Renewable energies – a promising sector for Europe

Daniel Wüest, Portfolio Manager at Crossinvest Zürich

Does the Trump administration's "drill baby drill" motto spell the end of the energy transition and alternative energies?

It's important to differentiate here. A key argument for the ongoing energy transition, especially in Europe and Asia, is the desire to break free from dependence on North America, which produces more energy than it needs and exports this surplus to these parts of the world. In view of the increasing demand for electricity – increasingly also due to the expansion of data centers and cloud services – both Europe and Asia must find ways to escape this dependency and import situation. This can be achieved, at least in part, with renewable energies.

What does the energy transition mean for investors?

From a short-term cash flow perspective, the extraction of fossil fuels offers advantages. If, for example, you have the necessary drilling capacity in the case of shale oil and have geologically proven the existence of oil or gas deposits, you can drill a well with relatively low investment in less than a month and quickly generate cash flows. Given oil or gas deposits are under high pressure the production is very high initially and drops thereafter. The scenario is different with renewable energies: The construction of solar or wind farms, on the other hand, requires enormous investments of up to billions of euros with initially much more moderate cash flows, which are, however, generated consistently over time. A solar farm, for example, does not experience this pressure generated by the release of energy; rather, it produces energy consistently over the years – and this energy flow does not decrease meaningfully. Once the farm is in operation, there are still maintenance costs – but no more input costs. This is a key advantage: Anyone who wants to generate electricity from fossil fuels has to buy these fuels. Solar energy, on the other hand, costs nothing. There are close to no operating costs (OPEX) for such a plant.

Do you also include the traditional energy sector in your investment policy?

This depends on the individual client's investment goals. If clients primarily want to generate dividends with their investments, oil stocks are attractive. Especially in terms of sustainability, however we see great potential in renewable energies. With a future-oriented growth strategy, alternative and renewable energies can be very exciting due to their comparatively low valuations. Valuations fell because of problems in 2022 and 2023, particularly in the wind power sector. Wind farms stumbled because they had already sold the electricity before the turbines were operational. When problems arose due to construction delays and rising energy costs in the wake of the Ukraine conflict, these companies had to purchase energy at higher prices on the market to meet their supply obligations. In addition, the companies were under pressure to build ever larger turbines in the interest of increasing efficiency. Because the products were not mature, technical problems arose, which ultimately led to losses and rating downgrades. After a significant market setback, attractive entry opportunities have opened up.

What are the opportunities and challenges in the solar sector?

The sector offers both strategic and financial advantages. The total cost to generate electricity at a utility scale solar park is significantly cheaper than, for example, the one of a gas-fired power plant—not to mention the CO2 savings. However, industrial production requires significant investment and was initially dependent on public subsidies. With the expansion of facilities and the development of this industry, economies of scale ultimately emerged, making the investment increasingly attractive. The main challenge is the volatility of electricity production and prices as a function of the weather.

What are your preferred investment options in the renewable energy sector?

Instead of broadly diversified ETFs, for example, we prefer direct investments. We like companies that are exposed to the growth of the power grid. We should see above-trend growth for years as many countries have understood that they need to expand their electricity network because renewable energies lead to decentralized electricity generation. Italy is a good example. Wind and solar power is produced in the south and consumed in the north – in the UK it is the other way around. Wind parks are located off the Scottish coast whereas the greatest demand factor is in central and southern England. Investments in companies that operate solar farms are also attractive if they have flexibility in their portfolio, for example through storage capacities or a combination of solar generation with gas turbines to smooth out peak demand.

How can excess energy capacity be used profitably?

During periods of high solar radiation or strong winds, excess electricity is produced. The electricity price drops to zero on the wholesale spot market, and production even has to be curtailed to avoid overloading the grid. If a provider has storage options, it's a huge advantage. Instead of leaving it unused, they can use the free electricity to pump water up into the reservoir. This allows them to release the water during times when the sun isn't shining or the wind isn't blowing, driving the turbines and generating electricity. In return this contributes to energy security at times when renewable assets don’t produce enough. One example is Iberdrola, which owns a large portfolio of pumped storage hydropower in Spain. Gas power plants, though more expensive to run, are also a factor in securing enough power at all times and will continue to play a role in our energy system. Before investing we closely examine such companies and their market position. We've compiled a basket for our clients, offering cost-effective direct investments in 15 different companies from this sector. Only companies that meet our requirements make it into this selection.

What sets Crossinvest Zürich apart from other asset managers?

We are distinguished by a combination of advantages: We are an independent provider that focuses exclusively on wealth and asset management, primarily for private clients. We do not grant loans or engage in foreign exchange transactions. We are solely committed to the success of our clients. Our large base of managed client assets gives us a strong negotiating position with banks regarding depository terms, etc. We are an agile team with short communication lines. I can quickly and easily access the expertise of my colleagues at any time. Unlike a major bank, we draw on not just one but a multitude of opinions when assessing markets or investments. And despite being smaller than the banks we also have direct access to the companies we invest in, can interact with management, and ask questions to gain a deeper understanding of the business and the industry.

Why should investors choose Crossinvest Zürich instead of a bank?

Our greatest strength is the long-term continuity of our client relationships. In the banking industry, it's often frowned upon when a relationship manager gets too close to the client – for fear that relationship managers will take the client with them if they leave the company. Not so with us. Our clients also value direct interaction with analysts or other departments within our company.

What ist your outlook for the stock markets?

Much depends on how the tariff discussions continue. Fundamentally, I see significant advantages in Europe, as equities are cheaply valued compared to the US. The recent German fiscal stimulus not only strengthens directly affected companies but also indirectly influences consumer sentiment. After a correction in the US markets, there could be a stabilization there, but probably not a very rapid recovery. The market has registered the undervaluation in Europe, and capital could increasingly flow from the US to Europe. Following the motto "The recovery begins in the mind," this could lead to an interesting phase of growth. I believe we currently have this opportunity in Europe. Germany, which has been paralyzed for the past two years, could once again become the driving force in Europe. Then we will experience a domino effect, and this positive momentum will increasingly spread to other economic sectors. Everything is interconnected. I am particularly positive about the European equity markets.

About Daniel Wüest

Daniel Wüest, Portfolio Manager at Crossinvest Zürich, looks back on a 30-year career in financial services, holding various positions at leading providers such as Bank Leu, Lombard Odier Darier Hentsch, Bank Sal. Oppenheim and Macquarie Capital. Before joining Crossinvest he was responsible for equity and commodity investments at a Zurich based family office. He also manages a metals & mining fund for Crossinvest.