Investing In Innovation: Energy & Environmental Systems

Investing in innovation provides opportunities for alpha returns but the challenge for investors is to identify investible opportunities in innovations that have the potential to change our world in a sustainable way. Undeniably, the Internet of Things, machine learning and artificial intelligence are showing enormous ability to transform our world and are just some examples of innovation within Big Data and Analytics. Gene sequencing and neurochemistry are providing innovations in healthcare which have the promise to radically improve our quality of life. However, innovation is not limited to the tech and healthcare sectors. Themes like Nanotechnology, Energy Systems, Robotics and 3-D printing have wide-spread application across other sectors as well as into our key Q4 investment theme of the Industrial Revolution 4.0.

The Industrial Revolution 4.0 is the trend of automation and data exchange in manufacturing technologies. It includes the Internet of Things, cloud computing and artificial intelligence. It introduces the “smart” factory concept through the use of the Internet of Things, cyber-physical systems to communicate and cooperate with each other and with humans in real time. In following Moore’s law, the growth of Big Data has been relentless with 90% of the world’s data created in the last two years. The reinvention of transportation could also bring about promising developments in lithium batteries, shared mobility and driverless technologies.

Key drivers behind renewable energy's mainstream adoption

The key driver behind renewable energy's mainstream adoption is total cost versus legacy power generation sources. Renewable power sources such as wind and solar have reached cost parity with fossil fuels. With lower operating costs, there is a strong business case to be made for building a renewable power plant. Public policy mandates and tax benefits are also supporting the growth of renewable energy. An example is California, where legislators are considering targeting 100% renewable energy by 2045. This would prose a daunting challenge for traditional utilities providing power for the state.

Company leading the renewable movement

First Solar (FSLR US) is well positioned to capitalize on worldwide renewable energy growth. The company is the world‟s largest manufacturer of thin-film solar modules, which convert sunlight into electricity. We expect the company to maintain its leadership position, though the growing worldwide demand for solar energy – both subsidized and unsubsidized – has brought many competitors into First Solar's markets.

Electric vehicles--factors tipping the balance in their favour

We see multiple factors contributing to electric vehicles (EV) gaining larger market share over the next couple of decades. In the near-term, government regulations that require electric vehicles to be manufactured will grow EV market share and spur research and development into advancements in electric vehicle battery technology and manufacturing. In turn, these advancements will reduce the cost of an electric vehicle so that EVs will reach cost parity with internal combustion engine (ICE) cars on a total cost of ownership basis. Further, the technological advancements will result in a better product, such as longer driving range and shorter re-charge times. Once electric vehicles reach cost parity with ICEs and become a more complete product, we expect EVs to gain more widespread adoption.

Biggest beneficiaries of increased electric vehicle adoption

Lithium producers will be the biggest beneficiaries from increased EV adoption. We forecast lithium demand to grow three to four times 2017 levels over the next decade, well beyond consensus. Albemarle (ALB US) became the world's largest lithium producer following the January 2015 acquisition of Rockwood. Its salt brine assets in Chile and joint venture in Australia give it access to some of the world‟s lowest cost sources of lithium. Sitting on the low end of the cost curve gives Albemarle a built-in cost advantage in lithium production.

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