Investment Views by Anric Blatt 2013
At year-end we like to do an exhaustive study of all the sectors we cover and highlight key investment themes, risks and opportunities for the upcoming year. Together with our advisors, consultants and investment managers, we discuss the cyclical and secular forces impacting these sub-sectors, changing supply/demand forces, improving or deteriorating industry competitive dynamics. Thereafter we overlay these finds with our broad spectrum macro and demographic views, taking into consideration human behavior and more recently mother Earth’s response to climate change induced catalysts that she is so violently objecting to. Having done this exercise now for several years, we were encouraged that despite the overwhelming uncertainty brought to the table by incompetent politicians, our team came away from the meetings with greater conviction to deploy capital in many of our sub-sectors. There are many exciting investment themes impacting the Industrial and Energy sectors as we enter 2013 and beyond that will prove more powerful over time than anything we have witnessed in our respective careers to date.
Frequently I am asked by investors at conferences: “what do you think are the most compelling investment themes for the coming year?” In short, the answer is Vital Assets, here’s a brief explanation why.
- The specter of resource insecurity has come back with a vengeance. The world is undergoing a period of intensified resource stress, driven in part by the scale and speed of demand growth from emerging economies and a decade of tight commodity markets. Poorly designed and short-sighted policies are also making things worse, not better. Whether or not resources are actually running out, the outlook is one of supply disruptions, volatile prices, accelerated environmental degradation and rising political tensions over resource access. Financial instruments like commodity ETF’s, freely available and misunderstood option products and ‘get-rich-quick’ certificates that bring large scale speculation into the hands of the retail trader compound the over-reaction paradigm. The sensationalist mainstream financial media that no longer truly investigates their ‘news’ to any kind of depth fuels that fire even more.
- Fears of resource scarcity are not new. On many occasions, higher rates of investment and improved technology have resolved the problem of the day, though often with additional environmental and social costs. With the maturation of technologies to access non-conventional gas and oil, as well as the global economic downturn, some analysts suggest that the resource boom of the past decade is coming to an end – especially in the extractive industries – and that resource-related tensions will ease.
- The hard truth is that many of the fundamental conditions that gave rise to the tight markets in the past ten years remain. In the case of food, the world remains only one or two bad harvests away from another global crisis. Lower prices in the meantime may simply trigger another bout of resource binge, especially in the large and growing developing countries.
- Large-scale resource extraction remains concentrated in only a handful of countries. Across 19 resources (crops, timber, fish and meat, metals, fossil fuels and fertilizers) the three largest producers on average account for 56% of global production. The eight dominant players are China, the United States, Australia, the European Union, Brazil, Russia, India and Indonesia. Others with significant production capacities for one or two major resources include Argentina (soybeans), Saudi Arabia (oil), Iran (oil and gas), Canada (potash and nickel) and Chile (copper). It is estimated that some 50 – 70% of the world’s supply of piosphates are controlled by King Mohammed IV of Morocco.
- The global trade of resources has grown nearly 50% from a decade ago in weight terms owing to expanding trade in oil, iron and steel, coal, oilseeds and cereals – all feedstocks for China, the factory of the world. Beyond the traditional powers and emerging economies, a wave of developing countries will become important resource consumers in the next decade. They are likely to include Iran, Vietnam, Turkey and Thailand.
- Average prices for agricultural commodities are set to rise. By 2050, global demand for food is expected to have increased by 70–100%. Global cereal demand is increasing at 1.3% per year; average yields are growing at 0.9%. You do the arithmetic. The food industry is expected to produce more food in the next 40 years than has been produced in all of history. Seriously ? We have not even mentioned shrinking water sources and the ever increasing climate wildcard.
- Climate change and extreme weather will become a growing problem for global food security, triggering regional food crises and global price spikes whenever they hit key production centres. Agriculture accounts for 70% of freshwater withdrawals worldwide, and up to 90% in developing countries.
- Concentration of production increases the risks of unilateral knee-jerk reactions. During the 2008 crisis over 30 governments imposed export controls, bringing agricultural markets to the edge. In 2011, Russia’s export ban on wheat drove up international prices and led to the initial protests in North Africa that became the Arab Spring. Emerging regional production centres for key commodities such as wheat, rice and soybeans also raise the prospect of cartels.
- As our population grows from 7 Billion to 9 Billion over the coming decades, food production, logistics, transport, technology, efficiency and management are all winning themes. Criss crossing these investment themes is the highly compelling “AG-Vector” WATER. Water and Food investments are inexplicably linked and a great way for portfolio managers like us to play both sides of that trade with lower risk and lower volatility as a result. The water sector, long since classified as pedestrian or boring by many analysts has woken up with a vengeance.
- Water is the most vital asset on the planet. Water scarcity is an economic constraint in major growth markets such as China, India, Indonesia, Australia and the Western United States (do these sound familiar ? see resource section above). Water is also a necessity in the creation of agriculture and energy production. US water infrastructure alone requires $1 trillion in infrastructure upgrades over the next 2 decades. The GCC countries have plans to invest $300 billion + in crucial water projects over the next decade, due to extreme water scarcity, as per capita water availability is expected to decrease by more than 50%. China plans to invest $622 billion on water infrastructure over the next 8 years. We invest in Water Utilities, Water rights (entitlements), Water Infrastructure (pumps, pipes, filtration, purification, etc.), Water Management and Monitoring ( compliance, testing, metering and distribution), Water-related Construction, Engineering and Service Firms, Advanced Water and Wastewater Treatment and Recycling Technologies.
- Water and energy provision will be increasingly interdependent. The hydropower sector will feel the effects of water stress most directly – leading to vulnerabilities in hydro-dependent regions in Latin America, South Asia and sub-Saharan Africa. Power generation and heavy hydrocarbons extraction and transformation processes (particularly coal and tar sands) are likely to compete with water resources in already water-stressed areas by 2030, e.g. in India, China and South Africa. The perception of unequal access to clean water will be a serious potential trigger of conflict and instability.
- Shale gas technologies have redrawn the global energy map. we don’t think investors fully appreciate the potential transfer of wealth that will continue over time from substituting high priced imported crude with domestically produced crude from the shale plays. On November 12th, the International Energy Agency (IEA) released its latest World Energy Outlook. In the report, the IEA concluded that the U.S. could be completely energy independent by 2020 and also replace Saudi Arabia as the largest producer of oil in the world.
- China rather than Europe will be the next test case for unconventional gas development, with state companies directed to produce 30 bcm of gas from coalbed methane and shale by 2015 – more than double China’s 2008 natural gas import volume.
- Heavier volumes of energy trade together with a changing climate, extreme weather events and water stress will increase the vulnerability of the global energy production and transportation systems. Much of existing and planned infrastructure will be at risk from storm damage, rising sea levels and the effects of melting permafrost. Having nimble and experienced traders that know how to hedge these outliers on your team will be an absolute necessity going forward.
- But most importantly, the overwhelming factors besides the trillions of dollars (real and printed) that are going to find their way into these sectors, is the fact that every government in the world will do whatever it takes to keep the power on, the water flowing and food on the shelves or risk immediate extinction. We are basically investing in sectors that China, India, Pakistan and Indonesia are competing for and at the same time that every politician and central banker in the world will underwrite. Its a no brainer, but it does require skill and experience.
- So in a nutshell, we believe strongly that careful (and liquid) investments in vitally important asset classes such as agriculture (equities and commodities), water (equities and water rights), energy (clean and tradtional equities, relative value spread trades, energy infrastructure) and other vitally important scarce natural resources will trump most other investments over the coming years.
Find out more on each of these sectors by visiting the fund portal pages below
About the Author:
Anric C. Blatt is the founder and Chairman of the Global Fund Exchange Group. Founded in 2005, the group operates businesses focused on providing visionary investors with solutions to create a sustainable legacy for future generations through prudent and profitable investments into the most compelling vital asset classes and mega macro trends such as energy, water, agriculture and other scarce natural resources.
Mr. Blatt is the co-portfolio manager of the Earth Wind & Fire funds and the AquaTerra fund and is well known for his compelling theme based approach to macro investing and is a frequent speaker at alternative investment conferences, asset allocation round tables and industry events.
Throughout his 20 year career, Mr Blatt has acquired expertise across all asset classes through posts in the US, Switzerland, Hong Kong and Africa. He is an innovative thinker with vision and leadership, a proven aptitude for detecting talent and is known for his strategic focus in moving companies and organizations forward in their goals.
Despite being an avid “quant” with significant expertise and interest in mathematics, statistics and related financial technology, he has an equally matched expertise in qualitative investment processes, having completed due diligence on thousands of investment managers and executed early stage investments in several hundred funds over his career to date.
Mr Blatt has founded and built several multi-billion dollar investment funds and has served on the board of over 50 investment companies, trusts and funds in all of the major financial jurisdictions across the globe. As an experienced hands on investor, Mr. Blatt has extensively travelled to over 100 countries, has lived on 4 continents and has a keen interest in history and geopolitics and how these intersect with financial markets. He is fluent in a number of languages.
Having grown up and experienced life from a very young age in the harsh, unforgiving yet grateful desert, Mr Blatt clearly understands the lessons of desert living, where sustainable practices and resource conservation are essential to survival. He thoroughly understands the tremendous challenges posed by population growth, climate change, environmental degradation and the urgent need to find sustainable energy sources, water conservation and waste management strategies. His business interests are entirely focused on providing profitable yet responsible investments in the energy, water and agriculture sectors, providing accelerated investment capital to the sectors that the planet needs most to fuel its growth in a sustainable manner.
He believes strongly that investors need to focus on integrating a compelling purpose and meaning behind their investments. We did, after all, not inherit this planet from our parents, we borrowed it from our children. What legacy are we going to leave them ?