As the economic recovery becomes firmly established, growth in late-cycle businesses, such as construction firms, is picking up.
This is true across the globe. In the US, the outlook for both non-residential and residential markets construction is strong.
Housing starts have been in recovery for the past few years, although they still have a way to go to catch up with their 2005 peak, and the Architectural Billings Index (ABI) has stayed mainly in expansionary territory since 2012.
As a result, expect non-residential construction to pick up further over the next nine to 12 months. Elsewhere, Eurostat’s monthly Index of European Production in Construction is now on a firmly improving trend.
Within this recovery, sustainable construction – where buildings are designed with their energy efficiency and environmental footprint in mind – is leading the pack. Indeed, construction of ‘green buildings’ is expected to outpace standard buildings two-fold in coming years.
Why this impressive growth? For an average up-front investment premium of two to five per cent, life-cycle savings of 20 per cent of the construction costs or more are attainable for sustainable buildings.
Furthermore, governments are increasingly providing incentives to encourage efficiency improvements that reduce electricity demand. For example, the UK government will require all new homes to be zero carbon from 2016, and is considering extending this to include all other new buildings from 2019.
This is good news for sustainability investors who can take advantage of both the recovery in the construction sector as a whole and the renewed focus on creating buildings that use resources more efficiently.
A number of stocks in the insulation, heat pump, LED and water markets are an exciting prospect.
Heating and cooling are the biggest consumers of electricity in buildings, and insulation is critical in reducing energy usage. We have taken a position in insulation manufacturer Kingspan, which is well placed to benefit from these trends.
Another company which is benefiting from the shift to sustainable construction is Swedish heat pump manufacturer Nibe. Heat pumps heat and cool buildings using latent heat in the earth or the air and have achieved 60 per cent market penetration in Sweden, but much lower elsewhere in Europe.
Nibe recently acquired WaterFurnace Renewable Energy in Canada, and is now the market leader in both Europe and Canada. The penetration of heat pumps is likely to increase further over the next few years due to the significant lifetime energy savings available.
Lighting is the second biggest consumer of electricity in buildings, and here the shift to LEDs (light emitting diodes) has escalated. The upfront costs versus the potential to save through reduced energy use is now very attractive, particularly in commercial buildings. Efficient lighting company Acuity Brands in the US has seen its LED sales double over the last year.
Water heating is another area of significant energy usage in buildings, and here AO Smith is a leading manufacturer of energy efficient water-heating products and the market leader in the US and China. The company’s products can have a payback of two to three years in terms of the cost of energy saved.
