Position for More Global Cooperation

By shifting away from the nationalistic policies of the Trump administration — during which international stocks underperformed US equites by 44%¹ — the Biden-Harris administration is likely to usher in a more global agenda with respect to trade, diplomacy, and climate policy.

Unlike broader policy proposals, such as tax increases and a multi-trillion-dollar infrastructure spending plan that both depend on Congress to enact, the new administration can use executive orders and re-engage with international organizations to reshape trade and climate policies. Together with improving economic fundamentals and ongoing secular trends, these policy pivots on trade and the environment could jump-start investors’ interest in Asian emerging market equities and potentially amplify the growth trajectory of clean power and clean technology companies.

Trade policy tailwinds and improving fundamentals in Asia

From negotiating trade deals to regulating intellectual property, competition will always define the US-China relationship. However, Biden’s more diplomatic and partnership approach — a reprieve from the Trump administration’s harsh rhetoric and punitive tariffs — is likely to make trade policy less confrontational and more predictable.

This shift in tone and policy may lay the foundation to restore investor confidence in China and other Asian countries that have been negatively impacted by the trade tensions over the past three years. As shown below, while both markets have trailed US equities since the onset of the Trump administration’s trade war — which intensified in March 2018 with 25% tariffs on steel imports and 10% tariffs on aluminum imports² — sentiment has shifted recently, coinciding with Biden’s improving polling numbers and subsequent victory. Yet even with this recent rally, Chinese equities are still down 12% relative to US equities since the end of 2017³ — an indication of the potential upside of a “back-to-even” rally if trade tensions thaw and the tariffs are reduced/removed in favor a more cooperative trade agreement.

Improved regional integration could further rejuvenate the region’s growth and support economic recovery. China and 14 other Asia-Pacific countries recently signed the Regional Comprehensive Economic Partnership (RCEP) to reduce tariffs, enhance market access and increase economic cooperation within the region.⁴ The pact covers about 30% of the world’s population with a combined gross domestic product (GDP) of $26 trillion and trade volume of $10 trillion. It’s expected to raise global national incomes by an estimated annual $186 billion by 2030 and increase trade among members by an estimated $428 billion.⁵

The potential for greater regional cooperation combined with an easing of US-China trade tensions may compound China’s already strong growth. As the bright spot in a gloomy 2020 global economy, China’s Q3 GDP growth improved to 4.9% from 3.2% in Q2 and -6.8% in Q1,⁶ when the country imposed a nationwide lockdown to contain the spread of COVID-19. The economic recovery strengthened in October, as both domestic consumption and fixed-asset investment grew at a faster pace than during the prior month, paving the way for greater growth in the final quarter of 2020.⁷ Forecasted to be the only major country with positive growth in 2020, China also leads global growth expectations for 2021. In fact, China’s 8.2% expected growth rate is more than 5 percentage points higher than the US’s rate of 3.1%.⁸

This upside potential in Chinese equities also comes with constructive relative valuations. The region’s forward price-to-earnings, price-to-sales, and price-to-book ratios⁹  are trading at a discount that is either at or below the historical median relative discount to US stocks, indicating growth/upside exposure at a reasonable price.

Elevating climate change initiatives on the world stage

According to Biden’s transition website, climate change is one of the four priorities that his administration will focus on from Day One.¹⁰ Calling for a carbon pollution-free power sector by 2035, the new administration has pledged to invest in clean infrastructure and technologies, public transportation and electric vehicles, and environmental justice.¹¹

While Biden’s ambitious clean infrastructure stimulus plan may be watered down given the composition of Congress, there are other ways that he can push forward his environmental agenda. Biden has pledged to immediately rejoin the Paris Agreement,¹² which places voluntary limits on nations’ greenhouse gas emissions. He also could reinstate climate and environmental regulations that the Trump administration has either revoked or rolled back, including vehicle and power plant emission standards.¹³ Biden also could issue an executive order to ban new oil and gas drilling on federal lands and direct federal agencies (the Environmental Protection Agency and Department of Energy) to craft new rules and regulations on emission standards and how companies assess climate risk. These policy initiatives are likely to fuel America’s transition to clean energy, boosting demand for clean technology and environmentally friendly energy solutions.

Another tailwind is that as people continue to work remotely and spend more time at home, energy consumption expenses will transition from businesses to households — leading to even greater demand for cost-efficient energy. In fact, the cost to generate renewables has already fallen by 40% (wind) and 80% (solar) over the past decade.¹⁴ And based on the pre-Biden regulatory environment — without even accounting for the policies he is likely to put forth or changing energy-consumption needs due to COVID-19 — wind and solar energy are projected to account for more than 60% of the new electricity-generating capacity over the next decade, as shown below.

Overall, Biden’s climate change agenda will likely accelerate an already strong secular trend line, amplifying the growth trajectory of the clean power industry. Even during the more pro-fossil fuel Trump administration, the shift to more renewable forms of energy had begun, as advances in clean technology significantly reduced the costs and improved the efficiency and accessibility of wind and solar energy. And while there was little support at a national level, state-level environmental targets, private funding and the public’s interest in climate change have fueled US renewable energy consumption growth for the fourth consecutive year in 2020 — exceeding coal consumption for the first time on record in June 2020.¹⁶

Shares of clean power stocks have recently shown strong performance, reflecting the already budding trend. In 2019, clean power firms outperformed the S&P 500 Index and the S&P 500 Energy sector by 31% and 51%, respectively.¹⁷ However, the pandemic’s impact and Biden’s win have turbocharged the industry’s performance, lifting it by 89% year to date, compared with 14% for the S&P 500 Index and a -36% loss for the traditional Energy sector.¹⁸

Despite this outstanding performance over the past two years, the clean power industry’s total market cap is much smaller than the traditional Energy sector’s market cap during the energy boom in the early 2010s. Clean power accounts for just 2% of the market cap of the Russell 3000 Index — compared with 10% for the traditional Energy sector at its peak.¹⁹ Given the expectations for capacity additions, behavioral shifts, and the Biden administration’s transformative global policy initiatives, the share of power generated from clean energy sources is likely to surge — indicating that clean power stocks may still have room to run.