MARKET REVIEW
In 2024, we experienced a period of normalization as the economy transitioned from above-average growth to more typical levels. Central banks successfully engineered an economic soft landing. Alongside economic shifts, we also encountered geopolitical developments, particularly with the ongoing dynamic situation in the Middle East. In the United States, Donald Trump's election towards the end of the year was perceived positively by financial markets, boosting equities. Conversely, political uncertainty persists in Europe, especially in Germany and France. In China, the equity market saw an improvement, closing the year near the MSCI World's performance, though challenges persist, particularly in the real estate sector.
The Fund ended December with a negative absolute performance, outperforming its benchmark, the MSCI Europe ND index.
PERFORMANCE COMMENT
The total benchmark performance was down with key sector movements noted. Information Technology and Consumer Discretionary sectors, exhibited positive performance at 4.18% and 4.30%, respectively. In contrast, the Real Estate sector underperformed significantly, declining by 6.06%.
The Fund’s performance ended December above its benchmark which can be fully explained by the implementation of its climate strategy, that we breakdown into three components:
- Net Zero Target: The primary objective of aligning with net zero targets resulted in a positive contribution of +0.06% to excess returns.
- Carbon Reduction vs. Benchmark: Efforts to reduce the carbon footprint relative to the benchmark contributed positively to the excess return by +0.06%.
- Exclusions: The exclusions from LOIM Sustainability Investment Policy was neutral to the excess return.
When comparing sector allocation to stock selection contribution, this month’s positive excess return was mainly driven by the stock selection.
After several months of strong stock selection, the momentum continued in December. We ended the month with a positive contribution mainly explained by our positioning within Consumer Discretionary, Industrials and Materials. In Consumer Discretionary, Renault – which has strong commitment and credible targets towards decarbonization - contributed positively adding 0.04% to the excess return. In Industrials, Metso Corporation – aligned to a low temperature scenario - added 0.03%. Within the Materials sector, excluding Glencore – which face a serious controversy and demonstrates weak decarbonization perspectives – added 0.03% to the excess return.
The fund ended the year with a positive gross excess return year to date, benefiting from our positioning in transitioning companies within carbon intensive but key sectors of the economy.
CLIMATE OUTLOOK
China's electrification
China's rapid electrification of its transport sector is not only transforming its domestic landscape but is also making significant ripples in global markets, particularly through its dominance in battery production and exports. Recent news from November highlights a stark rise in China's exports of lithium-ion batteries, pivotal components for electric vehicles (EVs), to the United States, reaching record levels before tax policy changes. This surge underscores China's strategic role in the global transition to net zero, where battery technology acts as a cornerstone.
Over the past decade, China has meticulously built a robust battery manufacturing industry, geared to support its ambitious domestic electrification goals. This has enabled the country to manufacture affordable and efficient batteries on a massive scale. Consequently, China's battery exports grew by 5% year-on-year in November, with shipments to the U.S. alone increasing by 27%, even amidst a backdrop of tariff impositions. This showcases China's positioning as a key supplier in the international clean energy supply chain, navigating and thriving despite global trade tensions.
According to recent data from November, electric and hybrid vehicles now constitute over half of passenger vehicle sales in China, marking a critical turning point. This momentum, fostered by strategic government subsidies and industrial scaling over the past decade, has prompted forecasts of a significant decline in the country's gasoline demand, affecting global oil markets significantly. According to experts, Chinese gasoline consumption could decrease by up to 5% annually through 2030, a trend poised to reshape global oil demand dynamics.