CAPE TOWN – IT data centres are now on a par with airlines as the world’s biggest emitters of CO₂. With this in mind companies like Google are locating ‘green’ data centres off the coast of Finland where wind energy is well developed and seawater can be used in the cooling systems.
Energy efficiency is one of seven growth themes that will change everyone’s lives in the coming years and need to be on the investor’s radar screens, both from a risk and opportunity perspective.
This is according to Bank of America Merrill Lynch, which has done research on this and other long term ‘megatrends’ including extreme weather and climate change; health, wellness and obesity; safety and security; waste and water.
The research will guide Merrill Lynch portfolio managers and analysts as they research and invest in the companies that they expect will benefit the most from these trends.
“We link these themes to phases of the economic cycle,” says Sarbjit Nahal an equity strategist with Merrill Lynch and one of the authors on a report on thematic investing, released last month. “Not every company operating in a thematic sector will prosper.
The aim is to identify which themes and stocks are attractive or unattractive and are likely to outperform or underperform in the given macro-environment.”
Nahal was speaking on the sidelines of the PRI in Person conference, held in Cape Town. Many of the megatrends that Nahal is describing tie closely with the themes of sustainability and responsible investment discussed at the conference.
Energy efficiency is a good example. “It doesn’t matter whether you buy into climate change or not, we live in resource-constrained times,” he says. “Energy efficiency is becoming the central plank of energy policy worldwide and efforts to reduce the amount of energy used to provide products and services are a logical response,” he says.
For instance Daimler Chrysler is buying the light, flexible and super strong gorilla glass from US company Owens Corning to replace the heavier glass used in its sunroofs. Owens Corning, along with Toshiba, Whirlpool and Ngk Insulators appear on BoML list of boom stocks in this sector.
Waste, water treatment
South African company Aveng is one of two ‘boom’ stocks listed by Merrill Lynch. The other is Mondi. In Aveng’s case it is the water subsidiary which delivers water treatment solution in southern Africa, South America and Australia that has attracted attention. “Of all the water in the world, just 2.5% of that is fresh water, and of that 60% is trapped in polar ice caps,” says Nahal.
Countries like China have recognised the problem and are investing heavily to ensure they can treat and reuse the water they have available. Companies that provide water treatment, and management and infrastructure and supply solutions will benefit.
Poor waste management is another global reality, with only 25% of the 11bn tons collected annually recycled or recovered. This is changing as companies recognise waste management as a business opportunity. “The opportunities include recycling, recovery of secondary raw materials, waste-to-energy, e-waste and sustainable packaging,” says Nahal.
Mondi’s commitment to recycling has seen recovered paper become an indispensable raw material for its business. In 2012 the company consumed 1.5 million tons of recovered fibre, amounting to around one third of our total pulp consumed. The company has also developed a line of biodegradable packaging materials.
The list of megatrends would not be complete if it did not include obesity, health & wellness.
“The obesity epidemic is the most pressing health challenge facing the world today,” says Nahal. “There is no silver bullet, but companies are coming up with solutions in response to consumer demand and sometimes, government regulation.”
In the US the Food & Drug Administration’s well known aversion to anti-obesity drugs has waned.
Last year Walt Disney Co. instituted a junk-food advertising ban on its programs for kids; companies like PepsiCo are trying to drive sales of their healthier ranges; Walmart has committed to supplying healthier foods and about 230 retailers and food producers have committed to reducing the sugar and salt content in the food they produce and sell.
For years food companies have added heaps of salt, sugar and fat to their products, knowing they contributed to obesity. “The companies that are seen as supporting the obesity epidemic will find themselves facing similar scrutiny as the tobacco industry did,” says Nahal. “There is a growing awareness that obesity and its ripple effect on diseases like diabetes will cost society (and in particular employers and insurers) more than smoking ever did.”
While the more cynical may prefer to invest in the likes of McDonalds, Merrill Lynch suggests investors look at companies in four specific sectors: pharmaceuticals & healthcare; food; commercial weight management and nutrition; sports apparel and equipment.
Many of these trends are here to stay – in the case of obesity for at least 25 years.
Investors need to be aware that over this time frame even companies surfing on the waves of megatrends will come and go. Keep a sharp eye on your investments, and these trends may return mega rewards.