Monthly commentary - Mackenzie Greenchip Team

August 31, 2024

Portfolio Manager Monthly Insights

Key takeaways

US markets, and the giant technology companies that increasingly dominate US indexes, led the way back, spurred largely by increasing confidence that the Federal Reserve would begin lowering interest rates at its September meeting.

Adding fuel to hot asset markets runs the risk of catalyzing another acceleration in both commodities and consumer prices.

Environmental indexes and the Greenchip Global Environmental All Cap Fund had similar performance to the broader indexes for the month.

All three of the portfolio’s China-based solar producers reported earnings in August, with panel makers Jinko and (especially) Canadian Solar delivering substantially higher margins than other market leaders.

Macroeconomic recap

The hints of concern around technology growth outlook and US market stability in July accelerated rapidly at the beginning of August. The Japanese Yen appreciated 10% while global equities lost nearly that much in the first week of trading. This early reckoning was quickly subdued (in US dollar terms). Subsequently, equity markets closed with a gain for the month, notching yet another all-time high. US markets, and the giant technology companies that increasingly dominate US indexes, led the way back, spurred largely by increasing confidence that the Federal Reserve would begin lowering interest rates at its September meeting. Other regions have already lowered rates, including both Canada and Europe, while Japan has signaled willingness to move cautiously in the opposite direction in the interest of market stability. Lowering interest rates with equity markets at all-time highs and financial conditions by most measures very loose is unprecedented. While commodities continued the summer’s relatively weak trading, official inflation readings remain well above stated targets of 2%. Adding fuel to hot asset markets runs the risk of catalyzing another acceleration in both commodities and consumer prices.

Current positioning and Outlook

Environmental indexes and the Greenchip Global Environmental All Cap Fund had similar performance to the broader indexes. Japanese holdings reversed much of July’s losses as the market recovered, while utilities remained strong, especially European companies Enel, Veolia, and Brazilian hydro generator and transmission operator, Eletrobras along with water utility SABESP. SABESP recently completed its privatization, with state ownership declining from 51% to less than 20% and the private capital in place to support infrastructure investment of more than USD $10 billion over the rest of the decade to provide universal water and sanitation services in Brazil’s most populous region. The largest detractors to performance were the solar and power management semiconductor sectors. Solar producers continue to grapple with capacity that remains in excess of still very strong demand, and correspondingly low prices and margins. All three of the portfolio’s China-based solar producers reported earnings in August and panel makers Jinko and (especially) Canadian Solar delivered substantially higher margins than other market leaders. Yet valuations have continued lower with panel prices and more general market concerns in China. Given distress among much of the value chain, and a growing policy awareness of the challenges of industry overcapacity, our belief is that market conditions should improve into 2025 and that this should benefit our holdings, which are the most profitable and among the most cheaply valued.

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