Market
Memos from Howard Marks: Mr. Market MiscalculatesRenewable deployments are setting records.
Falling inflation, subsiding supply chain headwinds, and a normalizing interest rate environment set the stage for an improving renewable power investing environment in 2024. Coupled with this better fundamental backdrop, we believe today’s attractive valuations offer a very enticing entry point into the asset class. We expect growing positive sentiment toward listed renewables and sustainable infrastructure amid strong demand for renewable deployments.
Despite challenges related to inflation and capital costs in recent years, annual spending on renewables continues to set records. 2023 exemplified this robust global development activity, with record capacity additions largely led by additional increases in solar and incremental offshore wind. We expect further step-function renewable capacity additions across all sources (wind, solar, biomass, etc.) to be supported by favorable economics, energy security concerns and public policy.
Utility-scale solar has been among the largest sources of capacity added to U.S. grids in recent years. We anticipate this trend will accelerate as lower input costs support the long-term trend of declining installed costs. Excess production capacity of solar panels in China and restrictions related to Chinese exports to the U.S. resulted in a flood of excess supply. As a result, solar panel costs reached record lows in 2023.
In addition, as we begin to see input costs rolling over, and interest rates falling, we believe that financing costs are likely to moderate. An abatement in capital costs and an increase in companies’ internal rates of return (IRRs) will likely accelerate any projects that have been delayed due to the recent higher rate environment. The global renewables build-out is still in its infancy. This megatrend will take decades, and we think recent headwinds related to interest rates will be a blip on the long-term horizon.
To capture this opportunity, we believe an active approach that focuses on companies with infrastructure- like business models and industry-leading growth prospects can potentially help mitigate volatility and risk.
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