The remainder of 2024 looks set to be volatile, with geopolitical tensions and a major election in the US likely to create noise. The energy sector is always vulnerable to short-term shifts in sentiment and changing views on the outlook for global growth, but the long-term trends are strong, as demand expands and supply remains constrained.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
The BlackRock Energy and Resources Income Trust (BERI) is a specialist mining and energy investment trust covering three key areas – renewable energy, traditional energy and mining. We see pockets of strength in all of them in the coming months, but each has its own nuances and requires selectivity.
Rising geopolitical risks
The energy transition has been a more difficult area in recent years. The share prices for many energy transition companies saw a significant boom during the pandemic, leaving valuations elevated. There have also been concerns around rising development costs for many companies, which has seen projects stall. There was an adjustment in 2023, which has brought prices down to more realistic levels.
At the same time, demand for renewable energy remains strong, as costs fall, and social and regulatory pressures increase for action on climate change. It is becoming more attractive – and realistic – for companies and households to move away from the incumbent fossil fuels to renewable fuels. By 2030, around 50% of the global electricity mix will come from renewables.
Even though some governments have pared back their climate ambitions, the move to renewables is still at the forefront of regulation and government spending, with major initiatives such as the EU green deal and Inflation Reduction Act. In spite of some minor set-backs, most individual governments around the world are still supportive of the transition.
Investing in mining and energy
People think of the mining and energy sectors as being ‘at risk’ from the move to renewables. Across both sectors, there remains underinvestment in new supply, and it continues to lag demand, which has remained resilient in spite of the slow opening of China. Strong growth in the US has compensated to some extent.
On the energy side, US shale production has proved much more resilient than our initial market expectations. The strength of Russian output has also been surprising. However, there has been a real restriction in reinvestment elsewhere in energy markets. As a result, US strategic petroleum reserves and spare capacity are at multi-year lows.
It is becoming increasingly clear that governments across the world will not be able to reach their renewable energy targets without investing in some of the commodities that are enabling this change, including steel, nickel and copper. This is where BERI is focused on the mining part of the portfolio.
Supply remains tight and there is strong capital discipline from the mining companies. This is helping to keep prices elevated. The lack of reinvestment in some of these mines is an issue. Supply can often take 20 years to come on stream and the tight supply environment is likely to be sustained. The mining companies have paid down debt and focused on capital discipline in recent years. These assets generate significant cash flow, which is being returned to shareholders in the form of dividends and share buybacks.
This year won’t be easy. There will be some volatility around underlying commodity prices and on the energy transition side. But there are strong tailwinds behind these sectors and continued regulatory support. We see some volatility over the year, but there are some exciting opportunities for BERI, particularly with its ability to invest flexibly across the energy transition, traditional energy and mining sectors.
Sources:
1 International Energy Agency - The energy world is set to change significantly by 2030 – October 23
Risk warnings
Investors should refer to the prospectus or offering documentation for the funds full list of risks.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Description of Fund Risks
Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Currency Risk: The Fund invests in other currencies. Changes in exchange rates will therefore affect the value of the investment.
Emerging Markets: Emerging markets are generally more sensitive to economic and political conditions than developed markets. Other factors include greater 'Liquidity Risk', restrictions on investment or transfer of assets and failed/delayed delivery of securities or payments to the Fund.
Gearing Risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
Investments in Mining Securities: Investments in mining securities are subject to sector-specific risks which include environmental concerns, government policy, supply concerns and taxation. The variation in returns from mining securities is typically above average compared to other equity securities.
