As is true for stock exchanges around the world, one of the oldest, the London Stock Exchange, has undergone a transformation in recent decades. The advent of digital trading and information systems technology has spurred fundamental changes in the way the LSE and counterparts in major financial centers around the world do business, prompting them to move from floor to electronic trading, opening them up to a much greater degree to international capital flows and re-organizing the structure of the brokerage and investment banking industry.
And like other exchanges – though perhaps more successfully – the LSE has built a subsidiary exchange that provides a conduit for entreprenuerial, less well-established start-ups to tap into individual, fund and institutional investors’ capital.
The LSE’s Alternative Investment Market, or AIM, – akin to Nasdaq – has pursued that strategy with great success. But while Nasdaq built its name and achieved great success by capitalizing on the information technology and Internet boom, the AIM has become a hotbed of activity when it comes to raising capital and trading the shares of mineral and energy resource companies.
The rising prominence, and market prices, of oil, gas, gold, silver and the range of key base and industrial metals and minerals has been the key factor driving this trend. Similarly, efforts to mitigate climate change have led to strong investor interest in companies developing alternative energy sources and technology. Biofuel, solar and wind power start-ups from the U.K., the U.S. and other countries around the world have fulfilled their capital needs by listing on the AIM.
The Current State of Affairs
Of late, tremors in the credit and housing markets, the continuing drop in the exchange value of the US dollar and the specter of recession is shaking the foundations of financial markets and economies around the world at a time when energy and commodity prices are hitting record highs, portending the onset of higher inflation.
The receding tide is sinking all boats. While physical commodities continue what appears to be their inexorable climb, the shares of so-called junior mining and exploration companies are taking a hit. And so are the shares of alternative energy companies.
London’s Ambrian Partners specializes in raising capital, trading and broking the shares of such companies. While Ambrian’s Alternative Energy Team sees continued rough sailing ahead, they argue that the value of select young alternative energy companies are supported by fundamental, long-term trends and hence that we may look back and find that the current downturn in share prices was an excellent buying opportunity.
“With the recent correction in the alternative energy sector it is important to distinguish between macroeconomic sentiment and opportunity. Within the sector there are defined tiers based on commercial maturity. The overriding reality, though, is that broader political, economic and social trends remain in favour of alternative energy. Alternative energy sub-sectors with long-term political support offer robustness in a volatile environment,” Ambrian analysts wrote in a Feb. 27 Market Commentary.
Let the Sun Shine In
Distinguishing between the present macroeconomic malaise and the economics of alternative energy, wind, solar and to a lesser degree biomass/waste sectors are conspicuously attractive investment themes, Ambrian argues.
“Wind and solar guarantee tariff support for 15 or 20 years, effectively offering an annuity stream for suppliers that provide electricity to the grid. Against the background of the credit market crunch, investment in alternative energy sub-sectors with this strong political and financial support implies security well above sectors exposed to the unknown.”
Having ridden the surging interest in alternative energy to new heights, a correction, or reset period will provide investors with opportunities to acquire shares of alternative energy stocks with immediate commercial appeal relatively cheaply, they continue.
“Some alternative energy stocks have been oversold since 4Q07, presenting buying opportunities in sub-sectors that have strong political support, technological readiness and earnings momentum. In 2008, there will be opportunities for undervalued alternative energy stocks that have recently been indiscriminately sold off.”
Ambrian’s alternative energy team sees opportunity in the solar energy sector in particular. “Favoured opportunities are sub-sectors with immediate commercial appeal beyond technology and where a supply shortage works in favour of well-financed businesses with scale.
“We consider that the recent correction in the solar sector represents the best buying opportunity, though there are avenues with technologies at a pre-commercial stage. Solar, indeed, is perhaps the only long-term secular theme with a 30% CAGR. New Energy Finance reports that there are currently 13 solar IPOs planned before the year end, a sign of the strength of this sub-sector.”