Impax blog

Trade tensions from the perspective of Environmental Markets

17 Jan 2019 - by Oscar Yang

As the new year commences thoughts turn to what it has in store for us all. No-one has a crystal ball of course, but we can confidently say that the trade tensions between the US and China will remain a focus of markets and investors. So, we are sharing our thoughts on the impact this is having on environmental markets in the region.

With almost a year having passed since the first tariffs in the US/China trade dispute came into effect, global equity markets are exploring their likely effect on future earnings as well as the potential for escalation from March. Amid the noise and uncertainty, Impax’s US/China-based analyst team have been examining implications for environmental markets.

Solar Energy is the only environmental product specifically targeted with higher tariffs to date. However, rising costs within industrial and infrastructure value chains, as well as the broader potential impact on global growth, is being anticipated by equity markets creating uncertainty around prospects for Asian equities.

We find our Asia-Pacific holdings to be naturally biased towards domestic spending. Identifying companies addressing local environmental concerns is the focus of our approach to investing in the Asia-Pacific region. This differs from typical investment styles focused on China as the primary exporter/factory of the world (to which the US is objecting).

Chinese commitment to environmental cleanup is only deepening. Efficient use of natural resources within an industrial economy is essential for a country with scarcity of supply. In addition, the scale and density of urbanisation is compounding waste, water and air pollution typically generated by affluent consumers and resulting in pressure on authorities to improve the quality of living conditions. The acuteness of these local drivers in China is resulting in clear divergence of environmental policy versus the US, rather than a watering down of intentions which some had predicted in the context of the US stepping back from leadership on these topics. (see table below)

ENVIRONMENTAL CONCERNS

 US1

 CHINA2

Climate Change

Withdrawing from the Paris Climate Agreement

Committed to Paris Climate Agreement

 

EPA opposed to CO2 and local air pollution standards

Raising renewable energy

Transport emissions and congestion

Decreasing penalties for non compliance with fuel economy standards

Investing in alternatives to internal combustion engine

Water treatment and infrastructure

Repeal the entire Clean Water rule

Water infrastructure investment rising

Land management

Rescind rules for Hydraulic Fracturing on Federal and Indian Lands

Addition of soil quality to 5-yr planning

1Source: Harvard Law School - Regulatory Rollback Tracker.
2Source: South China Morning Post.

Uncertainty creates an opportunity for active managers to choose where to focus and to beware:

In these markets, Impax is focused on...

  • Domestic suppliers benefiting from Chinese domestic spending
  • Potential beneficiaries in the broader Asia-Pacific region from business moving out of China
  • Local manufacturing for multi nationals with growth opportunities in China
  • Competitive pricing power to pass through tariff-induced inflation
  • Unique IP – both products and services –relative to Chinese environmental goals

and are wary of...

  •  Chinese exporters to US markets, although rare in the environmental universe
  • Potential demand destruction – particularly in vulnerable areas like agriculture, semis/electronics, autos

Trade wars act as a clear headwind to global economic growth, wherever they occur, and the trade tensions between the US and China are without recent precedent. Nevertheless, many companies should be able to weather these storms. The coming year will present an important opportunity to validate the resilience of Chinese end markets for environmental products and services.

To read our latest paper on Investing in Asian Environmental Markets please email clientservice@impaxam.com