Monthly commentary - Mackenzie Greenchip Team

March 31, 2024

Key takeaways

Low gas prices have advantaged North American over European industries, lowering European demand.

Integrated utilities are increasingly prioritizing investment in networks over new renewable generation given changing economics. There is also an increasing need for more investment in the grid to meet future electricity demand and faster connection of new renewable developments.

In their year-end reports, Canadian Solar and JinkoSolar both showed balance sheet improvements and competitive differentiation in this difficult period.

On the positive side, Alstom and Siemens Energy are increasingly putting their 2023 challenges behind them. As a result, the value in their low stock prices is increasingly being recognized.

Macroeconomic recap

Another month, another gain for global equities in March, completing a double-digit increase for the first quarter of 2024. Even as the US Federal Reserve continued to claim inflation was under control and tip off interest rate cuts for later in the year, further signs of sticky inflation were evident. Copper traded to a multi-year high, while gold and bitcoin hit all-time records. With the Gaza war becoming further entrenched and with Ukraine successfully droning several Russian refineries, oil added more than 5%. Natural gas prices, however, remained near all-time lows — especially in North America — as winters were unusually warm across most of the northern hemisphere and storage is close to full entering the summer months. These low gas prices have advantaged North American over European industries, lowering European demand. They have also driven down spot power prices, especially in Europe, and significantly changed the economics of new renewable energy development. These changing economics, along with the increasingly obvious need for more investment in the grid to meet future electricity demand and to enable faster connection of new renewable developments, have seen many integrated utilities increasingly prioritizing investment in networks over new renewable generation.

Current positioning and Outlook

Environmental indexes and the Mackenzie Greenchip Global Environmental All Cap fund enjoyed similar gains to broader indexes in the month. Solar remained under pressure due to overcapacity and consequent low panel prices. However, in their year-end reports Canadian Solar and JinkoSolar both showed balance sheet improvements and competitive differentiation in this difficult period. European utilities also continued to face headwinds from the above-mentioned power price weakness and higher interest rates. On the positive side, Alstom and Siemens Energy, which both experienced significant challenges in project execution in 2023, are increasingly putting these challenges behind them and the value in their low stock prices is increasingly being recognized. Siemens Energy, as a global leader in high voltage grid equipment, is seeing the benefits of rapid demand growth along with increasing backlogs and margins in this division. Its value was further highlighted by GE Vernova being spun off by parent GE. GE Vernova is a company with a very similar business mix to Siemens Energy but its initial valuation is expected to be two to three times as high.

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