Monthly commentary - Mackenzie Greenchip Team

May 31, 2024

Key takeaways

Power prices are rising, and so too are prices for grid equipment and systems and for the commodities that are critical for their manufacturing, such as copper.

While technology led market gains in May, utilities, engineering and construction companies (EPC) in the energy sector, and materials also performed notably well.

Momentum in grid equipment and strong earnings reports led to 20%+ gains in the likes of Siemens Energy, Hitachi, and US EPC firm Mastec.

Alstom gained over 20% as the company neared completion of its efforts to strengthen its balance sheet and in advance of increasing order momentum for rail systems and equipment.

Macroeconomic recap

After April’s brief and shallow pullback, it was off to the races for global equities and asset markets in general for the month. As Nvidia’s most recent earnings report pushed year-to-date gains to more than USD $1.2 trillion and elevated that company to nearly the most valuable in the world, the euphoria extended to related products and supply chains - especially anything connected with electric power. Nvidia chips and AI architectures have enormous appetites for power and ‘hyperscalers’ building the largest datacentres increasingly see access to electricity as a limiting factor to their growth plans. Power prices are rising, even in soft general demand markets such as Europe, and so too are prices for grid equipment and systems and for the commodities that are critical for their manufacturing, such as copper. While technology led market gains in May, utilities, engineering and construction companies (EPC) in the energy sector, and materials also performed notably well. Other sectors were mixed, both in market performance and economic indicators. Certain segments of the consumer economy, in particular, appear to be weakening as overall retail sales and major retailers’ growth outlooks have disappointed.

Current positioning and Outlook

With the AI focus shifting to power, environmental sectors generally kept pace or slightly exceeded the broader market. The Greenchip Global Environmental All Cap Fund fared better still, benefitting from several areas of portfolio allocations. Momentum in grid equipment and strong earnings reports led to 20%+ gains in the likes of Siemens Energy, Hitachi, and US EPC firm Mastec. Rebounds in power prices and slightly lower interest rates helped most of the team electric utilities to gains of 10% or better. Solar and wind, too, enjoyed strong performance. While solar was led by First Solar’s gains of greater than 50%, as investors look forward to high margins supported by US trade barriers, Chinese solar suppliers rebounded too, in the range of 20%. Both government policy makers and industry participants appear to be getting increasingly serious about limiting further capacity expansion and getting better market balance to support healthier, if not First Solar level, margins in the future. Finally, Alstom gained over 20% as the company neared completion of its efforts to strengthen its balance sheet following the difficult acquisition of Bombardier Transportation and in advance of increasing order momentum for rail systems and equipment. Company focus is now on converting this order momentum into improved margins and free cash flow and we plan to fully participate in the rights issue planned for June.

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