Winter is coming
Winter is coming, and what sounds like doom and gloom to ‘Game of Thrones’ viewers is good news to investors. Seasonality favours the winter months when it comes to returns, and seasonal patterns in the equity market remain a significant phenomenon with winter being the strongest time for equity market returns. Notably, an analysis of S&P 500 returns from 1950 onwards reveals that the period spanning November to April has yielded a substantial cumulative return of 9938%, whereas the remaining months have generated a relatively modest cumulative return of 164%.
Financial markets inherently evolve, which underscores the importance of analysing long-term returns through performance charts to identify potential shifts.
Some investors may be concerned that the exceptional performance of the current year could cannibalise returns in the subsequent year. However, examining all election years where there were double-digit gains by the end of October reveals that the S&P 500 has historically risen by an average of 15% through the end of the following post-election year. This suggests that the robust gains in 2024 are unlikely to hinder next year’s prospects.
Power play: AI, elections, and the future of utilities
This year, the utility sector has largely kept pace with broader market trends, but regional dynamics tell a more nuanced story. US utilities are outperforming, buoyed by optimism surrounding increased power demand, especially from data centres that support artificial intelligence (AI) development. In contrast, European utilities are lagging due to a sharp drop in power prices earlier this year. Two major themes are currently dominating discussions on the future of utilities among investors.
1. AI has driven a surge in electricity demand.
Data centre capacity has been expanding at 10%–20% annually for the past two decades. However, the current race among global information technology giants to develop leading AI models has accelerated power demand growth from data centres to 30%–40% in the last two years. After years of flat or declining power demand in the US and Europe, this could mark the start of a new era of growth, especially in the US. But AI is just one factor.
Increased electricity consumption is also being fuelled by the US reshoring of industrial production, the rise of electric vehicles, and the electrification of heating via heat pumps. In the short term, power producers with exposure to data centre hubs and deregulated markets are reaping the rewards. In the medium term, renewable energy developers in both Europe and the US are likely to benefit from the rising demand for clean energy.
2. US presidential election’s impact on the renewables sector.
The second hot topic is the upcoming US presidential election on 5 November, which is particularly relevant for the renewables sector. Donald Trump, who is gaining ground in national polls and key swing states, has long expressed scepticism about renewable energy. However, during his first term, his administration did little to disrupt existing support mechanisms for renewables.
Notably, 85% of the CleanTech investments announced since the Inflation Reduction Act (IRA) passed have been directed to Republican districts. There is strong bipartisan support in Congress for onshore wind and solar energy, which heavily rely on domestic supply chains. As a result, we see minimal long-term risk from the election outcome, though short-term market sentiment for renewables could be affected. Overall, we maintain a Neutral stance on the utilities sector but continue to see compelling opportunities for stock-pickers, especially in European markets.
What does this mean for investors?
Most investors feel like they are in limbo and have been watching equity markets tick up in the past weeks without taking action themselves. However, with the majority of equity market returns has achieved in the winter months, investors should consider taking action.
First, we suggest not being short the US market given the growth advantage we are continually seeing there. Second, the tactical opportunity in China has made investors reconsider their positive stance on India and Japan. For Europe, we wish there were more ‘late but great’ stocks, but so far Europe has just been late, full stop. We wonder what it will take for policymakers here to panic as much as we saw in China a month ago, but so far we cannot feel the sense of urgency yet.