As the world’s population grows, the demand on resources is creating investment opportunities.
From basic resources like water and food to investments in future manufacturing materials, fund managers are looking at how best to capitalise on population growth.
Eclectica Agriculture fund manager George Lee invests in firms which are playing a key role as food production intensifies to sustain the world’s needs. For the past 30 years, he says, the global population has grown about 1.5 per cent a year, although that has slowed closer to 1 per cent recently due to slower growth in China and parts of Africa.
The statistics seem to bear this out, with the United Nations putting the annual rate of growth between 2000 and 2005 at 1.2 per cent.
Lee notes as the world’s population continues to climb, an extra 1 per cent is added to demand as many cultures change their diets in line with wealthier lifestyles. This is leading to more countries increasing their protein intake, which is more resource-intensive to produce.
He says while total annual growth of between 2 and 2.5 per cent may not seem that surprising at first, the implications are staggering. For example, total grain supply this year is expected to be 2.4 billion tonnes, which means 50 million tonnes more grain will be needed next year just to keep pace with demand.
Large seed companies, such as Syngenta and Monsanto, are Eclectica Agriculture’s largest holdings. These firms have been working on creating larger vegetables in a bid to boost output but there are still hurdles to overcome in terms of public opinion and logistics.
Lee says developing economies are still benefiting from the easy gains from fertiliser use and implementing modern farming techniques. The larger ones, particularly Brazil, have scrubland that is yet to be cleared for arable farming.
He estimates the country could increase its already considerable arable land by half again. The nation supplies 30 per cent of the world’s soybeans and 40 per cent of all sugar.
He says: “Over time, you are really playing that volume growth because keeping pace with that growth is so difficult.”
Kleinwort Benson Investors chief investment officer Noel O’Halloran heads up the firm’s Environmental Equity Strategies division, with three funds focusing on new energy, water and agriculture. He estimates the demand for water will grow about 35 per cent in the next 30 years.
He says: “Water is the most finite resource out there. It is not growing and there is only about 1 per cent available for usage.”
He says a cheap and easy desalination process, where salt and minerals are removed to make water drinkable, is thought of by some as the “Holy Grail” in terms of boosting the water supply. But he says this is yet to materialise, and also raises concerns about the ecological issues created by changing the ratio of fresh water to salt water.
Instead, O’Halloran says more opportunities lie in making water use more efficient and improving reuse.
He notes the idea of putting a grea-ter price on water is being discussed more and more. In Ireland, where Kleinwort Benson Investors is based and where water charges are set to be introduced, the idea of a “God-given right” to water is entrenched.
Away from food and water, manufacturing materials are also changing to keep up with global demand.
The RobecoSAM Smart Materials fund looks for manufacturing materials and processes that will overtake existing ones.
Portfolio manager Pieter Busscher says the fund buys into the solutions emerging out of resource bottlenecks.
“We try to look for the inflection point, where the product is really competitive and they can gain market share.”
He gives the example of composite materials such as carbon fibre being used in the latest long-haul aircraft to reduce their weight and increase fuel efficiency.
As fleets are replaced, the market share of composites, where materials are combined together to give unique properties, is likely to rise dramatically and with it the fortunes of composites suppliers such as Hexcel Corporation, Busscher says.
Environmental regulation helps, too, as shown by Ford’s decision to use aluminium alloy and lightweight steel in its flagship F-150 pickup, the top-selling vehicle in the US.
Consultancy McKinsey & Comp-any predicts the use of conventional steel in automotive manufacturing will slump from 52 per cent in 2010 to 13 per cent by 2030.
Meanwhile, aluminium, magnes-ium, plastics, carbon fibre and high-strength steel will make up 67 per cent compared with 29 per cent in 2010.
That could give aluminium manufacturers such as Alcoa, which have been hammered by oversupply in recent years, a product with double its usual margin.
Busscher believes the development and use of new alloys will accelerate, and that the amount spent on research and development can also offer opportunities as well, through equipment companies supplying products such as microscopes.
He has steered clear of 3D printing companies, dismissing them as a fad, though says this could change with HP moving into 3D printing this year. He sees more promise in the manufacturing sector, especially for making bespoke parts cheaply and easily for aircraft engines.
Population growth: where are the investment opportunies?
Most developed nations’ water systems need large cash injections to improve efficiency. Moves to impose water charges and the need to clean up emerging market water sources offer opportunities for investors.
The world’s population has been growing by around 1.5 per cent annually for the past three decades. The equivalent of an extra 50 million tonnes is needed each year and arable land is running low.
Car and aircraft manufacturers looking for ways to cut their fuel bills have started changing production lines to incorporate more composites and lighter, high-strength steel and aluminium. 3-D printing has a strong future, particularly in aerospace.