An abundance of scarcities: Robeco identifies new investment opportunities

These are some of the recommendations from the report 'An abundance of scarcities' produced by Iris, the independent research institute owned by Robeco and Rabobank, and commissioned by Robeco. This report deals with the sectors in which population growth and increasing global wealth are leading to scarcities. It also discusses the consequences of such scarcities on our economy.

 

Macroeconomic developments are leading to rapidly changing global economic relationships, creating winners and losers. On balance, if the right policies are applied, these changes will increase the average wealth of the global population. These developments represent sustained long-term trends. Policies and investments still insufficiently reflect the consequences of the coincidence of global population growth and aging, and that population's general increase in wealth, together with the depletion of resources and the consequences of climate change.

 

Inflation has been low and stable worldwide over the last twenty years. The market expectations are that this will remain unchanged in the next decades. Robeco holds a different view. Many commodities which have been freely available for a long time, such as land, air and water, will become scarce and therefore expensive. Technological developments resulting in substitution and the more efficient use of new scarcities will not offer sufficient mitigation in the short term. Inevitably this will lead to attempts to pass the buck and if this works, inflation will increase. A doubling of the current inflation rate cannot then be excluded.

 

The economies of countries with few or no natural resources will face problems. Europe has the power to achieve a sustained period of growing wealth.

How Europe maintains its position will depend on progress made with continuing European integration, on allowing the market mechanism to work on commodities and the labor markets and on the creation of a culture oriented more towards risk and entrepreneurship.

 

- The fundamentally changed conditions in the food market require rapid adjustments to Europe's agricultural policy, which still has too many elements dating back to the era of food overproduction.

- The polluter must be made to pay as much as possible. This also means that emission rights should not be made available free of charge, but should be sold by public sale.

- Energy policies demand a European approach. And it should be made clear that we will have to pay more permanently for the energy and meat that we consume.

 

Central banks face a major task controlling lurking inflation. They are being confronted with a dilemma: inflation is curbed by increasing the interest rates and above all by reducing the size of the economic pie. However, inflation is now being caused by the struggle to distribute that pie. The reigning view that monetary policies only can provide price stability will prove unsustainable. It will be necessary to return to a form of moderate monetarism. This view does not focus purely on monetary policies; government policies in their entirety will have to concentrate on maintaining price stability. Stimuli that put work in a negative light next to leisure time must be removed. The retirement age can be very gradually increased and then be made dependent on life expectancy. The traditional wage-restraint policy in the Netherlands will come under pressure. Developments in the purchasing power of the minimum-wage earners will require attention if the price of basic goods and services such as medical care, food and energy increase.

 

The relative price changes resulting from increasing scarcity have not yet been completely assimilated. The risk of higher and less predictable inflation is not yet reflected in bond yields. This is bad news for bonds, as this scenario makes them less attractive. It is advisable for bond investors to give long-term bonds a strategic underweight position in their portfolios. Pension funds can hedge the risk of inflation, for instance, by investing in inflation-linked government bonds. Regulation of pension funds should focus on the real instead of the nominal level of funding. This will make it clearer to what extent the purchasing power of pensions is funded. Greater transparency is called for at all times.

 

There are good opportunities for sensible investors to respond to the break in the macroeconomic trend. This requires a thematic approach to an investment portfolio. Equity investors should opt for companies which process goods that are likely to become scarce and for companies which develop technologies designed to make more efficient use of natural resources. Such companies will be given extra work as a result of the effects of climatic changes. This would include companies active in infrastructure and civil engineering projects for roads and waterways, such as Arcadis and Boskalis, who will be building water reservoirs and reinforcing dykes. As far as the aging population is concerned, health-care and services companies will benefit. IRIS's analysts are also positive about companies handling medical equipment in the longer term.

 

Note for editors: This report can be downloaded via www.robeco.nl/corporate information

(http://www.robeco.nl/dut/press/home/index.jsp) or available on request via the telephone number below.

 

 

Robeco, established in Rotterdam in 1929, offers investment products and services to institutional and private investors worldwide. It has EUR 142 billion in assets under management (at 31 December 2006).

 

The product range encompasses equity and fixed-income investments, money-market and real-estate funds and alternative investments, such as private equity, hedge funds and structured products. The various strategies are managed from Rotterdam (head office), Paris, Boston and New York.

 

To service institutional and business clients, Robeco has offices in Bahrain, Belgium, Germany, France, Japan, Hong Kong, Poland, Spain, the United States and Switzerland. Robeco has a bank license in Belgium, France and the Netherlands, where it can sell its products straight to private clients.

 

Robeco holds a 100% interest in Transtrend in Rotterdam, the Netherlands, and in Harbor Capital Advisors in Chicago, USA. Furthermore, Robeco holds interests in SAM Group (64%) in Zurich, Switzerland; Canara Robeco Investment Management (49%) in Mumbai, India; and AIM (40%) in Rijmenam, Belgium.

 

Robeco is part of Rabobank Group, one of the few retail banks with the highest credit ratings from Moody's and Standard & Poor's. Furthermore, within the banking sector, Rabobank has the highest sustainability cluster score, which is used to assess an organization's people and environmental friendliness.

 

 

Spokesman:            Ronald Florisson

Office:                   010 - 224 2241

Mobile:                   06 53 83 15 86

E-mail:                   ronald.florisson@robeco.nl

 

 

 

'An abundance of scarcities' is the title of a research report produced for Robeco by IRIS, Robeco/Rabobank's research agency. 

The report states that new scarcities will result in price increases and that climate change and trend-breaking technologies should be decisive points of consideration when determining the investment policy for long-term investors in the case of pension institutions.

 

The analysis provided is one that can be used to formulate a number of different future scenarios, but we consider one to be the most realistic in the medium and long term. The market must ensure by its flexibility that the extreme elements from the analysis are not manifested. This scenario thereby becomes something of a base case.

 

The International Energy Agency is currently working on long-term models describing the utilization and availability of fossil fuels. Current estimates all point in the same direction, towards a downward adjustment of available supplies for the future. On the one hand this is the result of disappointing developments concerning the discovery of new resources and, on the other hand, of upward adjustments to demand due to the fact that global consumption is increasing at a more rapid rate than expected. The IAE's energy-crunch warning came last year.  This is perhaps symptomatic of what can happen to us in other areas in which scarcities threaten too, such as food and water. A crunch - a phenomenon we are familiar with from the recent drying-up of the interbank money market - is a rapid decline on the supply side resulting in an enforced harsh adjustment on the demand side. Climate change, the sustained growth of the global population in non-western countries and the rising average standard of living could constitute a dangerous cocktail. Accelerated demand accompanies the depletion of available supplies. Any scarcity encourages new supply, but it takes time to achieve a new balance with the aid of technology and a change in behavior. Utilizing energy resources more efficiently is an important part of this process. If countries like China and India accelerate their demand for a pro capita share in the natural resources, this could lead to a harsh redistribution of wealth internationally, with renewed inflation as a result.

 

If, as a result of factors such as scarcity of natural resources, the global pie does not grow as fast as consumption pressure from the population, and an ever-increasing part of the non-western population lays claim to the wealth that is available, then the western world will have to make do with a proportionally (much) smaller slice of the global-wealth pie.

 

The western central banks will be faced with new challenges in their efforts to achieve price stability. Increasing interest rates is the weapon commonly used to curb inflation. This weapon initially puts a brake on economic growth. If the increase in the general price level is caused by increasing scarcity, raising interest rates can lead to shifting of responsibilities and inflation, a difficult dilemma for central bankers.  Western consumers who see their food prices rise will find it hard to understand that the central bankers deal with this problem by seemingly adding to it by raising interest rates.  Surely higher and more volatile inflation can be expected? 

 

Climate change is heightening the pressure of demands to use les fossil fuels by introducing taxes on CO2. Climate change is also increasing the chances that harvests will fail and that the amount of available arable land will be reduced. We will have to perform more maintenance in our living environment and our infrastructure than ever before. One example might be a mega delta plan to protect our entire coastline.) In corporate economic terms, this means maintenance that hitherto has not been taken into consideration.

 

Scarcity makes resource independence an important topic. The head of the Italian utility Edsion, Umberto Quadrino, warns that, concerning its gas supply, Europe will become unacceptably vulnerable over the next 15 years: "Europe is sleepwalking into a staggering dependency on gas". Without making the mistake of putting up trade barriers again, Europe would be well advised to become less dependent on energy and food products from outside. This way, Europe will remain an independent player on the world stage. In the energy field this means economizing and using alternative resources. The trend for converting arable land into nature reserves has peaked, and the price of arable land in the Netherlands will not decrease any further.

 

The western world, and the Netherlands in particular, would do well to capitalize on technologies based on the scarcity theme Clean Technology (Clean Tech). This is an economic reality, but also a political and an academic one. If we succeed in developing technologies with which we can convert sea water into drinking water, we will hold new gold. The same goes for any technology with which solar energy can be generated at lower cost, or biodiesel made from algae. There will be a multitude of technical innovations that can contribute to alleviating the problems created, and policies will have to aim at stimulating such growth to the maximum. The Netherlands should wish to play a part in this; a part commensurate with its own powers, based on the problems for which it is best positioned to provide solutions.  We have no other choice than to get attuned to the scarcity scenarios and to set all our stakes there now.

 

The financial sector must take the lead in investing in the new technologies so that its clients can take a stake in the value creation of tomorrow. The report produced by IRIS "An abundance of scarcities" describes the opportunities for investors. The advice it contains addresses mainly the long-term investor, because not all the effects described above will not become manifest in the short term. Macro-economic factors are very important here: the period of relatively low interest rates appears over - a warning for long-term bonds in particular. Set your stakes in the long term on commodities that are subject to scarcity and on economic activities that can benefit from this in the future. Invest in companies (or economic activities) that capitalize with their products on the consequences of climate change by seizing new opportunities, including civil engineering and infrastructure. Invest in emerging markets, since this means sharing in their success, and ensure that if they demand and obtain a larger slice of the pie, you as an investor are in a position to reap indirect benefit from this too.