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A field of operating solar panels located in Prince Edward County, Ont.JOHNNY C.Y. LAM/The Globe and Mail

Widespread concern over energy security after Russia’s invasion of Ukraine is turning investor interest toward the energy sector – but the best-performing stocks are not the obvious ones associated with traditional oil and gas producers.

Instead, stocks tied to wind, solar and hydro energy are leading the way, and the gains could mark the start of a sustained comeback for the beaten-up renewable energy sector, according to some observers.

“The sun shines on all countries, the wind blows on all countries – so they can get much more sovereign security around that,” said John Bai, chief investment officer at Toronto-based sustainable investing firm NEI Investments.

On Monday, the iShares Global Clean Energy ETF, an exchange-traded fund that tracks the performance of 76 stocks, including Vestas Wind Systems A/S, SolarEdge Technologies Inc. and Orsted A/S, rallied 6.5 per cent in New York, adding to Friday’s gains.

The rally included a number of Canadian stocks.

Boralex Inc. and Northland Power Inc., both significant wind power producers, rose 3.6 per cent and 5.8 per cent, respectively. Cameco Corp., which produces uranium used for nuclear power, another alternative to oil and gas, rose 7.6 per cent.

“It’s really across the board, in terms of renewables,” said Garvin Jabusch, chief investment officer at Green Alpha Advisors, a sustainable investment firm in Colorado.

He noted that initial market excitement in wind power has broadened to include solar, as well as renewables-related advanced materials and equipment manufacturers.

The gains exceeded the performance of oil producers Suncor Energy Inc. and Canadian Natural Resources Ltd. The S&P/TSX energy sector rose 2.6 per cent, even as the price of crude oil jumped 4.5 per cent to US$95.72 a barrel amid uncertainty over Russian energy exports.

For some investors, the rebound comes as a relief.

Renewable energy stocks have struggled over much of the past year amid U.S. President Joe Biden’s stalled infrastructure agenda and pushback against wind and solar power as energy costs soar, particularly in Europe. More recently, the prospect of rising interest rates has weighed on equity valuations.

The iShares Global Clean Energy ETF slid more than 30 per cent from Nov. 1 through Feb. 22. The decline challenged the belief that renewable energy is a solid bet on the global push to fight climate change.

The rebound suggests that the sector has another attractive feature: It may satisfy the urgent need for energy security, and independence from traditional producers such as Russia, for the first time in years.

“Energy independence has been a key investment thesis behind renewables before. But it has been in the background for the past five or more years,” said Mark Jarvi, an analyst at CIBC World Markets.

Can the rally last?

Rupert Merer, an analyst at National Bank Financial, expects that the geopolitical crisis in Europe will underscore the need for energy alternatives for some time.

“Renewable energy is a domestic energy source,” Mr. Merer said. “Bottom line is, it’s going to drive higher revenue near-term and more growth in the medium term.”

But the sector has other things going for it right now.

Rising bond yields, which had made contracted cash flows from energy producers look less attractive, may have peaked: The yield on the 10-year U.S. Treasury bond retreated below 1.83 per cent on Monday, down from a high above 2 per cent last week.

And despite the rebound in renewable stocks on Monday, valuations are still well off their euphoric highs early last year, when investors drove share prices up in anticipation of an aggressive push into renewable energy after Mr. Biden entered the White House – only to see share prices decline soon after.

The rebound and the factors driving it, Mr. Jarvi said, “has woken us up to the value proposition, and the opportunity around renewables.”

He thinks that current valuations within the renewable energy sector are reasonable next to upbeat growth prospects. But given the volatile backdrop, no one is expecting a smooth ride.

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