Posted inESG

China environmental stocks to weather Trump storm?

François Perrin, a portfolio manager at East Capital, says China’s environmental companies have outperformed their global peers and are insulated from the direction US policy takes.

Chinese environmental stocks will continue to offer opportunities to investors as they are insulated from a potential turnaround of US policies on environmental industries, according to Perrin.

“Whether or not President Trump will cancel climate change deals, the Clean Power Plan or Investment Tax Credit scheme will not change the current level of air pollution in Beijing and the growing discontent of the Chinese population,” Perrin wrote in a research note.

If Trump follows through with a pullback on environmental policies it would structurally weaken US and European players through the next cycle, he added.

Backed by government support since 2011, China has become the largest cleantech market in the world, accounting for almost 50% of global investments, according to the report.

The Chinese government will apparently continue to invest in environmental companies. Under the coming 13th Five Year Plan covering 2016-20, the government’s environmental efforts will focus on water and waste management, which account for RMB 4trn ($580bn) – almost half of the overall environmental investment plan, according to the report.

Currently, China’s environmental companies’ market capitalisation represents one-third of the global environmental universe market capitalisation.

The total market capitalisation of the largest 100 Chinese environmental companies has increased by 80% to $580bn in the third quarter from $310bn in 2009, the report added.

Portfolio allocation

Perrin recommends a 30% allocation to China A and H environmental shares for a global environmental portfolio to match the current economic and financial realities of environmental protection industries.

The top 100 China A- and H-share environmental companies have outperformed their top 100 global environmental peers, Perrin said, adding that they also offer a much better risk and return profile than peers in the global universe.

According to the report, the China environmental universe’s P/E stands at 15.4 versus the global environmental universe’s 16.5. Meanwhile, its forward earnings growth is at 15.4, which compares to the global universe’s 5.6.

Chinese environmental companies are also not exposed to RMB fluctuations, Perrin said.

“Following the foreign exchange volatility episode recorded at the beginning of the year, foreign debt, if any, has been converted back into RMB through the year and the sector’s import dependency is close to nil.”

Perrin also noted that the company’s discussions with the Shenzhen Stock Exchange management has confirmed that more than 100 environmental companies are in the pipeline for a listing in the years to come.

Perrin, who leads a team in Hong Kong, supports the management of the East Capital China Environmental Fund, which is managed by Peter Elam Håkansson, the company’s chief investment officer and partner, FSA reported earlier.

Part of the Mark Allen Group.