GEOS Review and Outlook, May 2020
The global equity market has exhibited tremendous perseverance amidst a multitude of strife, from economic, to political and civil. At this writing, while our world fights the COVID pandemic, we are amidst civil unrest in the U.S. while the economy wrestles with critically-high levels of unemployment. While we too question the equity market rally, despite all the challenges, we believe all is not fully dire – there are several positives supporting the recent market rally. First, as we emerge from the first quarter’s earnings season, and on the heels of virtual meetings with Essex Global Environmental Opportunities Strategy (GEOS) holdings, as well as clean tech conferences, we are struck by human perseverance and ingenuity. One critical component of strong management quality is the ability to remain flexible in the face of uncertainty and challenges while remaining consistent with corporate culture and mission. A key element for success is leveraging differentiation during times of stress and challenge, yet honing business plans to increase competitiveness when challenges arise. For example, the pandemic has put a greater emphasis on the need for diversified supply chains, enhanced inventory management, and closer customer proximity. This, even before we consider enhanced friction with the China trade dispute. Most of our management teams are strengthening North American manufacturing bases, and leveraging more de-centralized customer distribution centers to improve goods and services delivery. Secondly, the equity market rally until very recently has been led by very few stocks, a narrowness driven by index and ETF momentum investing and herd mentality. We believe this tide to be turning, and the market has broadened a bit – a healthy sign, and one that should benefit GEOS given our focus on smaller companies. Thirdly, we believe most clean technology themes will be strengthened by the pandemic, and stand ready to solve global problems such as climate change.
Our recent meetings with GEOS holdings and research reveal cautious outlooks, placing further premium on key drivers, themes, and exposure to the long-term secular themes to which we invest. We believe the pandemic is illustrating many critical issues that need to be solved immediately, such as safer and cleaner cities, enhanced critical infrastructure, natural resource management including clean water access, and smart transportation. The United Nations sustainable development goals (SDGs) were designed over five years ago, and we believe the COVID crisis is an historically striking example that the capital commitments that have been made by companies, cities and countries to meet the SDGs need to scale – now, more than ever. Commitments need to lead to capital flow. Human health is intrinsically linked to the environment, and climate change is a crisis that will grow in severity and importance, harming the most impoverished just as did COVID. The capital markets can and must be harnessed for meaningful social impact solutions. The listed equity markets can be leveraged, by investing in true impact solutions that solve the SDGs, whether clean water and sanitation (SDG #6), climate action (SDG #13), or sustainable cities and communities (SDG #11). The companies represented by GEOS solve 6 SDGs, representing themes such as renewable energy, power technology, water or agricultural productivity. Our holdings provide impact solutions, and enable sustainability. Many of our holdings work directly in non-OECD regions, providing for example clean water technologies for villages or industry, negating the need for capital-intensive and central water treatment plants. Our focus with GEOS continues to be smaller companies that have sole focus in providing solutions to the world’s most vexing environmental problems, that are so linked to other global imbalances and challenges. We view these as investment opportunities.
This commentary is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. The opinions and analyses expressed in this commentary are based on Essex Investment Management LLC’s (“Essex”) research and professional experience and are expressed as of the date of its release. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is intended to speak to any future periods. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.
This does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product, nor does it constitute a recommendation to invest in any particular security. An investment in securities is speculative and involves a high degree of risk and could result in the loss of all or a substantial portion of the amount invested. There can be no assurance that the strategy described herein will meet its objectives generally, or avoid losses. Essex makes no warranty or representation, expressed or implied; nor does Essex accept any liability, with respect to the information and data set forth herein, and Essex specifically disclaims any duty to update any of the information and data contained in the commentary. This information and data does not constitute legal, tax, account, investment or other professional advice. Essex being registered by the SEC does not imply a certain level of skill or training.