How to position for the evolving energy landscape: UBS weighs in

UBS analysts noted that the global energy transition to renewables from fossil fuels is in full motion, and that new energy systems were likely to be formed in the coming years amid heightened capital spending.

UBS said that the current energy system was still dominated by fossil fuels, accounting for at least 80% of global electricity generation. 

But this trend is expected to shift in the coming decades. By 2050, the International Energy Agency expects at least 60%-65% of energy generation to come from renewable/clean sources. 

While fossil fuels will still be used for hard-to-decarbonize sectors, renewables are expected to drive a bulk of the economy. Annual investment in energy is also expected to rise to $4-$5 trillion in the next decade from current levels of $2-$3 trillion. 

Electrification is set to drive a bulk of this shift, particularly a focus on cleaner and efficient forms of electricity generation.  Position around electrification, decarbonization, UBS says 

UBS said it had identified a portfolio of 37 stocks in the Europe, Middle East and Africa region that are likely to benefit from decarbonization. The stocks are from sectors including utilities, capital goods, mining, chemicals, building and construction, energy, and automobiles. 

43% of its picks are from the capital goods sector, which UBS says will benefit the most from the energy transition. Utilities is the second-largest sector in the selection, while chemicals and mining are the smallest constituents. 

For capital goods, UBS’ most favored stocks include Vestas Wind Systems A/S (CSE:VWS ), Schneider Electric SE (EPA:SCHN ), Atlas Copco AB (ST:ATCOa ) and Siemens AG (ETR:SIEGn )- all of which are heavily exposed to electricity grids. Vestas is a major manufacturer of wind turbines, while Schneider and Siemens are key electricity grid companies. 

“We see electrical equipment manufacturers as one of the earliest beneficiaries of this trend, as growth in investment towards renewable generation as well as associated infrastructure is likely to accelerate first,” UBS analysts wrote. 

UBS said utilities are also expected to benefit from the energy transition. European utilities in particular already have several ongoing projects to replace thermal power generation, although these efforts have so far yielded mixed results, especially after disruptions in energy markets stemming from the Russia-Ukraine war. 

Among its utilities picks, UBS named EDP Energias de Portugal SA (ELI:EDP ), Oersted AS (CSE:ORSTED ), and E.ON SE (ETR:EONGn ). 

Energy companies are expected to benefit from the transition, given their expertise in commercial energy markets and strong capital positions. UBS’ most favored companies in the sector include BP PLC ADR (NYSE:BP ), Neste Oyj (HE:NESTE ), and TotalEnergies SE (EPA:TTEF ).

Source: Investing.com