Monthly commentary - Mackenzie Greenchip Team

Written by the Mackenzie Greenchip Team

Portfolio Manager Monthly Insights

Key takeaways

Environmental indexes and the Greenchip strategy generally underperformed amid ‘relative’ rotation back to US outperformance, with ‘defensives’ such as US large cap and financials – and, of course, outright defense - outperforming while non-US utilities and cyclicals underperformed largely due to rising interest rates and energy crisis dynamics.  

For Greenchip renewables producers were a weakness as our largest solar producer investment, Canadian Solar, reported challenges at its project development arm Recurrent Energy and traded lower in response.

Macroeconomic recap

March asset market developments actually began in February with the launch of US/Israeli attacks on Iran on the night of the 28^th. The dramatic escalation sparked immediate reactions across all assets, led by prices for fossil energy. Trading was far from one-way, however, as a constant stream of social media from President Trump and reports from other parties to the war had market participants rapidly changing their assessments as to the likely duration and result of the conflict. By the end of the month – but far from the end of the war – benchmark prices for crude oil had risen more than 50%, stocks were down between 5-10% and bonds were also punished as inflationary fears mounted.

Severe as the market reaction may have been, it could still understate the impact of what looks like a major step change in the ongoing process of deglobalization. The closure – or tight control – of the Strait of Hormuz by Iran and the damage to energy production facilities in both Iran and the Arab countries on the Persian Gulf were already causing real dislocation and shortages, with school closures, work from home advisories, and closed gas stations in many Asian nations and even in Australia. Beyond oil and natural gas, supply of other critical commodities such as fertilizer, aluminum, and helium (used in semiconductor manufacturing) is also threatened, as are incoming supplies of food and other critical goods to Gulf countries. Damage to GCC countries’ infrastructure and finances could also have material long-term consequences for US capital flows.

Current positioning and Outlook

Environmental indexes and the Greenchip strategy generally underperformed amid ‘relative’ rotation back to US outperformance, with ‘defensives’ such as US large cap and financials – and, of course, outright defense - outperforming while non-US utilities and cyclicals underperformed largely due to rising interest rates and energy crisis dynamics. Offsetting this was some expectation that renewables might get a lift as an alternative to fossil energy in crisis, with already some news of emergency deployment of Chinese solar panels in certain Asian countries grappling with shortages. Nevertheless, for Greenchip renewables producers were a weakness as our largest solar producer investment, Canadian Solar, reported challenges at its project development arm Recurrent Energy and traded lower in response. M&A was also in the news and somewhat supportive of Greenchip strategy: Canadian Independent Power Producer (IPP), Boralex, a long-time former holding of Greenchip, was the subject of a take-private offer from Quebec’s Caisse de Depot and Brookfield Renewable. This follows a similar transaction for Innergex last year (which was held by Greenchip at the time) and supported the value of current holding Northland Power, which is now essentially Canada’s last IPP. Meanwhile Japanese power management semiconductor producer, Rohm, disclosed that it was in discussions to be potentially acquired by Toyota’s largest supplier, Denso. This news, in combination with management commentaries across the power management semi landscape that the long-awaited end of inventory destocking seemed to be finally materializing, led to gains across our three holdings in this space.

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