Climate change investment opportunities unearthed

Volatility in equity markets has created winners and losers in the broader climate change investment sector. So says Farley Thomas, Global Head of Wholesale at HSBC Investments. This shake-out has presented attractive buy opportunities in some sub-sectors, and the portfolio composition of the HSBC GIF Climate Change Fund is constantly being rebalanced in order to capitalise.

Thomas cites the "solar" sector as a current example of an attractive theme. Although share prices within this sub-sector became overheated last year, general risk aversion has since led these stocks to be severely punished, falling 50% since their highs in November 2007. Many of these stocks still display favourable earnings forecasts, and following the correction are now attractively valued, Thomas says.

A good stock example, according to Thomas, is Ja Solar, a solar cells manufacturer. An increase in its production scale and capabilities should enable this group to become a cost leader in a rapidly growing industry. The company's earnings growth for 2008 is expected to more than double (+110%) with a 20% Return on Equity (ROE).

The manager of the HSBC GIF Climate Change fund took advantage of the share price correction earlier this year to increase exposure to this stock. The share price has since risen by 30% after recovering from the January and February lows.

The "energy efficient solutions" sector is also producing good opportunities. A stock example there is ABB, the world's largest builder of electricity networks, which reported better-than-expected profit thanks to China and India increasing investment in power stations and grids. Q1 net income almost doubled to $1 billion.

Meanwhile, earnings growth over the next 3 to 5 years is expected to be at 95%. Although the price earnings ratio is 18 times, with a 31% ROE and forecast of 25% long-term growth, the company is reasonably valued, Thomas says.

The fund management team, meanwhile, is less enthusiastic about the integrated power industry, which is highly rated while earnings growth potential is significantly below the market average.

Thomas says the recent polarised performance of subsectors within the broader climate change arena, reinforces the need for a diversified and flexible approach to investment in this sector.

He adds: "The ongoing market volatility has understandably increased risk aversion, but the long-term theme of climate change investment remains very relevant. In fact there are many current attractive investment opportunities that our fund aims to capitalise on.

"Given it will take many decades to arrest global warming, HSBC sees climate change as one of the most significant investment themes into the foreseeable future."

20 May 2008 © Moneyextra.com

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