500 soared on the same day.
Investors had good reason to be fearful. Mr. Trump has called climate change a hoax and has claimed that windmills cause cancer and kill whales. During his first term, he promoted fossil fuels and rolled back climate and environmental protections.
It’s hard to believe his views will change much in his second term.
But the market’s reaction during his first term tells a very different story. It suggests that investors would be wise to ignore the rhetoric and instead focus on the fundamental underpinnings of a sector that is bound to grow in the years ahead, no matter who occupies the White House.
“I’m not saying that the Trump administration is a great news for our industry,” Michel Letellier, chief executive officer at Innergex Renewable Energy Inc., said during a conference call with analysts on Thursday.
“But I think that the U.S., as we’ve seen in the past, will survive this change of politics,” he added.
He has a good reason to be calm.
During Mr. Trump’s first term, from 2017 to 2021, renewables did considerably better than that: The iShares Global Clean Energy ETF soared 306 per cent, including dividends. It outperformed the S&P 500 by 223 percentage points over this four-year period.
Curiously, the rough patch for renewable energy stocks began during President Joe Biden’s term, even though Mr. Biden confronted climate change with generous renewable energy subsidies included in his Inflation Reduction Act of 2022.
From 2021 through Tuesday’s presidential election, the Clean Energy ETF fell 55 per cent and underperformed the S&P 500 by 112 percentage points.
The takeaway here isn’t that Mr. Trump was good for renewable energy stocks and Mr. Biden was bad.
Rather, the sector was influenced by other factors – such as the direction of interest rates, the strength of the economy or the speed of constructing wind farms and solar installations.
Under Mr. Trump’s first term, interest rates were exceptionally low. That gave renewable energy companies cheap access to capital to fund their ambitious growth plans.
What’s more, investors became infatuated with the sector as the cost of producing electricity from renewables declined to levels that made solar and wind competitive with traditional energy sources, bolstering the economic incentive to going green.
During Mr. Biden’s term, though, snarled supply chains contributed to construction delays and rising costs. High interest rates, which followed soaring inflation, hit companies in the renewables sector particularly hard. Any lingering investor interest in the sector vanished when the share prices of oil producers surged in 2022.
Political leanings, in other words, didn’t matter much. Will they matter after Mr. Trump begins his second term?
Given the market’s reaction to Mr. Trump’s victory, investors aren’t optimistic. If he repeals subsidies in the Inflation Reduction Act, some observers expect that the sector’s profit margins will shrink.
“While wind and solar will continue to play an increasing role regardless of the administration, renewable energy stocks may not fair as well,” Brett Castelli, an analyst at Morningstar, said in an e-mail.
Nonetheless, the sector has a few things going for it.
For one thing, interest rates are now falling from multiyear highs. The Federal Reserve cut its key rate by a quarter of a percentage point this week, after a half-point cut in September. Lower rates should ease funding costs for companies that rely on debt.
For another, renewables stocks are beaten up. The Clean Energy ETF is down more than 60 per cent from its high in 2021 and trading near four-year lows. This suggests that a lot of bad news is already priced in to the share prices of companies that, in some cases, have little exposure to the U.S. market.
Lastly, tying a renewables energy bet to the policies and rhetoric of U.S. presidents has been a losing bet for the past two administrations. Mr. Trump is unlikely to go green, but that might not matter.