AXA WF Framlington Clean Economy

What’s happening? Global equities posted a strong start to 2020 as tension between the US and Iran was overshadowed by the positive news that phase one of the trade deal between the US and China was signed. However, concerns over the impact of the coronavirus on global growth weighed on equity markets towards the end of January. The WHO has called the outbreak a global health emergency and efforts to combat the virus have been expanded. This means mandatory factory closures and significant travel restrictions. Data already shows a material impact on retail sales within the region, and on travel to popular destinations such as Hong Kong and Macau. We expect to see temporary strain in some global supply chains as a result of factory closures. As a result of concerns for the near term impact on economic growth in the region, Emerging Markets underperformed during January. Despite some concerns over the potential for implications of the outbreak, broader sentiment remains constructive, buoyed by improving macroeconomic data, a strong US earnings season and resultant upgrades to earnings expectations. January brought further discussion of the link between climate change and the fires in Australia, elevating the broader issue of urgency in addressing climate change. Within the Clean Economy, we saw a particular focus on the growing market for meat eaters seeking to reduce – but not eliminate meat consumption. This is driven partly by health concerns, but is in part motivated by the growing body of evidence that highlights the heavy environmental footprint of mass meat production. { A report released by the Environmental Working Group in the US stated the levels of PFAS or ‘forever chemicals’ appear to be higher than previously believed. These chemicals were used in a variety of products such as Teflon and have been linked to a number of health issues (@ Geoffroy… I can name these but thought it might be depressing?). We view this news as part of a broader focus on the contamination of water supplies as a result of production and consumption practices which we expect to become an area of focus for investment in the future.}* Not sure whether to include this last topic at all – or whether to save it for another month? Portfolio positioning and performance Against this backdrop, the portfolio underperformed the benchmark over the month. The main detractor from performance was Sustainable Transport where Borgwarner and Aptiv both underperformed. During the month, Borgwarner announced the acquisition of Delphi Technologies in an all stock deal. The market responded negatively to the news sue to the valuation agreed for Delphi. Whilst we recognise that the price agreed is a significant premium to the existing share price, we believe that the deal makes good strategic sense given the complementary specialisms with the electric vehicle supply chain and the benefit of scale and comprehensive offering in negotiations with customers. Aptiv underperformed due to a disappointing guidance for this year’s earnings, principally based on weakness in China. This more than offset the positive contribution from Tesla which outperformed on following a strong earnings release and constructive comments regarding outlook. In Responsible Nutrition, Beyond Meat performed well, following news that its competitor that supply constraints would prevent it from seeking a contract with McDonalds and a series of announcements that its products would be stocked by well known quick service restaurants including KFC and Starbucks. This was offset by the underperformance of Deere & Co which suffered on concerns over the outlook for both the agricultural and construction cycles. Deere & Co leverages a range of technologies to offer precision agricultural solutions for reduced chemical applications to crops and has a strong position within its markets. However, we recognise that the near term outlook for the agricultural cycle is challenged. In Smart Energy, outperformance came from Nextera which reported strong full year earnings including a strong pipeline of future project. This was offset by underperformance from TSMC which reversed some of its earlier gains. We made a number of changes to the portfolio during January. We initiated a position in Beyond Meat, funded by reduced exposure to China Everbright International. Beyond Meat provide plant based meat alternatives for a number of food products such as burgers where w. It predominantly sells in to the restaurant market where the risk to subsidies in some of its activities is rising. Outlook The signing of Phase one of the trade deal between the US and China represents progress towards resolution of the trade conflict and is therefore viewed positively by investors. Instability in the Middle East around the turn of the year raised some questions as to the potential for a spike in the oil price. However, the recent outbreak of the Wuhan virus has had a dampening effect on demand for oil and has thus offset the risk of a spike. Clearly the virus represents a significant human impact, and will weigh on economic activity. We expect to see both the direct implications of restricted movement and travel and through strains on supply chains, particularly those focused on the Hubei province. We expect this impact to resolve rapidly once the spread of the virus is contained and restrictions are lifted. We are now more than half way through the US earnings season which has been strong, and economic indicators in the US are healthy. Monetary policy remains supportive and we expect to see earnings growth, particularly from the US, in 2020. The growth outlook for Emerging Markets is also improving with valuations at a relative low. The liquidity backdrop remains supportive and healthy, with dividend yields offering additional support to markets whilst macroeconomic uncertainties persist. The portfolio retains its bias towards high quality businesses which benefit from clear secular growth trends within the Clean Economy.