Merrill Lynch (NYSE: MER) has introduced a new index, identifying industry sectors which should benefit from the global drive to improve energy efficiency. The index is currently comprised of 40 companies globally that Merrill Lynch believes should benefit from the growing momentum to reduce CO2 emissions and the cost of energy.
“While there has been a clear shift of resources and investor attention into renewable energy, energy efficiency remains an area that is relatively under-explored,” said Asari Efiong, Merrill Lynch SRI/ Renewable Energy equity analyst. “We believe that energy efficiency represents a significant market opportunity for investors, as policy changes look set to force a structural shift in demand.”
Merrill Lynch has identified the automotive industry, capital goods, semi-conductors and building materials as most exposed to this theme. The Merrill Lynch Energy Efficiency Index is divided into four components: integrated plays with a focus on the capital goods sector; fuel efficiency in the automotive industry; building insulation; and energy-efficient solutions, including products, applications and industrial processes.
In the automotive industry, the confluence of energy security concerns and growing awareness of climate change are fuelling more stringent and widespread regulations on CO2 emissions and energy efficiency. In light of these trends, Merrill Lynch highlights the companies which could benefit from tightening fuel emission standards which are mostly market leaders in new technologies contributing to increased fuel efficiency.
Merrill Lynch’s analysts note the global manufacturing industry could improve its energy efficiency by 18 percent to 26 percent over all (and at the same time reduce the sector’s CO2 emissions by 19 percent to 32 percent). While not all of these potential savings are likely to occur without a strong framework of regulation and/or incentives, the potential over time is considerable. The index also highlights companies in the capital goods sector which are best positioned to reduce CO2 emissions and energy consumption across the industry.
The market for power semiconductors also looks well positioned for strong growth driven by the need to improve energy efficiency throughout the electricity supply chain from generation, through distribution to end consumption. Focusing on consumption, there are a number of ways that chip companies can lower the amount of energy required including reducing standby power, lowering heat loss in power supplies and the introduction of variable speed drives in motors. The new Energy Efficiency Index includes the leading companies in power semiconductors together with companies which are best positioned in efficient lighting (both CFL and LEDs) and smart metering.
Finally, Merrill Lynch analysts have identified the buildings sector as the area with the largest potential for energy efficiency gains at the lowest cost. The companies included in the index are fully expected to be exposed to double-digit demand growth in the building insulation sector. Merrill Lynch’s view of robust demand growth is underpinned by a new wave of legislation, particularly in Europe, targeting this segment of the market.
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