Wise investors know when to follow their themes
To make decent money on a long-term investment, buy shares in companies tapping in to the world's growing demand for food, fuel and water, our panel of financial experts tells Jennifer Hill
Saturday 11 September 2010
stock markets have endured a rocky ride and remain volatile, putting to rest to the theory that emerging markets decouple from developed ones. Against this backdrop, investment experts are increasingly favouring stocks that tap into global themes: the growing scarcity of water, the energy crisis, the challenge of feeding a world of nine billion people, the rise of Asian consumerism and how technology might change the world.
The performance of such shares does not depend on a particularly geographical stock market or economy faring well, and should drive markets – and make money for investors – over the medium- to long-term.
"At the moment, most sectors appear to be extremely correlated; everything is moving in the same direction," says Ben Yearsley, an investment manager at the financial adviser Hargreaves Lansdown. "However, that's only a short-term phenomenon and there are certain sectors that will prosper. It is clear as you look around the globe where there are opportunities to make money."
As the planet's population grows, more and more natural resources will be needed for fuel, heat, food and general sustenance. Therefore, investment in water, energy and agriculture should prove profitable as demand rises faster than production. Here, we look at how investors can tap in to these opportunities.
Demand for water is rising as the global population grows, agricultural needs increase and developing nations become wealthier. At the same time, supplies of fresh water are falling as weather patterns change and water sources are over-used.
Seb Beloe, who heads research into socially responsible investing for Henderson Global Investors, says: "Scarcity has driven an increase in demand for more efficiency and the long-term prognosis for companies focused on improving the efficient use of water is very good."
The $29bn water recycling technologies market is poised to almost double in size to $57bn by 2015, a report last month by SBI Energy predicted. However, while some stocks in the sector have soared, others have floundered. Shares in the established water companies Northumbrian Water Group, Severn Trent and United Utilities have risen by 25.7 per cent, 22.7 per cent and 17.9 per cent respectively in the year to date, largely off the back of a favourable regulatory review. Niche players Energy Recovery, of the US, and Japan's Torishima Pump have fared less well, slipping by 49.7 per cent and 33.2 per cent.
Phil Wong, of the stockbroker Redmayne-Bentley, likes the iShares S&P Global Water exchange-traded fund (ETF), which "gives low-risk access" and tracks the 50 largest and most liquid (in financial terms) companies involved in water-related businesses across the globe. These include familiar names such as the aforementioned United Utilities and Severn Trent, as well as France's Veolia Environment and Suez Environment. The ETF is up 10.1 per cent in the past year.
For a riskier play, Mr Wong tips Amiad Filtration, a company listed on the Alternative Investment Market. It is involved in taking the salt out of seawater to make it palatable. Its shares have risen by 21.8 per cent in a year.
Energy use is immense and growing. In 2008, world's consumption stood at 11.3 trillion tonnes of oil equivalent – 196 per cent higher than in 1965.
Tom Stevenson, an investment director at Fidelity International, says: "With developing nations, such as India and China, growing rapidly, so too will global energy consumption. China and India combined represent more than a third of the world's population. The impact of growing demand from nations of this size will be very large indeed."
Companies involved in wind power, solar energy, biofuels and carbon capture have the potential for strong growth, he says, with the likes of the Danish wind turbine manufacturer Vestas Wind Systems and Germany's SMA Solar Technology having established themselves as global leaders in their fields. However, despite a strong medium-term outlook, Mr Beloe points to a tough time for the renewables industry of late, because of financing issues arising from the credit crunch and lower demand from some markets, notably the US.
The WilderHill New Energy Global Innovation Index, which tracks the performance of 54 clean energy stocks, has fallen by 16.6 per cent since January, under-performing the S&P 500 index by more than 15.8 per cent.
Mr Beloe prefers to tap into the theme through companies involved in energy efficiency, such as Ameresco, based in Framlington, Massachusetts. One of the few recent success stories, it made an initial public offering at the end of July and its stock has risen 29.3 per cent since. Among the funds, Mr Yearsley, at Hargreaves, recommends the Pictet Clean Energy fund, which rose 6.1 per cent over the past year.
The global population is set to jump from six to nine billion by 2050, which means there will be a lot more mouths to feed. Even in the short-term, the planet faces "real threats" to its food supplies, warns Darius McDermott, managing director of the discount broker Chelsea Financial Services.
"The recent Russian heatwave and floods in Pakistan will threaten supplies for a basic human diet over the next year," he says. He recommends tracking soft commodities, such as wheat and corn, by investing in exchange-traded commodities, such as those offered by ETF Securities.
Another way to tap into soaring food prices is through agricultural equities. Mr McDermott likes the Eclectica Agriculture fund, which invests in companies that make or process soft commodities or manufacture farming machinery. "You are getting exposure right across the food supply chain, from pesticides to the sale of new tractors and harvesters," he says. The fund is up 13.1 per cent in the past year.
Mr Yearsley, at Hargreaves, likes Sarasin Agrisar. Its largest holding is Jain Irrigation Systems, an India agriculture business. The fund is up 20.7 per cent over 12 months, according to data from Trustnet.
The rise of eastern consumerism
China is almost certain to be the largest economy in the world by 2050, with latest figures from Goldman Sachs suggesting it might overtake the US as soon as 2027, owing to the fallout from the western-inspired financial crisis. Mr Stevenson, at Fidelity, says: "The rise of emerging powers, the impact of globalisation and a historic transfer of wealth, predominantly from western developed nations to eastern developing nations, will transform the familiar economic, political and investment landscape."
This will give rise to a powerful Asian market for consumer goods, which is great news for luxury brands and the technology sector. Laurent Belloni, co-manager of the Pictet Premium Brands fund, which has made 35.2 per cent over the past year, says: "The strong growth in China's economy is boosting a new class of luxury buyers with a population that tend to be young and seeking status."
The Chinese account for 19 per cent of Louis Vuitton's sales, second only to Japan. Sales of such "mega-brands" are expected to grow by up to 35 per cent in China this year, and growth should remain in double digits for a long time, according to Mr Belloni.
Brian Dennehy, managing director at the adviser Dennehy Weller and Co, warns against piling into themes that could prove fads, but recommends buying into companies that are taking advantage of the economic shift from West to East.
He likes the M&G Global Basics fund, which invests in everything from the Anglo-Australian miner BHP Billiton to PZ Cussons, the maker of Imperial Leather soap. The fund is up 22.9 per cent in the past year.
Tech stocks were the blue-sky darling of a decade ago – promising a lot but delivering little but hype and losses for investors who got burnt when the bubble burst. Ten years on, the technology sector has delivered.
"[It boasts] huge profits, large free cashflow and is probably the only global sector with no net debt," says Mr Yearsley. "If you assume we are in a low-growth environment, companies will be looking at ways of cutting costs; tech is one tool they will use to do that."
He tips the GLG Technology fund, which has made 23.1 per cent in the past year and is up 31.1 per cent over a decade, according to Trustnet. Its top three holdings are the computer giant Apple; Cambridge-based ARM, which supplies semiconductor intellectual property; and VMware, a global leader in virtualisation and cloud computing.
Their shares have risen by 22.8 per cent, 107 per cent and 99.2 per cent, respectively, since the start of 2010, and have vastly outperformed the Nasdaq 100 index, which is up just 0.5 per cent over the same period.
Phil Pearson, the co-manager of the GLG Technology Equity fund, points to "an unusually high level of innovation" in the sector. "The rapid rise in mobile internet devices, such as tablet PCs, netbooks and smartphones, has created a rapid change in consumer behaviour," he says. "Apple's iPad – if current orders to suppliers for 2011 are any guide – will likely be a $30bn a year product just 18 months after launch, which would make it, by a wide margin, the biggest consumer product launch in history."
Mr Pearson says some of the large incumbent bellwethers – big computer and mobile handset brands – must evolve rapidly or acquire to survive, but the likes of ARM, Apple, VMware and Autonomy, the second largest pure software company in Europe, seem poised for a "very bright future".
Mr Wong, of Redmayne-Bentley, also likes ARM, the British firm whose technology is used in more than 95 per cent of mobile handsets and a 25 per cent of electronic devices. Among the funds, his pick is the Polar Cap Technology Trust, an investment trust that has made 48 per cent in the past year. Apple, Microsoft and Google account for 16.5 per cent of its portfolio.
Mr Wong says: "Ben Rogoff, the fund's manager, feels that a 'new technology cycle' is about to start and that we will experience a number of new product cycles that have started or will start in the next year or so, so this fund is one to watch."
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