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Environmental Solutions Outlook

Outlook
14 October 2024

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Latest Environmental Solutions outlook. 

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The most significant events in markets over recent weeks have been policy easing in the US and China. In the US, against a backdrop of slowing economic data and with 3-month rolling underlying inflation already below the Central Bank’s 2% target, the Fed decided to cut by 50bps. This was clearly welcomed by equity markets as it increases the likelihood of a soft landing in the world’s largest economy, with additional comfort taken from the fact that the Fed has substantial scope to cut much further, if necessary.

While the direction of the Fed’s decision was well-telegraphed, policy easing in China caught investors by surprise and catalysed a major relief rally in China itself, as well as China-sensitive sectors in other markets. Key announcements include: cutting the Reserve Requirement Ratio to inject RMB 1 trillion of liquidity into the system; lowering outstanding mortgage rates to ease the mortgage burden for c.150m people; reducing downpayments for second homes; setting up a new swap facility to allow asset managers and insurers to tap at least RMB 500 billion of PBOC liquidity to purchase equities; and providing a further RMB 300 billion of funds to allow banks to lend to corporates for share buybacks. At the time of writing, there is speculation that these measures will be followed up with a series of fiscal announcements, including cash handouts, and issuing RMB 2 trillion via special bonds to stimulate consumption and help local governments tackle debt problems.

Against this backdrop, we remain very constructive on the outlook for environmental equities, where valuations have corrected substantially and remain depressed in many areas of the market. Some of the factors that were behind the derating, namely rising bond yields and weakening economic activity, particularly in Europe and China, no longer appear to be headwinds. Indeed, bond yields have fallen from their highs, and although macroeconomic data continues to be weak in Europe and China, there are reasons to believe that we are through the worst. Of course, we are not complacent and there are risks on the horizon that need to be navigated in the coming months. Clearly tensions are rising in the Middle East, with an associated uptick in the oil price. Meanwhile, the US election in November could be a source of volatility for global equities generally and particularly for environmental stocks. Our firm view is that a Republican presidency would have limited impact on the long-term trajectories of environmental technologies. We have relatively limited exposure to companies that might be vulnerable to reduced flow of IRA subsidies.

Important Information:

Nothing in this document constitutes or should be treated as investment advice or an offer to buy or sell any security or other investment. TT is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA).

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