Clean Economy Strategy - July 2022
US Climate Bill would provide additional tailwind for energy transition companies
- Global equity markets rose sharply in July
- Our four themes posted strong returns
- We initiated a position in Sungrow Power Supply and Enphase
Global equity markets rose sharply in July in US dollar terms as weaker macro data raised the possibility that interest rate expectations have peaked. On the corporate earnings side, several industry bellwethers reported results that were better than feared which also provided some relief. All regions posted gains except for China where rising virus cases, mortgage boycotts and fresh regulatory action against internet companies weighed on sentiment. On a sector basis, consumer discretionary and information technology bounced back strongly while more defensive areas of the market lagged. Growth notably outperformed value for the first time in several months.
Despite broader macroeconomic concerns, the impetus behind the Energy Transition continues to build. The Ukraine conflict has brought energy independence into focus and become a key strategic priority for Europe. We have already seen strengthening policy commitments to the energy transition from the EU and expect further easing of permitting and process bottlenecks, which have limited the pace of investment to date. In the US, the recently announced Inflation Reduction Act would provide a huge boost to energy transition companies if passed by congress while putting the US on a much closer path to achieving its climate targets.
Achieving these goals requires significant investment in the areas of Smart Energy and Low Carbon Transport. New energy infrastructure requires smart grids and interconnect capacity between regions, renewable generation capacity, improved energy efficiency and energy storage solutions. Transportation systems will move away from fossil fuels towards a combination of solutions including electric vehicles, biofuels and green hydrogen. Smart Energy businesses are already reporting strengthening demand for energy efficiency solutions, residential and commercial scale renewables, and energy storage projects. Meanwhile electric vehicles continue to increase their penetration of new car sales as manufacturers prioritise their production under constrained supply chains and consumers switch in response to high fuel prices.
Protracted lockdowns in China have weighed on areas of production and continue to disrupt supply chains. Although measures have been relaxed slightly over recent months, the “zero covid” policy remains in place so we continue to monitor the situation closely given the implications for verticals like low carbon transport and impact on inflationary pressures more broadly.
Portfolio positioning and performance
The strategy meaningfully outperformed the broader equity market (MSCI All Country World Index) in July led by holdings in ‘Smart Energy’ and ‘Low Carbon Transport’, although all themes posted strong returns.
In ‘Smart Energy’, our position in renewable energy solutions company Ameresco added most to performance after reporting stronger-than-expected results with solid execution in its projects segment. Management noted that bidding activity remains robust, and although inflation and higher interest rates are a headwind, higher energy prices are fuelling demand for their lower cost solutions. Elsewhere, shares in US solar manufacturer First Solar jumped on the announcement of the Inflation Reduction Act which, if passed, would boost earnings through production tax credits and further increase bookings activity given incentives for domestically-sourced content.
Returns in ‘Low Carbon Transport’ were boosted by electric vehicle manufacturer Tesla which delivered solid results for the second quarter on strong execution in the face of various headwinds that included higher raw material, commodity and logistics costs, Shanghai lockdown and foreign exchange volatility. Management indicated that there has been little to no signs of demand slowing and the backlog of orders now extends well into next year. Output at its Shanghai and Fremont facilities has ramped back up to record pace while Berlin and Austin are scaling up rapidly which should allow it to meet its targets for the year.
During the month we initiated positions in solar companies Enphase Energy and Sungrow Power Supply. Enphase provides solar energy and storage solutions mainly for residential use and is benefitting from strong demand for micro inverters, increasing storage penetration and electric vehicle adoption. Sungrow has the leading market share in photovoltaic inverters globally with a broad portfolio across utility-scale, commercial and residential applications.
2022 was already set to be an important year for the Energy Transition in all regions due to ‘Fit for 55’ regulations within European Climate Law and progress with the EU Green Taxonomy; China’s goal of 2030 peak carbon emissions followed by a goal of net zero by 2060; and a significant step up from corporates across the globe, with notable progress in the US.
The current Russia-Ukraine crisis has served to underscore the need for Energy Independence and has therefore strengthened the resolve of both policy makers and those for whom energy security and uptime is critical. Delivering the necessary transition requires considerable investment in Clean Technology solutions, adding to the multi decade growth opportunities already evident for the Clean Economy. This strong and resilient demand for clean technology solutions, now further underpinned by energy security considerations, encourages further innovation which continues to enhance the investment potential within the clean economy.
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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