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Monday, October 19, 2020

CMC US Renewable Energy Share Basket v/s Oil & Gas Share Basket

by سنشري للاستشارات في Investment Insights

CMC US Renewable Energy Share Basket v/s Oil...
CMC US Renewable Energy Share Basket v/s Oil & Gas Share Basket

*This performance is only observed with historical backtests and not traded by the company.

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The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.
Risks & Assumptions

  • The strategy is based on the historical performance of 2 share baskets – CMC US Renewable Energy & CMC US Oil & Gas. The performance is based on the current composition of the individual shares that are part of the basket.
  • The baskets & their components are subject to periodic review by their index providers. For any addition or removal of existing components, the performance of both these share baskets is likely to deviate from their previous trend.
  • The strategy takes into account the current market dynamics of fossil fuels & renewable sources of energy as well as their historical trend. Going ahead, any significant changes to market dynamics will likely affect the strategy performance.
  • Data for performance analysis has been taken from 05/01/2015 – 13/10/2020. For stocks in Renewable Energy Basket– Maxeon & TPI Composite, data taken from their respective listing dates.
Strategy Trade

The strategy involves going long on US Renewable Energy Share Basket & simultaneously going short on US Oil & Gas Share Basket.

Strategy Rationale

The strategy is essentially a play between cleaner/greener sources of energy i.e. renewable sources and traditional non-renewable sources of energy. The former majorly consists of sources like wind, solar, electricity & water. Non-renewable sources include high carbon fossil fuels like crude oil, coal & natural gas.

As seen from below statistics, renewable company shares have outperformed their non-renewable peers over the last 5-year period. Recent US election polls predicting Blue Wave Sweep under Joe Biden has given a further impetus to renewable energy shares.

US Oil & Gas shares on the other hand continue to suffer from legacy issues of sharp reaction to any drastic price movement in crude oil prices. WTI dipping below 0 level this year & the sharp rally thereafter in oil prices has clearly highlighted volatile nature of fossil fuel markets along with its long-lasting impact on non-renewable oil & gas companies fiscal health.

At macro level, other factors that are supportive for further long term growth in renewable energy shares is the fact that world is increasingly looking to turn towards more environmental friendly sources. Renewable energy is entering a new phase altogether with technology driving changes in this sector. As a result, there has been increased use of such sources in everything ranging from automobiles to home appliances & even power generation.

ESG (Environmental, Social, and Governance) theme is further likely to provide a major tailwind for further growth in renewable sources of energy. An outright win by Joe Biden & his party would likely propel further growth in this sector. Biden's massive infrastructure package bets big on using more clean, green & renewable sources of energy.

International Energy Agency’s latest World Energy Outlook report for 2020 now estimates world having 43 % more solar output by 2040 than it had expected in 2018. This is primarily on back of their new analysis which sees solar energy 25 % - 30 % cheaper than previous estimates.

IEA’s World Economic Output report has detailed 4 scenarios for net zero emission over longer period. Under all 4 scenarios, demand for renewable sources of energy is likely to grow. This is presented in the below chart taken from International Energy Agency World Economic Outlook Report 2020.

Renewable Sources (Legend: Light Green) is likely to account for the majority of demand growth in all 4 cases. Fossil fuels on the other hand are likely to see gradual reduction in their overall demand over the coming years.

The importance of clean energy can be seen from billions of dollars of investment done by big 6 super oil majors - BP, Shell, Chevron, Total, Eni and Exxon. BP for example is planning to invest more in renewable sources of energy with the company already having a 2200 MW of wind capacity in US. Shell in 2018 bought a 44 % stake in US Solar power plant firm Silicon Ranch for $ 200 million. Total, French oil major, bought a 74% stake in the French electricity retailer Direct Energie for $1.7bn in 2018.

Strategy Statistics

1) Over the last 5 year period, the average performance of US Renewable shares has been 32 % as against average performance of -8 % for US Oil & Gas shares.

2) On the total returns side, if we take the average returns of total sum of the entire respective basket stocks, for US Renewable it is 191%. For US Oil & Gas it is -49%.

3) Taking a Y-o-Y comparison between both respective basket shares, the difference is clearly visible as seen below

US Renewable Energy Basket Shares
Year Emphase Maxeon First Solar SunPower TPI Composites Ormat Tech Plug Power Renewable Energy Group Hannon Armstrong NextEra MKS Instruments Sunrun IDA Corp Hawaiian Electric Northwestern Avista BWX Techno Portfolio Level Average
2015 -75% 58% 23% 33% -30% -3% 33% -12% 1% 34% 5% -13% -3% 2% 50%
2016 -71% -52% -78% 21% 47% -43% 5% 0% -14% 65% -53% 18% 14% 5% 13% 25%
2017 130% 101% 23% 33% 21% 95% 19% 26% 67% 58% 6% 14% 10% 5% 30% 54%
2018 82% -40% -45% 18% -19% -49% 116% -21% -1% -34% 84% 4% 3% 2% -18% -37%
2019 431% 31% 54% -27% 44% 138% 4% 63% 25% 66% 26% 19% 31% 24% 12% 60%
2020 236% 8% 45% 225% 90% -1% 428% 109% 45% 26% 6% 361% -17% -25% -27% -27% -9%
Sum 760% 8% 144% 202% 134% 125% 539% 250% 146% 91% 162% 457% 42% 20% 6% 12% 142% 191%
Average 127% 8% 24% 34% 27% 21% 90% 42% 24% 15% 27% 76% 7% 3% 1% 2% 24%
Individual Stock Returns (From 5/1/2015 - 13/10/2020) 668% 8% 98% 4% 164% 170% 468% 510% 216% 93% 227% 645% 32% 2% -10% -2% 169%
Table 2 - US Renewable Basket Shares Performance over last 5 years
US Oil & Gas Share Basket Shares
Concor Phillips Kinder Morgan EOG Resources Chevron Pioneer Exxon Mobil Phillips 66 Baker Huges Valero Schlumberger Portfolio Level Average
2015 -32% -65% -23% -20% -16% -16% 13% -18% 40% -19%
2016 7% 36% 45% 32% 45% 17% 8% 38% -2% 21%
2017 8% -16% 4% 6% -7% -8% 17% -30% 31% -21%
2018 13% -18% -20% -15% -24% -20% -15% -33% -19% -48%
2019 3% 34% -8% 9% 13% 0% 26% 22% 24% 8%
2020 -47% -40% -54% -40% -42% -52% -54% -50% -56% -61%
Sum -48% -70% -56% -27% -32% -79% -6% -72% 17% -119% -49%
Average -8% -12% -9% -4% -5% -13% -1% -12% 3% -20%
Individual Stock Returns (From 5/1/2015 - 13/10/2020) -49% -71% -58% -35% 41% -63% -29% -67% 216% -82%
Table 3 - US Oil & Gas Basket Shares Performance over last 5 years
Strategy Performance

For a hypothetical position of client investing $ 100,000 each side - Buying US CMC Renewable Energy Share Basket and Selling CMC US Oil & Gas Share Basket, below are the performance statistics over last 1 year period. Since the both these indices data are available only from last year, a longer past 5 year performance of individual shares of the baskets can be seen from Table 2 & Table 3 as given above.

Open(31st May,2019) Close(13th October,2020) Total Returns P & L in case off $ 100K invested each side ( Long US Renewable Energy & Short US Oil & Gas ) Net P & L
CMC US Renewable Energy $ 3,462 $ 8,732 142% $ 141,792 $ 185,464
CMC US Oil & Gas $ 8,738 $ 4,922 -44% $ 43,672
Table 4 - Pair P & L for $ 100K investment each side
*Figures for P & L exclusive of holding costs & transaction charges as well as any other costs

*Past performance is not indicative of and does not guarantee future results. Trading in markets may involve loss of capital.

Risks & Assumptions

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The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
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Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
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Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
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The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
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Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
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Unforeseen events can lead to variation in performance from the tested trading strategy.
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The tested result has been computed with price feeds available from Bloomberg.
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The testing environment has not considered transaction or any other costs.
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Trading indicators used for the purpose of testing has been provided by Bloomberg.
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The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg & International Energy Agency World Economic Outlook Report 2020
Chart Source: International Energy Agency World Economic Outlook Report 2020

Arun Leslie John
Chief Market Analyst

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