‘Megatrend’ is the term we use for economic, environmental and political transformations which have long-lasting significance to society. While many of these transformations are initially man-made or a result of technological progress, they are themselves powerful forces of innovation and competition.
To identify these trends we need to assess the behaviour of producers and consumers when faced with changes in technology, income and relative prices. The thematic investment strategy acknowledges a more holistic approach, which recognises that the effects of such trends can work in opposite directions across industries and countries. For example, the rise of a disruptive trend such as e-commerce has benefitted consumers, but had a negative effect on traditional retailers who lack an online presence.
The economic impact of megatrends can take years to reach its full effect. When a technology is invented, it does not enter the market for a few years. Although the pace of diffusion has become faster due to globalisation, it can still take years before the technology becomes commercial. Sometimes relative prices need to move in the right way for the pace of adoption to achieve full potential. Remember $5,000 cell phones?
So, what are some megatrends that are important on a global scale, but with special relevance to Hawke’s Bay?
Demographic developments will be one of the key drivers of economic trends in the coming decade. While the pace of population growth will decline, the global population will expand rapidly in some regions, and by 2025 some 900 million more people will probably live on the planet. The bulk of the increase is expected to come from Africa, the Middle East and Emerging Asia.
Food security is a global issue. The problem is all too obvious: the global population rose by 120% between 1961- 2011, but according to the Food and Agriculture Organisation arable land only grew by 9%. As a result, the number of people supported per hectare of farmed land rose from 2.4 to 4.9.
By 2050, global agriculture production will need to have risen by an additional 70% from today’s levels to meet growth in food demand resulting from an increased population, rising incomes, and a shift in preferences to protein-rich diets. Yet, the supply of arable land is restricted due to urbanisation, soil degradation, and competing land usage.
Water is fast becoming an important strategic resource and a possible source of instability. The distribution of freshwater supply is skewed, with about 1.2 billion people globally now facing some level of water stress. According to the UN, sources are expected to drop by 20% by 2030 because of demand pressures and climate change. It is suggested that climate change will likely have different effects on water resources and quality across regions, by putting subtropical regions under greater stress, increasing the frequency of drought in dry regions, but also increasing resources in high latitudes.
And from a water quality perspective, increased human activity, chemical runoffs and inadequate wastewater treatment are contaminating aquifers and surface water, which will exert greater pressure on resources. In much of the emerging world, in the absence of proper irrigation facilities, erratic rainfall leads to high variability in farm output.
Trends in lifestyle are changing with more people aware of taking precautions for the future. Efforts are being targeted at maintaining wellbeing throughout the process of ageing. Although advances in medicine will likely extend longevity, consumers have become more aware of non-communicable diseases, such as diabetes and heart problems. Exercise, wellness and a healthy diet are now widely considered effective in preventing these diseases from occurring.
The growth in demand for organic food has been remarkable. In the United States, which accounts for about half of the world’s organic food market, retail sales in 2013 were valued at US $35 billion, according to the US Department of Agriculture. The industry now encompasses over 18,000 certified organic farms representing a 245% increase since 2002.
In addition, organic is neither a select phenomenon, nor is it a niche reserved to the privileged, according to a survey by the Hartman Group. While there is debate over whether organic food is indeed healthier than its alternative, consumer preferences have clearly shifted in favour of it. A similar argument can be made for food products where production is based on principles of fairness and sustainability.
These megatrends should be good news for Hawke’s Bay. As a region our economic wellbeing is largely determined by the success of our food producers. There is little argument that we are world-class at producing high quality food. Our natural resources, combined with a history of research and innovation and the clean green NZ story, have put our province in a strong position for future growth.
So what are the risks and how does a small investor gain exposure to these megatrends?
When considering your options, it’s important to draw a line between the trend and the investment opportunities available to you. Too often investors identify the trend correctly, but choose the wrong investment vehicle to express it. Investing during the early stage of a theme carries significant risk because of limited investment opportunities and the hype that is created.
The best thematic opportunities are frequently outside of investable companies. Here in Hawke’s Bay, businesses such as Bostock Organics, Firstlight Foods, Te Mata Mushrooms, Rockit Apples, Arataki Honey and many others are seizing the opportunity, but they are not open to general public investment. There are, however, businesses which operate in the primary sector and are publicly traded on the sharemarket. They include Scales Corp, Fonterra Shareholder Fund, Synlait Milk, Rural Equities and PGG Wrightson.
Megatrends aside, investors need to carefully analyse any business they intend to invest in. It is important to know that the business is in a strong enough position to take advantage of the external factors that will have such a pronounced influence on their markets.
This is especially true when investing in the primary sector, where investors should take a long term view and be ready for the volatility that comes with fluctuations in currency, weather, competition, disease, tastes and so on. It’s a long game.
Sam Howard is an authorised financial advisor at First NZ Capital Securities Ltd. A copy of FNZC’s Disclosure Statement is available on request.