Monthly commentary - Mackenzie Greenchip Team

Written by the Mackenzie Greenchip Team

Portfolio Manager Monthly Insights

Key takeaways

Environmental indexes and the Greenchip strategy outperformed again in February. Materials and utilities were particularly strong as consumer businesses and tech giants generally lagged.  

Greenchip benefitted from continued rotation to non-American investments, with strength in currencies and equities for Europe and Brazil leading the way.

Positive reports and investor updates helped integrated utilities Enel, EDP, and SSE all reach record levels, while the same transpired for Brazilian operator of hydro generation and electricity transmission networks AXIA.

Macroeconomic recap

In the face of ever-increasing geopolitical turmoil, global asset markets shrugged again and continued their long climb in February. With Venezuela and Greenland the prior month’s news, US aggression continued with further disruption of seaborne oil trade and rapid military buildup in the Middle East. The latter was aimed squarely at Iran, in parallel with threats and ‘negotiations’ that ultimately ended in a surprise attack by Israel and the US on the last day of the month that killed much of Iran’s leadership and set off a regional war. Since the attack was after close on the last trading day of the month, this commentary on price action in February is already dated. March trading has begun – and promises to remain – much different and more volatile than recent experience. 

Beyond increasingly dominant geopolitical news, other noteworthy developments included minutes from the US Federal Reserve’s January meeting that showed increasing disagreement about future interest rate policy and emerging signs of stress in private credit. Two retail funds run by Blue Owl, with relatively high exposure to software-as-a-service and data centres, had to temporarily halt investor redemptions. Other publicly traded providers of similar ‘alternative’ investment strategies were under heavy selling pressure. While Nvidia reported another banner quarter, there are growing indications that the business models and funding for its customers are increasingly imperiled.

Current positioning and Outlook

Environmental indexes and the Greenchip strategy outperformed again in February. Materials and utilities were particularly strong as consumer businesses and tech giants generally lagged.  Greenchip benefitted from continued rotation to non-American investments, with strength in currencies and equities for Europe and Brazil leading the way. Positive reports and investor updates helped integrated utilities Enel, EDP, and SSE all reach record levels, while the same transpired for Brazilian operator of hydro generation and electricity transmission networks AXIA. German wind turbine producer Nordex continued to report very strong orders and bumped its long-term margin targets significantly higher, sending the stock up by more than 20%. On the downside, French electric cable producer and installer Nexans dropped nearly 10% after announcing the suspension of a very large project to connect Cyprus to the European grid, while Johnson Matthey was down nearly 20% after renegotiating its deal to sell its Catalyst Technologies division to Honeywell for a price lowered by approximately 30%. The recent declining performance of that division highlights the reduced regulatory support and increasing uncertainty that are impeding financing of new carbon capture and blue/green hydrogen projects. 

As a post-script, and referring to the mention above of the war in the Middle East, March has begun very differently. The trend of outperformance of non-US assets has, at least initially, substantially reversed, with US markets outperforming European markets by more than 6% in the first two days’ trading. Emerging markets such as Korea, India, and Brazil have also experienced heavy losses, to say nothing of those markets in the immediate vicinity such as Dubai or Saudi Arabia. These initial trading trends would indicate a possible period of underperformance for Greenchip. While global energy markets are very much threatened by this war, and by the overarching US policy of energy dominance of which it is a part, some of the market responses – such as a 5% drop in the currency of Brazil, which is a net exporter of both energy and food – make little sense to us. We will judiciously rebalance where appropriate and carefully assess risk in an increasingly dangerous environment.

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