Market Commentary and Outlook

In June the equity rally paused for breath as the Fed signalled a less excessive Qualitative Easing programme. While economic activity continued to bounce, macro-economic ‘surprises’ became more difficult to come by.

Performance

The MSCI World Index ended the month -0.41% (USD). The FTSE ET50 Index finished the month -2.13% (USD).

Eco-energy

In solar, profit warnings from solar companies continued in June with both Solar Fabrik (not held) and Phoenix Solar (not held) citing a weak demand environment and rising inventories. Conditions continue to be precarious within the solar industry following intense price pressure which is most apparent within the cells and modules segment of the value chain. We continue to be very selective in our holdings of solar companies focused on those with long-term cost competiveness in the upstream segment such as Wacker Chemie .We remain cautious on downstream solar particularly European producers of cells and modules which we believe will face intensifying Asian competition. We believe the upcoming earnings season will be tough with the anticipated stabilisation of prices and strong uptick in volumes not occurring.

For the wind industry, June was uneventful with investors awaiting the Q2 results due in a month. Our industry contacts have noted that financing conditions are easing in Southern Europe which remains a sizeable wind market. Much anticipated new US wind turbine orders should be announced when the government loan guarantees are made available, likely in August. Following a number of contract wins, the Gamesa order backlog now largely covers the 2009 installation target further strengthening our investment case.

Pollution control

Pollution control once again showed a mixed picture with no specific policy or legislative catalyst behind performance but the Allianz RCM Global EcoTrends SM Fund (the “Fund”) overall underweight in some stocks was a negative driver for performance.

Clean Water

In the water sector, water consultancy firms Tetra Tech, RPS and Arcadis were both amongst the best performing stocks as investors continue to appreciate their business model benefitting from increased government spending in the green sector and increased regulation to consider whenever new major projects are planned. On the negative side, Itron, despite an increase in the media coverage on smart grid in terms of efficiency, could not benefit from the overall positive sentiment and saw its share price decrease over concerns of higher than expected competition and high valuations. In Italy, water utility Hera continued to recover from previous lows, while the rest of the European water utilities, especially the UK ones, remain out of favour in the investment community. In France, global water services leader Veolia Environnement (not held) is faced with increased competition from Suez Environnement while in the UK the beginning of the new regulatory review period has created uncertainty about what rate of return will be granted this time and resulted in further de-rating of the sector.

Environmental Technology Market Outlook

The passing of the Waxman-Markey bill on US climate change by the House of Representatives in June was significant for clean energy companies suggesting new investments in the order of US$190bn. Importantly however, the bill has still to pass the Senate and it is likely that several amendments are made first. It will be some time before actual cash flows and so the impact on clean energy stocks was fairly muted although we believe likely positive for the longer term. China may also unveil new solar subsidies as soon as 2H09.

With the upcoming election in Germany this year in September, political parties are showing their green credentials. Angela Merkel’s Christian Democratic Union and its Bavarian sister party, The Christian Social Union parties ruled out for the first time building nuclear power plants in Germany and backed plans to develop electric-car technology. Instead both agreed to stick to a policy of extending the lifespan of existing atomic plants, citing that nuclear power is merely a “bridge” to greater use of renewable energy. In the Fund we view nuclear energy a zero carbon energy source that will play a role in helping Government to meet their climate change commitments and consequently we have exposure to both nuclear power generating utilities as well as companies that should benefit from the retrofitting and build out of new nuclear power plants, and include Aveva, Alstom and Siemens.

China rejected $69bn of polluting projects last year, which accounted for 156 highly polluting industrial projects. Statements from the deputy head of the Ministry of Environmental Protection, further indicate China’s ambitions to improve energy efficiency and increase the use of renewable sources boosting its ability to produce electricity from clean sources to about 35 per cent of total capacity by the end of 2020. The next round of discussions for global carbon emissions will take place in Copenhagen in November this year and developing economy countries such as China and India remain cautious on committing to binding carbon caps over concerns that this may negatively impact their economic growth. Instead they are urging industrialised nations to be more ambitious with their binding targets on carbon reductions. It is too early at this stage to say how negotiations will evolve and how ambitious future greenhouse gas emissions will be, however it will be clear that in the run up to the event, a great deal of lobbying and pressure will be put on Government leaders by industry bodies, intergovernmental and non-governmental organisations to come to an agreement which goes towards meaningfully addressing climate change. Any cuts in emissions will require the development of clean technologies further supporting growth of established alternative energies, energy efficiency and emerging technologies such as carbon capture and storage.

In the US, the Environmental Protection Agency granted California a waiver request enabling the state to enforce its own greenhouse gas emissions standards for new vehicles, beginning with the current year models. California asked the EPA in 2005 for permission to set more stringent standards for greenhouse gas emission from vehicles. The Bush administration rejected the request, but under President Obama that decision has been overturned. This should now set the precedent for the setting of more stringent emissions standards for vehicles for the remainder of the US.

European Union governments approved tighter rules on air, water and soil pollution by 52,000 industrial installations after breaking the deadlock over when electricity, oil and steel companies should comply. EU environment ministers strengthened the 1996 Integrated Pollution Prevention and Control Law covering emissions such as sulphur dioxide, nitrogen oxides, dust particles, dioxins and heavy metals. This move will further back the use of the most effective emissions-reductions technology, known as the best available techniques, in the granting of permits for affected industrial installations. Compliance with the rules is required by 2016 and 2020, with new installations having to face the rules by 2012. The legislation aims to plug holes in existing rules that allow national authorities to grant permits to installations that fail to use best available techniques.