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Investing in renewables: 5 UK shares I expect to rally in 2021

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Windmills for electric power production.
Image source: Getty Images

The UK budget today, as would be expected, focused on getting the economy back on track post-pandemic with a slew of relief measures. UK shares in the real estate segment have been the first to rally as a result. 

But I think more budget announcement unpacking can happen. 

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UK Budget 2021 gives renewables a push

Specifically, I think companies associated with renewable energy will get a boost in the coming days and months. Chancellor Rishi Sunak’s second budget gave some importance to this aspect.

For instance, green bonds that will allow the individual investor to participate in the growing sector are in the offing, as is an infrastructure bank to finance green infrastructure projects. Offshore wind manufacturing has also received a boost

FTSE 250 shares with green focus

I think the real benefits of these initiatives will only show up overtime. But they do once again underline that climate is a key policy issue and I think they bode well for the following five UK shares.

One, the Renewables Infrastructure Group (TRIG) is an obvious choice. The FTSE 250-listed investment company, specifically, though, will benefit because one of its focus areas is offshore wind projects. TRIG’s share price has lost some of its mojo since the stock market rally of November. Additionally, its last results were nothing to write home about. Both its revenue and profits for the full-year 2020 had declined. I think it is due for recovery and could be a good investment over the long term. 

Two, Greencoat UK Wind (UKW), another FTSE 250 stock, is even more likely to gain. And not just because of the latest policy push.This renewable infrastructure fund showed stellar performance for the full-year 2020. Its revenue increased by 74% and its net profit more than doubled.

Risks to these UK shares

The one big risk to both these stocks, however, is that their share prices are already quite elevated. For instance, TRIG has a price-to-earnings (P/E) ratio of over 37 times and UKW has one of 33 times. 

I think that for TRIG in particular, this looks steep, going by its latest performance. UKW less so, but it is highly priced nevertheless. For all the commitment to green energy, the growth process can be slower than is anticipated. This would mean that returns to capital maybe slower to come by. 

FTSE 100 shares to consider

In this context, FTSE 100 shares that are tied to clean energy can look like better options. Not only do they have longer track records of being successful companies, they also have interests in other segments. 

As an example, consider Anglo American, which sees greater use of platinum group metals to this end. The FTSE 100 multi-commodity miner Rio Tinto and chemicals manufacturer Johnson Matthey are other examples that I talked about in some more detail yesterday.   

However, when investing in the context of renewables, I think it is important to remember that it may not become a significant enough business segment for them in the foreseeable future. 

For pure renewable investments, the FTSE 250 stocks look more promising, though they come with their own risks. 

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Greencoat UK Wind. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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