Since the beginning of 2022, financial markets have been experiencing heightened volatility against a backdrop of rising interest rates, inflation and peaking economic growth. As at end-July 2022, the MSCI All-Country World Equity Index has recorded a 15.5 per cent drop, with the Bloomberg Barclays Global Aggregate Bond Index also down by 2.7 per cent.
While the persistent supply-chain bottlenecks and the Russia-Ukraine conflict aren't in any way helping to ease inflationary pressures, we believe that themes that can withstand the impact of these headwinds are likely to gain traction. In fact, some quality companies present interesting opportunities for investors after the global equity and bond sell-off seen in recent months. Investors who are taking a thematic approach may find themselves inspired by structural trends and may look beyond traditional geographies and sectors for opportunities.
ESG (environmental, social and governance) has been a crucial investment theme for some time, and food and water are a core component. The system alone is responsible for around 25 per cent of global greenhouse-gas emissions, and 65 per cent of freshwater usage, according to United Nations data. It also accounts for about 60 per cent of the two billion tonnes of waste produced globally each year, directly or indirectly.
We are also closely watching the energy transition investment theme. The sharp rise in gas prices in the aftermath of the Russia-Ukraine conflict and the relatively lower cost of other viable power sources has made renewable energy even more attractive to end-users and investors. Investors recognise the need for vigorous action to mitigate the risk of climate change; immense opportunities can emerge from across the green value chain.
Nordic seafood companies, for example, have demonstrated their tenacity in the unprecedentedly challenging environment we face today. Despite supply-chain disruptions stemming from geopolitical factors, the stock prices of many of these companies continued to surge as investors shifted from growth to value in 2022.
It is estimated that US$30 trillion needs to be spent across the different food and water value chains by 2050 in order to make our current system sustainable. The imperative to achieve this goal creates the potential for new sources of growth in companies from mature sectors that many investors may have written off as old economy.
Shift in consumer behaviour
Consumers today do care about whether food producers and stores are sustainable in the ways they produce, package and sell products.
As consumers become increasingly aware of their impact on the environment, the likes of bamboo straws and paper takeaway boxes have become more and more common in our day-to-day food purchases, while single-use plastic is becoming less so. This is creating a huge demand for companies that focus on sustainable food packaging.
The food packaging industry is expected to grow from US$338.3 billion in 2021 to US$478.1 billion in 2028. Looking back at the sector's performance in 2022, we noticed that some leading companies in this niche market actually performed extremely well. We believe those that are able to address sustainability-related issues could well be riding on the expected rapid growth.
Three key characteristics
Market volatility and uncertainty will likely continue in the near term. However, some investments can still generate positive return and, more importantly, have a positive impact on the environment. Investors may discover these hidden gems by focusing on companies that are (1) attractively valued, (2) relatively resilient and (3) can combat inflation, as they relatively have more value due to being a consumer staple or positively correlated to commodities prices.
When viewed alongside the anticipated structural shifts - higher yields and efficiency, dietary changes, and reduced waste/emissions - there is a wealth of opportunities across the food and water value chain.
Moreover, the food and water system is an area where problem-solving technology is becoming more widely available; consumers are more aware of health and the environment; and governments are starting to focus on food sustainability, not simply food security.
Brought together, these factors indicate a food and water system on the cusp of dramatic change. As equity investors, we see the potential for attractive returns to be made by investing in companies with the products and technologies to make this change happen.
Many of these companies generate good cash flows but have suffered price declines because investors perceive the space as "old economy" and unexciting, rather than a growth opportunity. This is partly a result of low food prices, which means there has been little investment.
We think that's going to change as the imperative to make food and water sustainable creates opportunities for new sources of growth in companies that investors may have written off as old economy in mature sectors.
The writer is investment director, multi-asset, at Schroders.