• Financial & Investment Management Group
  • Tuesday, January 06, 2009

Sustainability Solutions

by Zach Liggett
Posted July 10, 2008
FIM Group

Current Observations

July Edition
PDF Version

Try not to look at the axes in the chart below and take a wild guess at what the line represents. Gasoline prices over the past 2,000 days? Nice try, but no cigar. The chart is actually a Rand Corporation estimate of the human population from 1 A.D. Note the surge over the last two centuries. If that were a stock, you might be thinking: "Bubble! Get out!"

Fortunately, Mother Earth has accommodated this parabolic increase in human population, albeit with more than a few scars from our footsteps. Adaptation and innovation have been significant mitigating factors preventing a catastrophic bursting of the population bubble. Risk-taking entrepreneurs and enterprising scientists around the globe have brought creative solutions to help feed, quench, house, move and care for humankind during this massive growth spurt. Calls for further innovation will only grow louder as the world confronts a new wave of population change: the expected massive bulge of the global middle class.

Middle-Class Bulge

Researchers estimate that the world will gain just under a billion new bodies by 2020. The global middle class, however, is estimated to see its ranks grow nearly twice this pace, adding 1.8 billion new members over the next decade. If this trend pans out as estimated, a massive new consumer class will enter the market and bring compelling opportunities for companies providing these spenders with goods and services ranging from steaks to air conditioners to Disney vacation packages. Our investment team has long targeted investments expected to directly benefit from this phenomenon, including rapidly growing companies like Modern Beauty (Hong Kong and China spa/salons), asiatravel.com (Singapore-based online travel) and Dynasty Ceramic (Thailand ceramic tiles).

Figure 1

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A darker consequence of this bulging middle class, though, is accelerated pressure on many areas related to global sustainability. Greater consumption drives higher demand for limited supplies of fossil fuels, water and other natural resources. Air quality is increasingly at risk as manufacturers boost production to meet this consumption, and piles of new garbage beg for disposal solutions.

Pressures on global sustainability invite significant opportunities for companies with innovative approaches to these challenges. Our investment team is tracking and devoting increased research attention to several "sustainability solutions" sectors that we believe offer compelling investment potential as noted in the table below.

Let the Sun Shine

Energy is one area substantially impacted by demand growth from the global middle class bulge. Fossil fuel supplies are failing to keep pace with this demand, and potential new sources of supply, including those in our own North American backyard, are increasingly difficult (logistically, financially and politically) to find and deliver. Oil and gas companies have benefitted handsomely from what many describe as the "peak oil" situation today and will likely continue to do so for some time to come. However, we believe that an even better long-term opportunity awaits companies innovating in the alternative energy space like Carmanah Technologies, a Canada-based leader in innovative solar lighting and power applications.

Water Water (No Longer) Everywhere

"Peak" is also a term increasingly finding itself paired next to water. This represents a potentially much more monumental challenge for the world as the H2O many of us take for granted, unlike oil, has no substitute. Surface water pollution remains a major problem, and aquifers are being drained around the world at frightening rates. Fresh-water demand for agriculture remains the dominant pressure-point on water supplies, as grains are grown not only to put meat on the table (a new luxury for many in the emerging global middle class) but also to put fuel in our "flex-fuel" vehicles. The net result is that water will potentially be seen by more of the public as "blue gold," and companies bringing new means of treating, recycling and conserving water should see accelerated growth opportunities. One such company is Sinomem Technology, a Singapore-listed company with a variety of filtering membrane technology and wastewater treatment plant engineering know-how.

I Need a Remedy

Entry into the global middle class often also means a greater awareness of the importance of health care and increased subscription to health care insurance plans. It also makes a less healthy lifestyle "affordable," which leads to obesity-related conditions including diabetes and heart disease. This combination is likely to put pressure on health care infrastructures in regions experiencing this middle class surge. Malaysia is one country where such phenomena are clearly being seen and where demand for health care services is expected to outpace economic growth. KPJ Healthcare Berhad, Malaysia’s largest private hospital operator, is a company, we believe, well-positioned to meet these needs.

The ETF Red Flag

Alternative energy, water treatment, medical services and the other sustainability solutions investment themes we follow are by no means unnoticed in the market. Just this month, I received a funky sunshine-head figurine in the mail from a large investment product firm. Their new solar exchange-traded fund (hence the sunshine doll) joins others in their product lineup including specialized ETFs in agribusiness, environmental services and global alternative energy. ETFs tend to be heavily marketed, passively managed investment products that aim to outperform an index rather than explicitly protect and make money. As these and other ETFs creep into the "sustainability" space, investors like us go on extra alert for warning signs of the exuberant valuations, bubbles and, ultimately, troubles that seem to inevitably emerge when "buy the fad" ETFs proliferate.

The existence of ETFs alone will not preclude us from investing in these areas, and at present we are finding some very exciting opportunities. We take a bottom-up, one-at-a-time approach to investment selection with a sharp eye toward price and valuation. Our buy or sell decisions on investments in sustainability solutions areas are subject to the same "price matters" discipline we employ across all of our investment ideas. We buy when prices are sufficiently cheap to provide great risk-adjusted return potential, and we get out of the way when overly expensive valuations no longer justify a holding.

Mother Earth is likely to be tested again by a bulging global middle class, and companies with sustainability solutions are sure to be rewarded with excellent growth opportunities. We will continue researching and investing in related companies, always with a strict price discipline, and report with more depth in future newsletters on particular themes and companies we find compelling.

Visit the companies discussed in the article at the following websites:
http://www.modernbeautysalon.com
http://www.asiatravel.com
http://www.dynastyceramic.com
http://www.carmanah.com
http://www.sinomem.com
http://www.kpjhealth.com.my

 
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