Climate change pushes U.S. fund managers to bet on AC makers
12/09/2019 18:58
By David Randall
NEW YORK, Sept 12 (Reuters) - Record heatwaves in Europe and
Asia this summer are leading fund managers to buy shares of air
conditioning manufacturers, betting that the public health risks
of rising temperatures will compel businesses and apartment
building owners to install cooling systems.
Shares of Johnson Controls International Plc JCI.N , United
Technologies Corp UTX.N , and Ingersoll-Rand Plc IR.N , are
all up 25% or more since the start of the year, well above the
19% gain in the U.S. benchmark S&P 500 index. Those gains come
despite concerns about slowing global economic growth due to the
lingering trade war between the United States and China that
have weighed on the industrial sector.
Japanese companies Daikin Industries Ltd 6367.T and
Hitachi Ltd 6501.T are also up strongly year-to-date.
Fund managers and analysts say the recent outperformance
will likely continue due to the necessity of cooling systems as
temperatures rise globally. Paris hit 42.6 degrees Celsius
(108.7 Fahrenheit) in July, the highest in the city's recorded
history, while Britain reported its hottest July on record. Heat
waves contributed to the deaths of 1,435 people in France this
summer, the country's health ministry said Sunday. urn:newsml:reuters.com:*:nL5N25Z0GZ
"This is an issue that isn't going away and it will
certainly continue to drive adoption" of air conditioning in
regions that traditionally have not relied on it, said Rob
McIver, a portfolio manager at Jensen Investment Management.
McIver owns shares of United Technologies, which is spinning its
Carrier business off into a separate company, expected to become
independent next year.
Europe will likely be a large growth market despite the
outsized costs of retrofitting older buildings with new cooling
systems, said Nicholas Heymann, co-group head – global
industrial infrastructure at William Blair. Currently, only
about 20% of European households have air conditioning, compared
with 87% percent of U.S. households and 90% in Japan, due in
part to greater emphasis on less energy-intensive forms of
cooling in Europe.
"It's something that's structurally more challenging in
Europe, and conceptually too, because Europeans tend to be more
environmentally-conscious. But personal safety is going to be a
bigger issue and they are going to have to come to terms with
retrofitting," he said.
That market would likely be particularly lucrative for
Johnson Controls International, where cooling systems make up
approximately 50 percent of its revenues and it has a lead in
so-called mini-split systems, which do not require expensive
ducts to send cool air through buildings, Heymann said.
The number of European households that buy and install a new
air conditioning system will increase by an average of 4.3% a
year through 2040 as more people move to cities, according to a
study published in Environmental Science & Policy in July.
Overall, global air conditioner sales will increase by 700
million units by 2030 and 1.6 billion by 2050, driven mostly by
sales in developing countries such as India, according to
estimates from the U.S. Department of Energy.
A slowdown in new construction in Asia, which has accounted
for the majority of the sector's growth, would likely weigh on
the shares of air conditioning makers overall, said Noah Kaye, a
senior analyst at Oppenheimer. Yet that could make companies
such as Johnson Controls, which has seen its trailing
price-to-earnings multiple jump nearly 72% over the last year,
more attractive on a valuation standpoint, he said.
"There is a real opportunity here that's under the radar" if
Europe begins to adopt greater usage of air conditioning than
its historical trends, Kaye said. "The use of air conditioning
begets more air conditioning, and that's a trend we see
continuing as the world gets hotter."
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Reuters Insider - Trading at Noon: Global warming concerns
boosting air conditioning manufacturers urn:newsml:reuters.com:*:nRTV5SkDZy
Summer heatwaves caused 1,500 extra deaths in France -health
minister urn:newsml:reuters.com:*:nL5N25Z0GZ
Meteo France revises June record temperature to 46 degrees
Celsius urn:newsml:reuters.com:*:nL8N24K4UM
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(Reporting by David Randall; Editing by Jennifer Ablan and Nick
Zieminski)
((David.Randall@thomsonreuters.com; 646-223-6607; Reuters
Messaging: david.randall.thomsonreuters.com@reuters.net))