Solar exchange traded funds were the best performers last year and could continue their streak over the first half of the year, but the industry faces some obstacles in the later half of 2014.
“2014 should be a good year for the solar industry owing to strong demand for PV solar capacity in China and Japan, capacity constraints across tier 1 module manufacturers, stabilizing polysilicon and module prices, and improving business models,” J.P. Morgan analysts Paul Coster, Mark Strouse, and Paul J Chung said in the article. “We expect 2014 to start out strong, with PV suppliers’ gross margins trending into the 15-20% range, EBIT margins ticking up into single digits, and improving balance sheet health.”
The analysts, though, warn against potential hurdles in the second half of the year.
“Risks escalate in 2H14 when new capacity could enter the market, Japanese deployments peak, and potentially disruptive next-gen technology arrives,” J.P. Morgan analysts added.
Additionally, policy uncertainty, notably from China and Japan, which make up 40% of global demand, could put pressure on the solar photovoltaic industry. For instance, observers are concerned that Chinese demand could weaken this year if the government decides to cap solar farm installations.
Both the Guggenheim TAN ETF and Market Vectors KWT ETF track global solar industry names, but the two funds have slightly different compositions. For instance, TAN has a heavier emphasis on Chinese stocks, with China at 36.9% of the overall portfolio and Hong Kong at 12.3%, whereas KWT weights China at 24.7% and holds U.S. solar stocks as its highest allocation at 35.0%.
As policy speculators will trade on Chinese solar stocks, TAN could experience greater volatility, with its larger weighting toward China.
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