Monthly commentary - Mackenzie Greenchip Team

Written by the Mackenzie Greenchip Team

Portfolio Manager Monthly Insights

Key takeaways

Global asset markets began weak in September but quickly recovered and turned in another solid gain, sparked mainly by the long-awaited initiation of interest rate cuts by the US Federal reserve after more than a year of no rate changes and increasing speculation.

Adding fuel to the animal spirits unleashed by the 0.5% cut from the Fed was a series of economic and financial measures adopted by the Chinese government the following week.

Environmental sectors and the Greenchip strategy outperformed broader global markets for the month.

The performance of Chinese solar stocks, up 30% or more from their lows, and of green materials stocks, such as copper miners First Quantum, Capstone, and Hudbay Minerals, were among the biggest contributors to Greenchip’s results.

The greatest contribution, however, came from Siemens Energy, up 30% for the month and almost 200% for the year to date. 

Macroeconomic recap

Just as was the case in August, global asset markets began weak in September but quickly recovered and turned in another solid gain. Helping to revive enthusiasm were comments from Nvidia’s CEO asserting to continued demand for its high-powered AI chips well beyond the company’s ability to supply. Most important, however, was the long-awaited initiation of interest rate cuts by the US Federal reserve after more than a year of no rate changes and increasing speculation. By many measures, in comparison to March 2022 when interest rates were first raised from their COVID emergency levels of 0%, financial conditions are currently actually easier, and in some cases significantly so. Adding fuel to the animal spirits unleashed by the 0.5% cut from the Fed was a series of economic and financial measures adopted by the Chinese government the following week. Unlike the American market and economy, Chinese financial conditions are quite tight and the country’s stock and housing markets have been under sustained pressure.  While the announced measures pale in comparison to those adopted in Western markets in response to the 2008/09 financial crisis or COVID, they nevertheless represented a signal that Chinese company shares were considered undervalued and an increasing policy priority. In the meantime, as asset markets in most corners of the world celebrated, wars in Europe and the Middle East continued to escalate, with Israel unleashing attacks against Lebanon, Yemen and Iran and with the Ukraine and its Western backers debating long-range missile targeting deep into Russian territory.

Current positioning and Outlook

Environmental sectors and the Greenchip strategy outperformed broader global markets for the month.  The performance of Chinese solar stocks, up 30% or more from their lows, and of green materials stocks, such as copper miners First Quantum, Capstone, and Hudbay Minerals, were among the biggest contributors to Greenchip’s results. The greatest contribution, however, came from Siemens Energy, up 30% for the month and almost 200% for the year to date. The company is benefitting from the growing appreciation of the need for much more investment in electricity transmission grids and baseload generation, not just for AI, but for electrification of transportation and other industrial sectors, and for integration of distributed and intermittent renewable sources of electricity. Orders are running at twice the rate of sales, backlogs extend well beyond three years, and margins are increasing. Meanwhile the company is making good progress in turning around its wind division after design failures made it one of our worst performing stocks in 2023. While the performance in 2024 is eye-popping, we still see upside to our assumptions regarding margin expansion and free cash flow generation. And the company still trades at a greater than 50% discount to GE’s recent spin-out, Vernova, with nearly exactly the same business mix and arguably better performance.

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