Innovation and change require capital investment, which creates exciting opportunities for long-term, active investors across a variety of sectors.
In periods of market uncertainty, it can be easy to lose sight of the bigger picture. But these periods can also create opportunities to position for longer-term themes. In our view, a number of secular trends are centred around the theme of scarcity.
The changing supply side
Scarcity has not been an issue for much of the past two decades. With China joining the World Trade Organisation and bringing 1.2 billion people into the global labour market, increasingly integrated global supply chains, and the discovery of significant additional oil and gas in North America, the last few decades could be characterised as a period of abundance. If anything, the problem has been ensuring demand kept up with rapidly expanding supply.
But the supply side of the global economy is changing. Worries about climate change have raised concerns about the exploitation of natural resources for some time, while the pandemic has led to what we perceive to be lasting changes to supply chains and labour markets. And Russia’s invasion of Ukraine has created a shortage of numerous commodities, at least for western buyers.
One might expect this to act as a considerable restraint on global growth. However, history has multiple examples of humankind’s ability to overcome problems with innovation. Innovation and change require capital investment, which creates exciting opportunities for long-term, active investors across a variety of sectors.
Clean energy scarcity
Low-carbon energy is perhaps the most obvious example. Forecasts for renewable energy investment shortages are eye catching – for example, spending on electricity generation from renewables will need to more than triple by 2030 for the world to meet energy demand in a way that is consistent with net zero targets.
After many years of scarce low carbon energy being a problem, policymakers are finally taking action. Public investment in the transition is ramping up – see the European Union’s (EU’s) Recovery Fund, with its focus, among other objectives, on catalysing a transition in Europe’s energy supply. Incentives for private clean energy investment are also multiplying, thanks to the US’s Inflation Reduction Act and EU’s Green Deal Industrial Plan.
An ongoing scarcity of low-carbon energy and these more recent government carrots (and sticks) create earnings opportunities for firms who can help countries and companies clean up their energy footprints. Obvious examples include businesses in the renewable energy, efficiency, electrification and carbon capture spaces. If a recession does materialise and “growth-ier” clean energy firms are caught up in a broad-based stock market decline, investors could be provided with an opportunity to position for these secular themes. Beyond energy generation, low-carbon power will need to permeate the economy more widely, and thus the sustainable transport and construction sectors also look set to benefit.
Solving for energy scarcity, however, creates another scarcity problem: materials scarcity. Demand for certain metals, such as lithium, copper and silicon, will soar as the energy mix is transformed. For example, solar energy generation is more than four times more materials-intensive than gas-fired plants. The need for utility scale electricity storage to deal with the intermittency of wind and solar generation will also contribute to increased metal demand, as will a shift to electric vehicles (EVs), which are six times more minerals-intensive than traditional combustion engines.
While emerging market regions will be some of those most challenged by climate change, they are also likely to be secular beneficiaries from this huge rise in materials demand given they are often where these critical inputs are primarily mined and processed. However, mineral-rich regions won’t be the only winners – as the sources of these critical minerals and their processing facilities tend to be concentrated in a few countries, supply chain concerns will force developed markets to look for solutions closer to home. Companies focusing on the domestic processing and recycling of rarer metals will therefore also likely profit. In the nearer term, recession risks could lead to volatility in resources markets, creating opportunities for those looking to identify attractive entry points for these longer-term themes.
Food and water scarcity
Over the next decades, climate change and population growth will generate scarcities in other natural resources too, primarily food and water. Along with higher average temperatures, water-related extreme events, such as floods and droughts, have already risen in frequency and are expected to do so further, hurting agricultural yields. The amount of global land affected by droughts has already doubled since 2000.
Meat consumption – which has more than doubled per person since 1990 – will have to fall to allow the food production necessary to feed a global population expected to reach 10 billion by the end of the century, as well as to limit greenhouse gas emissions and deforestation. At the same time, as sea levels rise more river deltas – usually particularly fertile as well as highly populated regions – will become salinated, reducing both the amount of water available for drinking and agricultural yields. Food inflation and its volatility are likely to increase as a result.
To deal with these issues, a major shift is needed towards more sustainable food and water systems that reduce carbon intensity, limit land exploitation, and protect forests that act as natural carbon sinks. Firms in sustainable agriculture, water management, reforestation and green infrastructure will benefit as water availability becomes more limited and food yields from traditional agriculture fall, transforming challenges into huge opportunities for investors.
Finally, despite global population growth we see labour scarcity as another secular theme. In most major economies, the ratio of over 65s to the working age population will rise unrelentingly over the coming decades, leaving fewer workers to support more dependents.
It is sometimes argued that the solution to labour scarcity will be found in increased migration from higher fertility parts of the world, such as Africa. There are economic merits to this argument, but in our view they ignore the political realities that have become evident in recent years.
Numerous investment themes arise. Physical capital will be required to compensate for labour scarcities. For that reason, we don’t fear automation and artificial intelligence (AI) – we see these developments as necessary to fill impending labour shortages (though acknowledge they could exacerbate inequality). Then there is the issue of how to provide the goods and services for older populations to live well.
Given the gravity of this topic, this overview is just an initial outline of our thoughts and more will follow. The new era of scarcity – across clean energy, materials, food and water, and labour – will pose challenges. But it will also create secular economic shifts and consequent opportunities, which longer-term active investors should not ignore.