Snap shot February 25th, 2009

Green stocks: a new market segmentation ?

Since the beginning of the year, our environmental funds record a better resistance compared to the markets in a context of high volatility. In 2008, and still now, many investors thought that the financial crisis would mean the end of the development of the environmental sectors due to many reasons such as high capex, liquidity squeezes, etc. On the contrary, some think that the credit access is not a stumbling issue.

A new market segmentation is rising in the environment sectors :

• The small companies or the more recent ones have difficulties to find the financing that they need due to the low visibility of their activity. For example, small French companies such as Cervin, Theolia or Chinese solar companies such as China Sun Energy or Yingly are undergoing these kind of problems since their recent listing on the markets.
• The companies located on the upstream of the supply chain such as cell, solar panel and wind turbine producers: these companies have difficulties to sell off their stocks due to the delay of some of their clients’ projects and to a lower negotiating power. We remain invested in tech leaders such as Sunpower in the United States, which are recording a good stock price resistance since the beginning of the year
• The green utilities (operators) represent the most important weighting in our environmental portfolios. Their fundamentals are still solid as they generate cash which is guaranteed by the existing installations. Even if these companies could slow down their investments in 2009, their profitability will be much better on the short run. We have selected for example EDF Energies Nouvelles in France, Iberdrola Renovables in Spain and EDP Renovaveis in Portugal.

We had already anticipated this trend at the end of 2008 and this is why we decided to concentrate our environmental portfolios on companies which offer a “defensive growth”: a strategy that begins to bear its fruits since the beginning of the year. For 2009, we will not change this investment strategy as investing in the environment requires prudence and selectivity. The big issue is to benefit from this momentum, which has never been so favourable for the sector and enable us in the same time to keep apart from risks :

• The low valorisation does not take into account the growth potential of the environmental activity in the coming years. The last reportings of Séché Environnement and EDF Energies Nouvelles are particularly comforting this gap.
• The next reportings should emphasize the de-correlation between the cyclical and non cyclical stocks due to the deterioration of the economic perspectives.
• The speculative interest of the sector is due to the foreseeable consolidation in this context of crisis. The recent purchase of Endesa by Enel is a good example
• Decision makers have reaffirmed their strong will to revive the global economy through the environment sectors (creating jobs) and to be energetically independent.

Obama’s Administration, with the signature of the “American Recovery and Reinvestment Act of 2009”, announced several positive measures for the wind power sector :

• The system of Production Tax Credit (PTC) was extended for 3 years (until 2012), giving an outstanding visibility to the sector.
• A wind power project can from now on use the PTC system (a tax credit linked to a site production over 10 years) or Investment Tax Credit (ITC) which is an immediate tax credit representating 30% of the real investment.

Even if the financial crisis is still deepening the economy and a social crisis is emerging, the environment remains a priority on the long run. We remain very prudent in the current market context and will keep our defensive strategy until positive parameters come up.