Clean Economy strategy: Growing optimism in equity markets for normalisation as the vaccine rollout continues
- Global EVs1 sales continue to grow with notable strength seen in China and Germany
- Weakness seen in Smart Energy with some renewables given back recent strength
- We initiated a new position in Xinyi Solar
Global equity markets rose during February, reflecting growing optimism for normalisation as the vaccine rollout continues. Towards the end of the month, we saw a rotation to value names reflecting this optimism.
Within ‘Low Carbon Transport’, global Electric Vehicle sales continue to grow, driven by notable strength in multiple markets including China and Germany. We note comments from Biden expressing an intention to encourage resilience in the EVs1 supply chain which would be supportive of investment for enabling technologies.
For ‘Smart Energy’, we note the resilience of investment in the Energy Transition and growing commitment to building resilience into energy systems as extreme weather events increase in regularity. Headlines cited wind turbine outages in Texas as a case against renewables but failed to note that a larger volume of generation was lost from fossil fuel generation which is also not designed for this temperature in Texas. Clearly, technology is available to manage wind generation in colder climates, as demonstrated by markets such as Scandinavia. It seems likely that future development will require investment to ensure viability in a broader range of conditions, thus hardening the system. This is supportive of growth for the technology leaders in their respective areas.
In the ‘Agriculture and Food Industry’, the shift towards a more sustainable diet continues, illustrated by a ramp up in targets for emissions and food waste from a number of leading players in the food industry. The recent earnings season has underscored the relative strength in sustainable categories across the food industry.
In ‘Natural Resource Preservation’, we note the growing demand for recycled PET2 from beverage manufacturers who need to meet commitments to recycled content in their packaging. However, the current supply in markets such as the US is too low to support the increasing demand, pushing up the value of recycled packaging. This is a signal to either increase the rate of recycling or shift to more sustainable solutions creating opportunities for businesses which support circularisation or provide alternative packaging solutions.
Portfolio positioning and performance
The Clean Economy strategy underperformed the broader equity market (MSCI All Country World) during February due to some weaknesses seen in our Smart Energy sub-theme.
In ‘Smart Energy’, we saw many renewables holdings give back some of their recent strength contributing underperformance to the portfolio. We remain confident in the longer term outlook for all of these holdings.
In ‘Low Carbon Transport’, holdings in semi-conductor manufacturers Silicon Lab and Infineon Technologies outperformed as a result of strong fundamentals in their industry. Suppliers to Electric Vehicle OEMs3 , TE Connectivity and Aptiv also both performed well on continued signs of strength in their order book and outlook.
In ‘Agriculture and Food Industry’, Deere & Company and Trimble both performed well following strong earnings and outlook reflecting strength of demand from end markets and traction with their offering.
During February, we reduced exposure to a number of outperforming names, particularly in Smart Energy. We initiated a position in Xinyi Solar, a leader in the Chinese solar glass industry where the long term outlook is positive but the stock has recently pulled back on concerns over new capacity, presenting an opportunity to open a small position.
The EU and its member states have underlined their commitment to Net Zero 2050 and set the framework for a green recovery in Europe. China has recently made a commitment to net zero by 2060, a significant move which came sooner than many expected. Corporates are also increasingly committed to Net Zero targets and are investing accordingly. In addition to existing consumer trends and cost-effective technologies, this represents accelerated opportunity for the Clean Economy. We see commitment to innovation underpinned by growing demand visibility and expect this to create new areas of investment potential.
We retain the view that high quality management teams, operating businesses with a sustainable competitive advantage in their markets and with the benefit of secular tailwinds are best placed to weather the current storm and to seize opportunities for growth. The portfolio is therefore well positioned to benefit from the secular growth opportunities we see within the Clean Economy.
No assurance can be given that the Clean Economy strategy will be successful. Investors can lose some or all of their capital invested. The Clean Economy is subject to risks including Equity; Emerging Markets; Global Investments; Investments in small and micro capitalisation universe; Investments in specific sectors or asset classes.
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