Europe’s Record Heat Is Splitting Stock Winners From Losers

Even as Europe’s heat wave finally breaks, money managers say they’re still coming to terms with how climate change will affect their portfolios.

Pictet Asset Management’s Katie Self says her firm has been fielding calls from clients about the risks and opportunities posed by the extreme heat. Nuveen says Europe’s drought will soon start affecting corporate credit spreads. Over at Rathbones Asset Management, fund manager David Harrison says he’s bullish on companies involved in climate solutions and grid infrastructure.

“Climate adaptation and resilience is one of the most important investment themes of the next decade, but also the most difficult to navigate,” said Self, a senior investment manager at Pictet.

The impact is becoming clearer among individual companies. A discussion once dominated by utilities now spans financials, industrials and healthcare. Recent filings by global companies contained more mentions of extreme heat than ever before, according to an analysis by BloombergNEF. Mentions of the Rhine and water levels in earnings calls are at highs not seen since 2018.

The challenge for investors now is to identify the firms most exposed, and those that stand to benefit. So far, markets have treated the Rhine’s all-time low water levels as a weather story rather than a credit story, but “the scale of disruption suggests otherwise,” wrote Laura Cooper, global investment strategist at Nuveen.

Bloomberg Intelligence estimates extreme weather will drive more than $20 trillion in global spending in the next decade. Here’s a look at the industry impact:

Cooling Systems

Schneider Electric SE, ABB Ltd and Siemens AG may benefit from increased spending on cooling, automation and grid resilience, according to Bloomberg Intelligence analyst Omid Vaziri. He also cited Alfa Laval AB and Wartsila Oyj as ways to trade trends in cooling, backup power and microgrids.

Munters Group AB, which supplies industrial cooling systems, or Stef, a temperature-controlled logistics specialist, may also benefit, according to BI analyst Andrew John Stevenson.

“You want the picks and shovels of this trend,” says Harrison, a portfolio manager focused on ESG investing at Rathbones.

But some valuations are already steep in the industry, driven higher by energy demand of AI systems. Schneider Electric shares have soared some 25% this year, boosting its price-earnings ratio to 30. Munters trades at about 60 times earnings.

Europe’s extreme weather, exemplified by this summer’s heat waves, is powering a push for cooling and building efficiency and creating two distinct opportunities for the largest HVAC companies. – Bloomberg Intelligence analyst Christina Feehery

Industrials

Low water is forcing Rhine barges to carry smaller loads, increasing freight costs for chemicals, steel and cement businesses.

BASF SE has invested in ultra-shallow-draft tankers operated by Stolt-Nielsen Ltd, an Oslo-listed shipping firm that could gain if others are forced to make similar changes, according to Stevenson at BI.

Utilities

Power producers relying on water for cooling or to drive hydroelectric turbines have slashed output. EnBW Energie Baden-Wuerttemberg AG warned it faces a hit to earnings that could run to several million euros.

“Companies with diversified generation, alternative logistics or pricing power should be rewarded,” said Cooper of Nuveen.

Agriculture

Farmers may need science to come up with a longer-term fix for environmental stress. Bayer AG, BASF, KWS SAAT SE and Corteva Inc. are all developing productsto protect yields in harsh conditions.

Novonesis A/S, which makes an enzyme that encourages deeper root growth, is another one to watch, according to Self at Pictet.

Retail

Mitchells & Butlers Plc was among those citing UK heat as a drag on sales, while Dunelm said it lowered foot traffic. On the plus side, Nestlé SA’s water unit and Carlsberg A/S said warmer European weather gave them a boost.

Photograph: A commuter with an umbrella passes the Bank of England (BOE) during a heat wave in London; photo credit: Jose Sarmento Matos/Bloomberg