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All Eyes on AI, Obesity & Renewable Energy in Q2-Q3 for Art9 Equity

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Stockholm (NordSIP) – The second and third quarters of 2023 were dominated by different macroeconomic trends that reverberated through sustainable equity markets leading to volatile performances. Whilst US growth enthusiasm dominated Q2, rising interest rates dominated the third quarter.

To better understand how these and other trends affected the performance of funds classified as Article 9 (“Dark Green”) under the EU’s Sustainable Finance Disclosures Regulation (SFDR), NordSIP reached out to 16 actively managed global funds available to retail investors in Sweden.

Macro Focus Changes

Fund managers’ replies suggest that whilst the second quarter saw benchmarks and funds generally provide positive (absolute) returns, the third quarter, dominated as it was by rising interest rates, saw both funds and benchmarks in the red. Nevertheless, a general trend of negative relative performance during both quarters.

From a macroeconomic perspective, the second quarter was seemingly dominated by a belief that the expected recession in the US would not materialize. Sectorally, tech companies and those focused on AI in particular, did very well. Fund managers also pointed to Healthcare sector as a driver of returns thanks to the success of medicines aimed at fighting obesity. Novo Nordisk performed so well that its market capitalisation exceeded Denmark’s GDP.

During the third quarter, performance took a hit. The macroeconomic landscape became dominated by rising interest rates. Article 9 funds’ performance was driven by the good performance of energy stocks, the underperformance of renewable energy and the overarching relevance of tech and healthcare stocks. The importance of this latter trend is patent in the fact that the only fund to overperform its benchmark is a healthcare-themed fund.*

From a local market structure perspective, the merger of Navigera and Naventi in September (both owned by Max Matthiessen one of Sweden’s leading life and non-life insurance brokers) led to the rebranding of the Navigera Global Change fund into the Ruth Global Change Equities fund.

Second Quarter Positive Macro Headwinds

Macroeconomic optimism permeated the performance of all asset classes during Q2. “Global equities rose over the [second] quarter although exhibiting diverse performance driven by multiple influential factors. Central banks, notably in the United States, European Union, and the United Kingdom, exerted their influence on the markets through their decisions on interest rates. Revisions of GDP growth, particularly in the United States, stood in contrast to a mild recession in the Eurozone,” says Oskar Schyberg, co-portfolio manager of the FCG Havfond.

“By the end of May performance was almost flat compared to our benchmark, which we were actually fairly pleased with given all that had happened during the year already (powerful mean reversion of last year, China re-open, regional banking crisis in the US and Credit Suisse in EU and thereby following recession fears, when AI hype etc.). In June the market became convinced that the expected recession in the US would not materialize. Short interest rates rebounded and we had a cyclical rally where especially the Consumer Discretionary sector did extremely well. This sector is our biggest underweight since we are not able to find many sustainability cases in this sector and that therefore hurt performance. We didn’t experience any significant draw-downs within our holdings but more a cyclical rally in the market,” Kasper Brix-Andersen, portfolio manager of the Danske Invest Global Sustainable Future fund adds.

AI Dominates During  2023Q2

The second quarter of 2023 was awash with talk of AI, thanks to the rise in prominence of Chat GPT. Funds with strong exposure to this trend benefitted significantly. “IT and especially anything AI related that totally dominated the market,” Marcus Grimfors, portfolio manager of the CB Save Earth Fund argues.

“Big tech as well as artificial intelligence (AI) continued to drive the stock market higher in the second quarter of 2023. For example, we added Nvidia, a clear winner in the AI race so far, to the portfolio in February and the stock surged by 52,3 % during the quarter. Another theme during the period was the growing enthusiasm for Japanese shares, with the Nikkei 225 hitting its highest levels since 1989,” says Johanna Ingemarson, portfolio manager of the Simplicity Green Impact Fund.

Olutayo Osunkunle, Portfolio Manager of the Nordea 1 – Global Social Empowerment Fund, agrees. “Probably the most noteworthy development during the second quarter was that the AI theme suddenly gained significantly more traction on the back of record-breaking, strong results from AI-exposed companies like NVIDIA that saw its share price skyrocket. Furthermore, commentary indicating an inflexion point in generative AI and large language models sparked a broader tech rally as it spread to other exposed names – with investors grappling with who will be the beneficiaries and who will lose out,” Osunkunle explains.

GLP-1 and Novo Nordisk Fight Obesity in Q2

Healthcare made an important contribution to market performance, particularly those companies that focused on obesity products. “Another burning topic of interest during the year has been the rising penetration of the GLP-1 weight loss drugs as a potential mitigating factor for the increasing obesity epidemic,” Osunkunle says.

“Major themes in the healthcare space has been for the year, diabetes and obesity. Recently focus has been on Novo Nordisk SELECT study that showed a cvd benefit that was material. This will add a strong benefit not just use GLP-1 for diabetes/obesity indication but also for prevention for cvd. This study has been an important contribution for the performance of our holdings in Novo Nordisk and Eli Lilly,” Christopher Sundman, Portfolio Manager of the Handelsbanken Hälsovård Tema fund adds.

Renewable Struggles

On the negative side, renewable energy and electric vehicles (EVs) dragged down performance. “The themes during Q2 was more or less a repetition of Q1; AI and the magnificent 7. It was a challenging time for renewables whose valuations has reset back to 2020 lows across regions. This is partly due to stubborn inflation and regulation of components and material from China which has put a headwind on the sales and new installations which hasn’t grown as much as expected, which is reflected in the returns. The EV segment has been quite stable over Q2,” Mirella Zetoun, portfolio manager of the SEB Global Climate Opportunity and the SEB Global Equal Opportunity funds, says.

“The main theme that we noticed was that the market’s general growth expectations regarding companies within the solar and wind spaces were revised down which led to falling share prices,” Johan Eriksson, portfolio manager of the Swedbank Robur Climate Impact, the Swedbank Robur Global Impact and the Swedbank Humanfond, agrees.

“The quarter began on a negative note, with companies in the solar energy technology sector showing the weakest performance in Havsfonden, due to a decline in solar installations in the US. Following that, we witnessed robust performance in US and Japanese stocks, with a particular emphasis on the positive trend among companies in the water management technology sector. This, combined with the depreciation of the Swedish krona, contributed to reinforcing the fund’s positive returns,” Havfond’s Schyberg adds.

“Obviously interest rates have had a significant impact on growth stocks, especially those with business models centred around debt such as residential solar companies who rely on individual loans to install their panels,” Philip Ripman, portfolio manager of the Storebrand Global Solutions fund explains.

“In the solar energy sector, installation volume growth remained healthy, thanks to easing supply chains and more clarity of US IRA incentives. However, equipment prices continued their downward trajectory, mainly due to high channel inventory levels built earlier. Entering Q3, the pace of residential solar PV installation slowed in the US, particularly in California, due to higher mortgage rates and changes in metering rules, while the US utility end market remained relatively resilient,” Huizi Zeng, portfolio Manager of the Espiria SDG Solutions A Fund continues.

 A Challenging Third Quarter

The macroeconomic environment did not favour equity markets in the third quarter. “Q3 was a challenging period for sustainable investments overall.  The energy sector rallied, and Bond yield went up,” SEB’s Zetoun argues.

“In Q3, the most important driver for markets was a significant rise in bond yields due to an expectation that central banks would keep rates higher for longer until a cooling off in economic data would be more clearly visible. The US 10 year government bond yield at September end reached levels last seen before the Global Financial Crisis in 2007, pulling down most financial asset prices. With bonds, equities and commodities falling, there were not many positives to focus on, with the exception of energy, which saw the oil price climb as a result of Saudi production cuts, export bans by Russia, and higher fuel demand by healthy travel activity,” Nordea’s Osunkunle explains.

“The third quarter of 2023 reflected a change in market sentiment. Investors began to price in a ‘higher for longer’ interest rate environment and the 10-year Treasury yield rose to the highest level since 2007. The higher rates had a negative impact on the stock market and on the fund performance during the period. Given the fund’s growth tilt, the fund performance was hit harder by higher rates than the overall market. However, the fund generally benefited from its focus on profitable companies and by diversifying investment among several sustainable themes – including the energy transition, circular economy, sustainable infrastructure, and water,” Simplicity’s Ingemarson says.

Renewables Continue to Struggle

Several issues continued to cause the renewable energy sector to struggle, not least the macro picture. “Increased interest rates have had a negative impact on growth stocks, and even more negatively on certain segments like ‘residential solar’. Together with rising inflation, this means that households have less capital, and thus it becomes less attractive to take out loans to finance solar panels,” Storebrand’s Ripman explains.

“Renewable/green stocks have had a tough year – and much of the explanation lies in increased interest rates. At the same time, there has been a negative sentiment around renewable stocks – which has contributed negatively to the returns. Stabilization in interest rates could positively benefit these companies,” Ripman adds.

“The US residential solar market weakened due to high interest rates and policy changes. EV makers had a strong quarter whilst when it comes to renewables a headwind still stood strong. For example, the wind profitability was impacted by short-term supply chain dislocations, higher cost of components- and installations hit the market hard,” Zetoun argues.

“On the negative side renewables continue to underperform, led by Solar and wind. On the positive side energy efficiency gained during the quarter with contributions from companies involved with IT optimizations and automation.  Our views is that renewables have underperformed based on high valuations combined with underwhelming revenues and results. Reasons include a softer economic cycle, higher interest rates (more expensive financing) and slower implementations of the various initiatives in the area,” Swedbanks’ Eriksson adds.

Tech Calms Down in Q3

On the tech front, excitement seemed to also calm down. “The magnificent seven had a calmer 3rd quarter in comparison to previous quarters. We saw value started coming back in Q3,” SEB’s Zetoun says.

Regarding the performance of the Magnificent 7, Storebrand’s Ripman noted that “to a large extent, the American stock market has been driven by the major tech companies. They represent almost 30% of the S&P 500 today. We have only identified Nvidia as relevant for our funds, and have had a position in the company since 2017.”

Water’s Appeal

According to Havsfond’s Schyberg blue investments performed well too. “Havsfonden’s investment in the Blue Economy and its lack of direct exposure to the Information Technology sector proved advantageous during this quarter,” Schyberg says.

CB Fonder’s Grimfors agrees. “During the third quarter, our fund demonstrated outperformance of all three of our investment sectors, namely cleantech, water, and renewable energy. The water sector, a consistent pillar of our fund, once again stood out with the strongest performance. However, renewable energy, constituting less than 10 percent of AUM and serving as a supplementary component, faced challenges, displaying the least favorable performance among the sectors, particularly in absolute terms,” Grimfors explains.

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*A previous version of this article showed 3 funds had outperformed their benchmarks in the third quarter of 2023. This mistake has now been corrected.

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