Investment report: Population and profits

Greater numbers of people will consume more of the globe’s resources. Take note, investors
October 19, 2011
A Palestinian boy drinks from a broken pipe in the Jordan valley, 2010: much of the developing world lacks proper water infrastructure

InfrastructureSimon James

The OECD estimates that $50 trillion must be spent by 2030 on global infrastructure. This is because of population growth, urbanisation, industrialisation and rising living standards. Infrastructure accelerates growth. It also brings change in countries facing environmental degradation.

The UN forecasts that by 2050 there will be 2.3bn more people in the world. Populations in developing economies will grow by 58 per cent, while those in developed countries will increase by 2 per cent. But already about 1.4bn people have no electricity, while some 880m are without safe drinking water and 2.6bn people are without access to basic sanitation. There are 900m rural dwellers worldwide who are more than 2km from the nearest all-weather road.

There is a clear motivation for governments to invest in infrastructure. Not only does it provide jobs and growth but also, by improving social wellbeing, it boosts their chances of re-election. It also has the less obvious benefit of improving the inflationary outlook by improving the efficiency of businesses and communications.

First-class infrastructure is needed for an efficient economy, and helps attract new investment in business. Infrastructure spending is also believed to have a powerful multiplier effect in the economy, which is likely to be greater in an emerging economy than in an advanced one.

The range of opportunities for investors is broad. Opportunities include both transport infrastructure, such as ports, railways or toll roads, and public utilities such as water and electricity generation and distribution. Many aspects of the infrastructure market are accessible to investors, from mining companies, to engineers, to completed projects.

Simon James is founder partner, Gore Browne Investment Management

FoodHenry Boucher

High-fertility countries tend to be relatively poor, so the economic impact of the growing global population is greatest at the most basic level: the consumption of food. Not only are there more mouths to feed but the rise of living standards is accelerating the growth in food demand. Growing incomes and urbanisation fuel a dramatic change in diet, with more meat, fresh fruit and vegetables, dairy products, processed foods, restaurants, supermarkets, packaging, branding and more profit margin within a rapidly expanding food sector.

Supply limitations are appearing at the production end of the food chain, as all of the available, well-watered farmland is used. Imbalances are acute and there is an urgent need to increase farm productivity and reduce waste. But, as global agriculture already has such a destructive effect on biodiversity, improvements in output must be achieved using less water, fossil fuels and minerals. This seems possible only with the application of new technology and better government incentives.

Investing in the food chain requires sensitivity to a wide range of risks. Beyond the environmental considerations, investors need to beware of volatility if they choose to speculate in commodities, and liquidity if they invest in land.

Henry Boucher is deputy Chief Investment Officer & Partner, Sarasin & Partners

Water Lydia Whyatt

Villagers in India or Africa pay three to five times more for a litre of water than we do in the developed world. This will get worse as the climate continues to change; whether or not we accept global warming, we cannot ignore changing weather patterns.

The developed world relies on a very old water infrastructure of pipes and treatment plants. Such infrastructure has not been built in much of the developing world, particularly in rural areas and the picture is very similar for both drinking and waste water systems. The key issue is who is going to fund infrastructure work, in both developed and developing economies.

Luckily, we are not short of water on Earth—the problem is that 97 per cent of it is saline. Saline water can be treated, and a lot of money has been invested in desalination plants, but this is an energy intensive and expensive process. Add in the cost of transport, and desalinated water becomes very expensive. It is not a viable solution for most of the developing world.

But where there is a problem, there is an opportunity. The focus has been shifting from desalination to water reuse. General Electric, for example, has said that this will be the main focus of its water business. Industrial and domestic waste water can be collected, treated and reused. In some markets that are very short of water, suppliers are considering using reclaimed water as drinking water, after intensive treatment. In most cases, it is cheaper to treat waste water than to desalinate and transport it.

Over all, the water industry is growing at a moderate rate of 6 per cent per annum, but the market for reuse is expected to grow at double digit rates in major markets. Another key focus for us is energy efficiency in water treatment and transportation. Energy is both a major component of operating costs for water treatment and a growing environmental and regulatory issue, resulting in increasing pressure on water utilities and plant operators to reduce consumption.

Investors should also be aware that the cheap finance from governments and banks for the water industry is no longer forthcoming. Now, technologies that can quickly pay back the initial investment via operating cost savings will do well. “Quick fix” rather than major capital expenditure is what customers will be looking for in the next few years, and companies that can think in this shortened time frame are likely to prosper in the near future.

Lydia Whyatt is managing director of FourWinds Capital Management

Commodities John Kemp In an official 2005 report for the US department of energy, Robert Hirsch predicted that American gas production was peaking, and cited an impressive array of supporting opinions. Sensing an opportunity, US gas companies constructed a network of billion-dollar terminals to bring in liquefied natural gas from around the world to bridge the gas gap. But Hirsch and the companies failed to spot the shale gas revolution that was under way, which would transform the US from a net importer to a potential exporter in the space of five years.

The same techniques (hydraulic fracturing and horizontal drilling) that revolutionised the US gas market are transforming gas production around the world, and starting to change oil supply. So abundant is the new fuel that the International Energy Agency has even proclaimed a “golden age of gas.”

If five years is a long time in commodity markets, two decades is an age. In the short term, commodity supply and demand is relatively fixed. But we know too little about the state of technology over periods of more than three to five years to make confident, investable predictions about consumption and production.

Rather than worry about the impact of future population growth, investors would do better to focus on what they can hope to predict (near-term trends, business cycle instability and spotting disruptive new technologies), leaving engineers and industrialists to worry about meeting increased resource demand.

John Kemp is a Reuters analyst specialising in commodities and energy. The views expressed are his own

Energy Ian Simm

Investing, as opposed to trading or gambling, is a long-term game, and when the dust settles after this crisis, those who have invested in clean and efficient energy should do well. The numbers are compelling. A combination of 2 to 3 per cent annual economic growth plus a 30 per cent increase in the world’s population by 2050 paints a rosy picture for energy suppliers.

Yet several energy sectors are struggling. Pollution laws have restricted the construction of coal-fired power stations in Europe and the US, and the prospects for carbon capture and storage are uncertain. Since Fukushima, nuclear power is on the back foot—Germany and Switzerland are exiting the sector. Japan is likely to follow suit, and many countries are in limbo. Several Asian nations face alarming increases in oil imports, prompting debates on alternatives.

In this context, clean energy and energy efficiency markets look attractive. If Japan switched its 1.6bn light bulbs to light-emitting diode technology, it could abandon nuclear (and develop a strong export market). China plans to spend $770bn on low carbon energy by 2020, anticipating hundreds of thousands of new jobs. Technology developments support this trend. Solar panels are 60 per cent cheaper than in 2008, and solar power can prosper without subsidy in some markets. Meanwhile, suppliers of advanced insulation report a pick-up in orders.

As governments seek to shape these markets, risks remain. Nevertheless, a diversified portfolio of clean energy and energy efficiency investments should reward the patient investor, particularly if she or he is willing to buy when others are running for cover.

Ian Simm is chief executive of Impax Asset Management Group