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Environmental Solutions Outlook

Outlook
14 January 2025

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Latest Environmental Solutions outlook. 

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The election of Donald Trump as US president is likely to engender more uncertainty and a greater dispersion of performance across global equities in 2025.  While this will throw up challenges, it also plays into our active management style and therefore provides us with exciting opportunities for alpha generation.

The incoming US administration clearly adds a negative impetus to tackling climate change and biodiversity loss. However, in many cases, we believe that this is more than discounted in stock prices, and that fears may prove overblown in some areas. For example, we believe that a selective pruning of the IRA rather than a full-scale repeal of the act is most likely. The ‘45X’ provision in the IRA provides tax credits for US produced goods and is widely claimed by US corporates. In solar module production, it would seem unlikely that Trump would penalise US producers as the only viable alternative is Chinese imports. The US leader in the field, First Solar, is one name that we have therefore been buying, as an expected beneficiary of aggressive tariffs against Chinese manufacturers. IRA subsidies in areas such as offshore wind and EV consumer tax credits are likely to be more vulnerable, and we have positioned accordingly.

Elsewhere, we expect the trends of accelerated deployment of low/zero carbon power generation, higher grid capex and investment in grid-scale energy storage to continue, driven by the increased electrification of the economy and, in particular, power demand from AI datacentres. We have good exposure to these themes through renewable gencos (Serena, Greencoat), renewable supply chain (First Solar, Cadeler), cables (Nexans), grid capex (Legrand, Longshine), and datacentre high efficiency cooling (NVent). Even some of our holdings focussed on other environmental themes are starting to benefit from these trends, as witnessed by insulation-play Kingspan’s fast growth in its datacentre business and EV-tester Chroma’s system-level testing for AI chips.

Finally, it is instructive that we had two stocks bid for in the last few months of the year (Renewi and Renew Energy Global), highlighting that valuations are extremely compelling within the environmental universe, and that management teams and private equity firms are increasingly aware of the opportunity. Indeed, our portfolio’s upside to average price target is at elevated levels (weighted mean upside of 55%) and our recent publication of names that we believe can double is indicative of our high conviction. We continue to concentrate capital in these names, with our top 10 holdings accounting for approximately 48% of NAV.

Notable portfolio changes over the quarter included adding to Soitec, a French company that designs and produces semiconductor materials. Its biggest end market is mobile handsets, which have been in a sharp downcycle, leading to earnings downgrades for Soitec. However, there is good visibility in the order book, suggesting that demand will inflect in 2025. The company is also seeing strong growth in its Edge and Cloud AI division.

Elsewhere we added to NVent, which provides electrical connection and protection products. It has a rapidly growing liquid cooling business with attractive exposure to AI datacentres. More generally, following the election we were looking to selectively increase US exposure in stocks such as NVent that would not be negatively impacted by Trump from an environmental regulation point of view and where the valuation still has significant upside.

Conversely, we took some profits in Daiseki and Knorr Bremse. The latter was also part of efforts to harvest capital in Europe and selectively reallocate to the US. 

We also reduced our exposure to Brazil by taking some profits in Sabesp.

Finally, we further hedged the portfolio’s overweight European equity exposure from a currency perspective, and also put on a Brazilian Real hedge. 

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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