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Environmental Solutions Outlook

Outlook
12 July 2024

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Latest Environmental Solutions outlook. 

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Our core view remains unchanged; inflation is gradually falling and growth is holding up reasonably well, which makes for a supportive environment. Consequently, we are generally positive on markets as this is typically a good backdrop for equities. We are particularly upbeat about our own environmental universe as we believe that headwinds continue to ease, be it economic activity picking up outside the US or bond yields eventually coming down. At the same time, valuations in the space are generally low. Indeed, we continue to have near record upside to many of our price targets, being confident to back our highest-conviction holdings by allocating more capital to them. Clearly there is significant political change occurring in 2024, with a potential Trump administration front and centre of the agenda for many investors. Our view is that much of the environmental policy that has been implemented has bipartisan support as a lot of the investment is going into ‘red’ states, limiting the appetite amongst Republicans to repeal it. Of course, there will undoubtedly be executive orders to row back on certain measures, but we do not believe that this will have a radical impact on the portfolio as our exposure to the US is relatively limited.

In terms of activity over the quarter, we bought Legrand, a producer of low voltage electrical equipment. Its products are crucial to the energy efficient management of heating, cooling, ventilating and lighting of buildings. Legrand has significantly lagged many of its peers such as Schneider Electric and Hubbell as it has more exposure to cyclical office and residential markets in the US and Europe, which have been relatively depressed. However, one of the aspects that has been driving strong performance in the other names has been excitement over AI datacentres, where Legrand has similar exposure to peers. As its cyclical end markets begin to pick up, we believe it will see a rerating as investors begin to price in its rapidly growing AI datacentre exposure. Legrand used to trade at a large premium to peers but now trades at a discount. We therefore see it as a lowly valued opportunity to increase exposure to the electrification theme.

Another purchase in the electrification theme was nVent, which makes electrical connection and protection products, as well as cooling systems for AI datacentres. Its products cool datacentres efficiently and also reuse the heat, helping to mitigate the negative environmental externalities associated with these assets. Currently about 15% of its business is exposed to datacentres, but we believe this could be 35-40% by the end of the decade as it is growing rapidly.

We also added to Japanese waste management and recycling company Daiseki on weakness. It has substantial opportunities to deploy capex in high returning projects, and is also returning capital to shareholders through buybacks.

Conversely, we took some profits in Cadeler, Chroma and GEA, and consolidated WSP into Tetra Tech, where we had higher conviction.

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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