JPMorgan American (JAM ) says investors should be wary of pigeon-holing investments, as the shift to renewable energy and electrification has given some cyclical stocks a new lease of life.

Fiona Harris, an investment director who works with fund managers Jonathan Simon, Tim Parton, and Felise Agranoff, said: ‘You have to be very careful when the market puts labels on stock; a stock is called defensive or cyclical, but sometimes a company may not be cyclical anymore as the context changes.’ 

Energy and renewables is an area where the context is quickly being reassessed in light of the one-year Ukraine war, which has kickstarted the biggest energy crisis seen in decades, causing soaring inflation.

In order to bring cost-of-living pressures under control, the US last year implemented the Inflation Reduction Act, which aims to curb price rises in a number of ways, including investing in domestic energy production and clean energy.

The act could more than triple US clean energy production, resulting in as much as 40% of the country’s energy coming from renewable sources such as wind, solar, and energy storage, by 2030.

Solar edge

Harris said the act will have a big impact on companies that offer clean technology, including those producing electric vehicles and their components, as the government is offering a $4,000 electric vehicle tax credit under the scheme.

She said the fund managers were looking at companies that will benefit from the build out of infrastructure for clean tech and electric vehicles.

‘There are lots of big benefits in renewables over the long term,’ she said.

One Nasdaq stock the team is excited about is Israeli business SolarEdge Technologies, which develops solar and battery storage technology.

‘Its balance sheet is fantastic, it has really strong free cashflow, and it is growing its range of products,’ she said.

‘We added to this stock last year on an attractive valuation. There are opportunities out there [in renewables, but the chances are it is not in names that you’ve had at the forefront of your mind over the last five years.’

On top of newly minted legislation to boost clean energy, Harris believes there is another trend that will propel the sector: electrification.

‘One area that is misunderstood is electrification and how much electrification of the grid that needs to be done in the US,’ she said.

She said investment in the US grid has not kept pace with the electrification of everyday products such as phones and cars, and providing enough power and building the right infrastructure is now ‘a multi-year investment cycle’.

To play this theme, the trust added electrical component group Hubbell, which has in the past been struck by the curse of being labelled a cyclical stock, said Harris.

‘It has been a very cyclical business and people have stayed away because of that,’ she said. ‘But it will be less cyclical going forward.’

Electrical utilities group Xcel Energy is also one to watch in the renewable space, said Harris.

‘It is moving more and more into renewables and has great opportunities in front of it,’ she said.

Although it deals in regulated assets, she said it has the opportunities to ‘move into sustainability’ and has ‘great targets’ for reducing its carbon emissions from the electricity it provides by 80% by 2030 and provide 100% carbon-free electricity by 2050.

‘These are aggressive targets…but it shows how quickly these companies are moving on,’ she said.

Harris said investors have ‘got used to buying growth names over the last decade’ but the names that will shape the future are changing.

Overhaul

The managers of the £1.2bn investment trust appreciate the benefits of keeping their investment strategy flexible and open-minded, having revamped the portfolio in 2019 to work under a dual growth-and-value strategy.

The overhaul worked, improving the previously ‘middle of the road’ performance with the trust last November winning a Citywire award for best-performing North America trust over three years.

Over five years it is currently ranked second, behind the equally revamped Pershing Square (PSH ), out of seven investment companies in the AIC North America sector. Its 94% total shareholder return is just ahead of the S&P 500’s 91% an achievement for a trust that typically lagged the US benchmark.

However, over 10 years, although it tops the small group with a 299% total return, it lags the even more impressive return of 316% from the S&P 500.

Harris said of the recent renaissance: ‘The growth and value remit gives us more levers to pull.’