After a difficult year of 2022 on the markets, many asset classes saw rebounding performances in 2023. While the central banks' turnaround on interest rates ensured a “return to normality” on the bond market, the focus on the equity market was primarily on technology companies. In the Funds exclusive series, the fund managers of selected funds look back on developments of the previous year and give their assessment of what the markets could expect in 2024. (Note: Prognoses are not a reliable indicator of future performance.)

"In terms of interest rate developments in particular, it seems that we have reached the peak of the restrictive central bank policy."

Clemens Klein, fund manager ERSTE GREEN INVEST

"The sharp rise in interest rates is weighing more heavily on shares from the environmental and renewable energy sectors than on those from other sectors."

Alexander Weiss, fund manager ERSTE GREEN INVEST

Fund & Performance

The ERSTE GREEN INVEST invests worldwide primarily in companies in the field of environmental technology. The investment process of the fund is based on fundamental company analysis. Furthermore a measurable positive impact on the environment or society is paramount in the investment decision making. The selection of stocks takes place with a focus on companies in which an environmental benefit could be identified and which are primarily active in the areas of water treatment and -supply, recycling and waste management, renewable energy, energy-efficiency, mobility, transformation and adaption (Note: Please note that investments in sustainable investment funds involve risks as well as opportunities.).

Note: Past performance is not a reliable indicator of future performance.

Performance since start of the fund (3.8.2020). The performance is calculated in accordance with the OeKB method. The management fee as well as any performance-related remuneration is already included. The issue premium which might be applicable on purchase and as well as any individual transaction specific costs or ongoing costs that reduce earnings (e.g. account- and deposit fees) have not been taken into account in this presentation.

Commentary by fund managers
Clemens Klein und Alexander Weiss

How would you sum up the last market year 2023?

While the positive performance of the broad equity market was primarily driven by major US technology companies such as Apple, Microsoft, Meta, Nvidia, etc., shares from the renewable energy sector or the environmental sector in general ended up on the weaker side, performance-wise.

Note: The companies listed here have been selected as examples and do not constitute an investment recommendation.

The main reason for the negative development is the change in the central banks' interest rate policy. The sharp rise in interest rates is weighing more heavily on shares from the environmental and renewable energy sectors than on those from other sectors. Smaller companies often do not finance themselves via the capital market, i.e. via fixed-rate bonds, but via floating-rate debt. If interest rates rise to such an extent and at such a speed as in the past two years, this has an impact on companies that comes in the form of higher financing and interest costs.

 

How did ERSTE GREEN INVEST perform in this environment?

The weak performance of environmental companies over the year has also affected the performance of ERSTE GREEN INVEST. The fund pursues the strategy of achieving a measurable, positive impact for the environment and also invests in so-called “pure plays” from the environmental and renewable energy sector. As described above, these small and mid-cap companies have been hit particularly hard by the rise in interest rates.

The fund closed 2023 with a slight gain of 3.4%. In contrast, our other environmental equity fund, ERSTE WWF STOCK ENVIRONMENT, posted a loss. In ERSTE GREEN INVEST, we benefit from the relative strength of large caps described above, as we have a greater exposure to large-cap companies in the fund.

 

What are your expectations for the new year?

In terms of interest rate developments in particular, it seems that we have reached the peak of the restrictive central bank policy. Inflation rates are on the decline, and market players are beginning to speculate about interest rate cuts in the course of 2024.

There are also a number of other reasons that fuel our optimism for 2024. On the one hand, the topics and trends in which we invest with ERSTE GREEN INVEST will remain relevant. In view of the increasingly frequent dry and drought periods, solutions for water treatment and supply will be needed, to name just one example.

However, topics such as recycling and the circular economy are also becoming increasingly important, not least due to the race for limited resources. Above all, the megatrends of renewable energies and electromobility are here to stay, regardless of the market situation, and will even accelerate over the next few years despite already high growth rates. The reason for this is that renewable energies are now the cheapest form of electricity generation in most parts of the world and electric cars are increasingly overtaking combustion engines in terms of overall costs (purchase and use). This trend is set to continue in the coming years.

At the same time, the political stimulus packages (Inflation Reduction Act in the USA and RePowerEU in the European Union) can still be expected to provide support. The implementation of these packages has only just begun, but it is already clear that renewable energies, smart grids, electromobility, energy efficiency, and all related topics will benefit in the long term.

Note: Prognoses are not a reliable indicator of future performance.

The significant cost reduction for many companies is also providing a tailwind. The price of solar modules, for example, has more than halved compared to 2022 and reached new lows. Indeed, prices have fallen by more than 80% over the past ten years. The cost of batteries is also on the decrease, and freight costs have now returned to pre-Covid crisis levels.

 

What about the valuation level of environmental stocks after the price losses in 2023?

The aforementioned positive factors are not yet reflected in the share prices, but they are certainly reflected in the valuations. The S&P Global Clean Energy index, a broad equity index covering the topic of renewable energies, is now valued significantly in excess of the broad equity market, despite considerably higher expected growth rates. The valuations of small caps have also reached a new record low compared to the market as a whole, although this market segment has historically always traded at a higher price than large companies due to higher growth rates.

There is therefore much to suggest that the environmental sector will remain an attractive investment opportunity and that the current levels offer interesting entry opportunities for investors.

Note: Please note, that an investment in securities entails risks in addition to the opportunities described.

Important legal note:

Prognoses are not a reliable indicator for future performance.

Disclaimer

This document is an advertisement. Please refer to the prospectus of the UCITS or to the Information for Investors pursuant to Art 21 AIFMG of the alternative investment fund and the Key Information Document before making any final investment decisions. Unless indicated otherwise, source: Erste Asset Management GmbH. Our languages of communication are German and English.

The prospectus for UCITS (including any amendments) is published in accordance with the provisions of the InvFG 2011 in the currently amended version. Information for Investors pursuant to Art  21 AIFMG is prepared for the alternative investment funds (AIF) administered by Erste Asset Management GmbH pursuant to the provisions of the AIFMG in connection with the InvFG 2011. The fund prospectus, Information for Investors pursuant to Art  21 AIFMG, and the Key Information Document can be viewed in their latest versions at the website www.erste-am.com within the section mandatory publications  or obtained in their latest versions free of charge from the domicile of the management company and the domicile of the custodian bank. The exact date of the most recent publication of the fund prospectus, the languages in which the Key Information Document is available, and any additional locations where the documents can be obtained can be viewed on the website www.erste-am.com. A summary of investor rights is available in German and English on the website www.erste-am.com/investor-rights as well as at the domicile of the management company.

The management company can decide to revoke the arrangements it has made for the distribution of unit certificates abroad, taking into account the regulatory requirements.

Detailed information on the risks potentially associated with the investment can be found in the fund prospectus or Information for investors pursuant to Art 21 AIFMG of the respective fund. If the fund currency is a currency other than the investor's home currency, changes in the corresponding exchange rate may have a positive or negative impact on the value of his investment and the amount of the costs incurred in the fund - converted into his home currency.

Our analyses and conclusions are general in nature and do not take into account the individual needs of our investors in terms of earnings, taxation, and risk appetite. Past performance is not a reliable indicator of the future performance of a fund.