Extreme heat reshapes European stock market investment logic! Refrigeration, power grid and other companies may eat the “climate dividend”

The Zhitong Finance App learned that even though the European heatwave has finally begun to subside, fund managers said they are still trying to assess how climate change will affect their investment portfolios. Katie Searle, senior investment manager at Patek Asset Management, said that recently the company has been receiving continuous calls from customers to inquire about the risks and opportunities brought about by extreme high temperatures. “Climate adaptation and resilience is one of the most important investment themes in the next ten years, but it is also one of the hardest topics to grasp,” said Searle. US asset management company Nuveen said the European drought will soon begin to affect corporate credit spreads. David Harrison, fund manager of Rathbones Asset Management, said he is optimistic about companies involved in climate solutions and grid infrastructure construction.

This impact is becoming increasingly clear at the individual enterprise level. In the past, this discussion focused mainly on utility companies, but now it has expanded to industries such as finance, industry, and healthcare. According to the analysis, the number of references to extreme high temperatures in recent documents submitted by global companies reached the highest level in history; the number of references to the Rhine River and its water level in corporate financial conference calls also reached a high level not seen since 2018.

European companies warned of the effects of extreme weather, and the number of references to heatwaves and water scarcity in this quarter's earnings conference call reached the highest level in at least a decade

The challenge for investors today is to identify which businesses are at greatest risk and which are likely to benefit. Until now, the market still sees the decline in the Rhine water level to its lowest level as a weather issue rather than a credit risk issue, but Nuveen Global Investment Strategist Laura Cooper said, “The scale of this disturbance shows that this is not the case.”

It is estimated that extreme weather over the next decade will drive more than $20 trillion in global spending. The following are the impacts on various industries:

refrigeration system

Analyst Omid Waziri pointed out that Schneider Electric SE (Schneider Electric SE), ABB Ltd, and Siemens AG (Siemens AG) may benefit as the market's spending on refrigeration, automation, and grid resilience increases. He also pointed out that Alfa Laval AB and Wartsila Oyj can also be targets for investing in refrigeration, backup power, and microgrid trends.

Another analyst, Andrew John Stevenson, believes Munters Group AB, which provides industrial refrigeration systems, and Stef, a company specializing in temperature-controlled logistics, may also benefit from this. Harrison, portfolio manager at Rathbones Asset Management focused on ESG investments, said, “What you need to invest in is a 'shovel sellers' in this trend.”

Demand for AI drives refrigeration-related stocks to rise

However, since the energy demand for AI systems has driven up valuations in related industries, the valuations of some companies in this industry are currently quite high. Schneider Electric's stock price has soared about 25% since this year, driving its price-earnings ratio to 30 times; Munters's price-earnings ratio is about 60 times.

industry

Low water levels force barges on the Rhine to load less, driving up transportation costs for chemical, steel, and cement companies. According to analyst Stevenson's analysis, BASF SE (BASF SE) has invested in ultra-shallow draft tankers operated by Oslo-listed shipping company Stolt-Nielsen Ltd. If other companies are forced to make similar adjustments, Stolt-Nielsen may benefit.

The Rhine reached a new historic low in August

utilities

Power companies that rely on water to cool or drive hydroelectric turbines have drastically cut production. EnBW Energie Baden-Wuerttemberg AG warned that its profits could be impacted by millions of euros as a result. Cooper said, “Companies with diversified power generation capabilities, alternative logistics channels, or pricing capabilities should be rewarded by the market.”

agriculture

Farmers may need to use science and technology to find long-term solutions to environmental stress. Bayer AG (Bayer AG), BASF, KWS SAAT SE, and Corteva Inc. are all developing products that can help protect crop yields in harsh environments. According to Searle, Novonesis A/S is also a company worth watching. The company produces an enzyme that can promote deeper growth of plant roots.

retail

British restaurant giant Mitchells & Butlers Plc is one of many companies that point out that high temperatures are dragging down sales, and Dunelm, one of the largest household goods retailers in the UK, said that high temperatures have led to a drop in customer traffic in its stores. Retail sales in the UK declined in July for the first time since April, partly because consumers cut back on shopping trips to avoid extreme heat. According to data from the British Meteorological Service, England experienced the driest July since records were recorded in 1836, and the average temperature in the whole of the UK in July was more than 2 degrees Celsius above normal.

The high temperature in the UK in July dragged down clothing sales

However, there are also beneficiaries. The drinking water business under Nestlé SA (Nestlé SA) and Carlsberg A/S (Carlsberg A/S) said the warmer weather in Europe boosted their business.