Bridging the gap

Video Transcript

2022 Midyear Outlook

Presenter: John LaForge, Head of Real Asset Strategy, Wells Fargo Investment Institute

Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value

Fossil fuels have been the lifeblood of the global economy for nearly two centuries. Coal fueled the industrial revolution, oil transformed transportation, and natural gas changed the way farmers fed the world.

Renewables are making technological strides, and gaining adoption, but most are no match for the efficiency of fossil fuels. We believe that the transition to primarily renewable energy will take decades and require using all available energy sources – including fossil fuels, nuclear, and renewables.

This “all of the above” transition will be a long bridge for the economy, but we see a variety of investment opportunities over that long bridge.
What are the main places that we think investors should be looking? With companies facing increased disclosure requirements around carbon emissions, we will likely see an acceleration of capital investment in carbon capture technology.

In order for a successful transition from fossil fuels, capacity and storage technologies will need to evolve.

As a result, we see growing investment opportunities in long-duration battery and storage.

A sector that may benefit during the transition away from fossil fuels is Energy, as we anticipate many of today’s oil companies will make inroads diversifying into alternative energy businesses. We believe that Integrated Oil Companies and Midstream Energy companies are positioned to potentially gain market share in alternative energy over time.

As one of the top contributors to global emissions, nearly every company in the Utilities sector has some exposure.

We also believe the Industrials sector, particularly the Capital Goods Industry, may benefit as it supplies equipment and parts in support of infrastructure modifications.

Within the Materials sector, we see multiple opportunities. One large opportunity is the rising demand for blue and green hydrogen. The Industrial Gas sub-industry is well positioned to benefit from this demand. A second opportunity for materials companies is that there will be a great need for extra metals and minerals, metals such as copper, cobalt, nickel, and lithium – these will be essential for the batteries to store that renewable energy, whether for cars or homes.

And, speaking of electric vehicles, we believe the Consumer Discretionary equity sector should benefit in the long term from the potential for growth of sales in those electric-powered cars – though this idea is likely still in its early days.

For more on these recommendations and what we expect from an energy transition read our Wells Fargo Investment Institute special report:

Bridging the gap: Challenges and opportunities of moving from fossil fuels to renewables.

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Risk Considerations

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve.

Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Concentration in the energy sector and in industries may present more risks than if a portfolio were broadly diversified over numerous sectors of the economy. A downturn in the energy sector of the economy, adverse political, legislative or regulatory developments or other events could have a larger impact on a portfolio that concentrates in the sector.

General Disclosures

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