Of con men, spivs and ‘gangreenous’ stocks | FT Alphaville

Of con men, spivs and ‘gangreenous’ stocks

The headline on a recent Bloomberg stock market report out of Japan said it all: “Japan Stocks Rise on Green Technology Optimism”.

We’re seeing a growing number of headlines in that vein. Indeed, the rising wave of investor optimism on everything and anything related to so-called “green technology” has seen some lucrative deals and surging stock prices in sectors ranging from alternative energy sources to hybrid cars, anti-air pollution systems and environmental technology of every description.

Even China – once the scourge of environmentally-conscious investors – has gotten in on the act, with a $3.4bn deal last week by Hong Kong-traded power plant operator GCL-Poly to buy a mainland solar-cell parts maker.

In another trend, western asset managers are eyeing new “green investing” opportunities further afield, in Asia and elsewhere. JPMorgan Asset Management for example, recently decided to become the first foreign company to participate in South Korea’s ‘g0-green’ initiative.

As Bloomberg reported, the US bank signed a letter of intent with the South Korean government for its plans to set up “Korea Green Funds” of more than $1bn to invest in the country’s alternative energy industry. Seoul, meanwhile, plans to invest 4,200bn won ($3.4bn) by 2013 to make products including PCs and television sets that use less power and emit less carbon dioxide.

All this – err, greenery – is proving a bit much for CLSA’s ever-ascerbic Asia strategist Christopher Wood, who takes a swipe at “green investing” in the latest issue of his weekly client newsletter Greed & Fear, and grumbles about how “global warming” has become the “developed world’s new religion”.

The arbitrary nature of  “green” investment mandates is “obviously irrational from an investment perspective”, says Wood:

From a longer term perspective it is almost inevitable that the frenzy for green will attract to the area the usual mob of con men and spivs who jump on every bandwagon. There is also a more fundamental risk that government sponsorship of alternative energy leads to massive over investment in the area.

At a recent meeting in Beijing, he recounts, a local economist expressed concern about a future investment bubble in alternative energy in the mainland as a result of policies designed to encourage production in this area. In that context, Wood examines a recent survey of local Chinese government officials in 11 cities about their policy towards investment in solar power:

The findings show a stampede to offer upfront subsidies and other support for local polysilicon producers, including preferential power tariffs and preferential loans. It is also of note that “new energy” topped the list of manufacturing sectors to which banks are most likely to lend to in the same 11 cites.

(We say: think, GCL-Poly).

There is therefore, in Wood’s view, “a growing risk of over-investment in this area even though it is also the case that Beijing will also come up with more polices to encourage demand in the alternative energy area”. Still, he adds, “with a long established tradition in China of local governments piling in to whatever is the politically favoured area, it is surely only a matter of time before Beijing focuses on the need for consolidation”.

Regardless of the fundamental merits or otherwise of the climate change story, alternative energy stocks will, for now, continue to trade as high beta proxies for the oil price, concludes Wood. In this sense, “‘green’ investment mandates have, for now at least, almost zero diversification merit.”

On the rapidly solidifying nexus between oil prices and alternative energy stocks, an interesting discussion recently took place on Seeking Alpha between Lara Crigger, associate editor of HardAssetsInvestor and John Rubino, author of Clean Money. Here’s a portion of it:

Crigger: You once wrote that “gold and clean tech are two sides of the same coin.” Can you explain the connection?

Rubino: The huge amount of money that the world’s governments are pumping out right now has to go somewhere. To some extent, it’s going into upgrades into the infrastructure, especially energy infrastructure: solar, wind and smart grid technologies-the next-generation “green” or “clean” technologies.

So the same thing that makes clean tech a good investment also makes gold and silver a good investment, and it’s reasonable to think that if you build a portfolio of clean tech stocks and good-quality gold and silver miners, you make out both ways, at least for the next few years.

Crigger: Certainly if oil keeps rising, it should help out the sector.

Rubino: Absolutely. Although in power generation, for something like a wind or solar company, oil isn’t a direct competitor; they compete with coal. But in the mind of investors, rising oil prices will send a lot of money into solar, wind and other kinds of clean tech. If oil spikes, you’ll see a corresponding spike in the best clean tech stocks.

“Frankly”, notes Crigger further into the discussion, “this is starting to sound an awful lot like the tech boom in the 1990s”.

So here’s Rubino’s advice to investors about how to jump into clean technology investing without getting burned:

Yes, and it is going to be like that. There will be a lot of hype. The main piece of advice in “Clean Money” is to avoid the “story” stocks. A lot of companies will promise to have these revolutionary technologies that, if they work, will change the world. Ten years ago, in the dot-com boom, the same thing happened. All these companies came out and they’d soar, but only one in 10 ended up being an eBay or an Amazon. The rest disappeared without a trace.

So you want to be very careful in clean tech; don’t buy a stock just because a company has a revolutionary-sounding technology. That’s not enough. You need real orders in hand, an actual cash flow, a real management team that’s competent. You need to be willing to pass on the early pop in a stock like that, and wait until it’s real to buy in. That will save you a lot of heartache.

Related links:
A nice green day for GCL-Poly – FT Alphaville