Category: Environment

How to invest in the battery revolution

Batteries are currently the bottleneck of many technologies. You have a phone, but after using it for half a year its battery percentage says 36% at 5PM, when you still have a long evening ahead of you. Your laptop battery used to last for five hours when you first got it but now can only go for two. Your smartwatch can barely last you a full day, and on that twelve hour flight your wireless headphones die eight hours in.

Consumer devices have become more compact over the years. Whereas a Nokia 3310 (yes, that Nokia) used to measure 22mm in thickness, the latest iPhones measure only 7-8mm thick. Battery technology has had to shrink down in size accordingly, and on top of that it has had to go from supplying power to small monochrome displays to now powering full-fledged computing devices with huge state of the art screens. Never mind powering lightweight sports cars.

Thus far the battery technology that is available in your average consumer electronics (typically Lithium-ion) has struggled to keep up with these developments. Should at some point the barriers to quick charging and longer battery life be broken however, battery technology would represent a great investment for the longer term.

What are the latest developments in battery technology?

Most devices you will have come across in an average household (and in its next door garage) over the last decades run off Lithium-ion batteries. There are many different types of Lithium-ion batteries, and without going into the technical stuff (you know, how electrons are moved from one end of the battery to the other between the anode and the cathode or positive and negative electrodes, ahem) suffice it to say that these have generally been found to be the most efficient type of battery. Though not without their issues, mainly in the area of safety.

Developments in battery technology all focus on increasing the density of the battery (more energy in less space), improving the battery life and safety. Because no one likes exploding batteries.

Currently there is no clear indication of which technologies are going to win out. There is ongoing research by the big technology companies into improving Lithium batteries, with Lithium-air or Lithium-sulfur as possible contenders to take Li-ion’s place in your phone. Other technologies like solid state batteries, Sodium-Ion or Aluminum-Air batteries look at replacing Lithium entirely, but that seems further off and is receiving less R&D spending. So far no successor has successfully been brought to the market yet.

Demand from all sides should make this a great longer term investment

Batteries go in practically anything, and crossing the hurdle to having longer lasting and faster charging batteries could literally change our lives. Whatever the new technology ends up being, once it ends up on the market there is sure to be enormous demand.

As we have outlined above, which technology is going to end up in your phone is harder to predict, but most currently see no real competition for advances in Lithium batteries. Moreover, if the last 25 years are any guide for the future, it appears that any changes will happen gradually than suddenly. If new advances come to the fore, existing battery manufacturers are likely to be quick to jump on it.

Portfolio construction: lithium and battery technology

  • This single ETF theme portfolio consists of the Global X Lithium and Battery ETF which tracks the Solactive Global Lithium Index. It invests into the full cycle of a battery: from miners (creating exposure to Lithium prices) to actual battery producers
  • The ETF contains allocation to predominantly the United States, Australia, South Korea and Japan (77%) in total
CategoryNameIDTERAlloc %
BatteriesGlobal X Lithium & Battery Tech ETFLIT0.76%100.0%

Risk, Diversification And Allocation

  • Risk level: high
  • Diversification: low
  • For risk and total return since initiation see Portfolios
  • Probability of this theme playing out in the next 3-10 years: 50%-50%

Portfolio Characteristics (Full Look-Through, From USD Perspective)

  • Dividend yield: 3.74%
  • Ex-ante predicted volatility: 15.8%
  • 1 year 95% Value-at-Risk: –22.2%
  • Scenario 2008 Lehman Brothers default period: -31.0%
  • Scenario Interest rates +100bps: +6.1%
  • Scenario 2008-2009: -21.7%
  • Scenario 2010 onwards: +156%

 

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Investing in clean energy to profit from an unstoppable trend

Global energy demand continues to rise. Yet fossil fuels are slowly depleting, with oil and gas expected to run out by the 2050s, and coal only expected to last a few decades longer. Meanwhile, the negative impact on the environment of carbon dioxide emissions as well as fossil fuels general contribution to climate change and global warming has been well documented.

Clean energy is the solution

Clean energy based on renewable sources like sunshine, rain, wind or heat are therefore slowly going to increase in prominence. That will be based on increasing energy consumption in and by itself (+40% over the next 20 years by some estimates), but also as an indispensable “green” alternative to traditional energy sources which are slowly running out.

Renewable energy is already contributing some 14% to US energy production, 25% to Chinese energy production and 32% to German energy production. At the current pace, some predict that by 2040 the US figure will rise to 23% while the European Union is aiming at 100% by 2050. Globally, the International Energy Agency estimates that 40% of all energy will be from renewable sources by 2040.

Obviously the Paris Agreement also comes into play here, making its original 195 participants set ever more ambitious goals in terms of global emissions reductions, and aiming for those to peak as soon as possible.

And what is the impact of it all? The reduction (or slowdown) in global warming and improved public health from lower pollution levels are some of the clear environmental benefits from clean energy. Meanwhile job growth, greater stability in energy prices and energy independence are some of the economic benefits.

Where to invest to benefit from this trend

In just over a decade, the clean energy sector will have seen further investments of upwards of $5 trillion, growing at some 10% per year. Allocating money to firms active in producing the following types of renewable energy should reward investors in the long run:

  • Solar energy. sun light converted into electricity, using either photovoltaic systems (panels) or concentrated solar power (heat). The former technique dates all the way back to 1876, and is currently the fastest growing renewably energy source.
  • Wind power. Using air flow to power wind turbines which generate electric power. Typically takes the shape of either offshore or onshore wind farms, where the former is obviously more costly to construct though tends to get more and stronger winds.
  • Tidal and wave power. The power of waves and tides in the world’s seas and oceans converted into electricity using turbines. Still in early stages of development, but with some potentially interesting properties such as the fact that tides can be predicted centuries in advance while wind and sun patterns change more frequently.
  • Biomass and biofuel. Getting energy from burning organic matter such as manure, plants, crops, etc. Produces emissions when being burned but since the source is renewable is classified as a renewable energy source
  • Geothermal. Tapping into the heat of the earth through steam, magma or underground hot water reservoirs and converting that into electricity

Portfolio Construction: one ETF to capture it all

  • The portfolio constructed here is very simple and consists solely of one single ETF: the iShares Clean Energy ETF. This invests in 29 of the most liquid traded companies within the clean energy equity universe
  • Within this ETF, you get 30% US exposure, 27% China exposure and 43% exposure to other countries through a total of 29 holdings
  • Some of the larger holdings are First Solar Inc (7%), Enel Americas (5%) and Siemens Gamesa Renewable Energy (5%)
CategoryNameIDTERAlloc %
Clean EnergyiShares Clean Energy ETFICLN0.47%100.0%

Risk, Diversification And Allocation

  • Risk level: high
  • Diversification: low
  • For risk and total return since initiation see Portfolios
  • Probability of this theme playing out in the next 3-10 years: 25%-75%

Portfolio Characteristics (Full Look-Through, From USD Perspective)

  • Dividend yield: 2.4%
  • Ex-ante predicted volatility: 13.1%
  • 1 year 95% Value-at-Risk: -19.8%
  • Scenario 2008 Lehman Brothers default period: -22.9%
  • Scenario Interest rates +100bps: +3.2%
  • Scenario 2008-2009: -0.2%
  • Scenario 2010 onwards: +101%

 

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Five reasons to invest in agriculture

People cannot live without food. The global population is ever growing and expected to hit 9.7 billion by 2050. Per the United Nations, food intake is projected to grow by 70% both off the back of that trend as well as a general increase (some 12% per person on average by 2050) in caloric intake in both wealthy and developing nations.

Meanwhile, global arable farmland is scarce. If the above population projections become reality, there will be a need for one additional billion tonnes of cereal and 200 million tonnes of meat. That will naturally put a strain on arable land already, but deforestation and degraded forest land as well as soil erosion also reduce the availability of topsoil and make matters worse. On top of land, scarcity is also going to apply to water (of which agriculture is one of the biggest global consumers).

All of this is going to put an increasing stress on the the $5 trillion agriculture sector and upwards pressure on food prices. New advances will be needed to keep up. So what are some of the main advances in agriculture (or as some like to call it, agtech) taking place today?

#1 Robots

Whether it is to plant, control weeds, monitor the crops or reap the harvest, or even pack the final products, robots as a replacement of fieldworkers are an obvious candidate for enhancing the quality and productivity of global agriculture. Even entire tractors could become driverless vehicles.

#2 Drones

Can be used for soil and field analysis from up high, meticulously geotagging every location and providing data that can be useful in planting, watering, pruning etc. Could potentially even be used for spraying and irrigation in much more efficient ways than old technology could do.

#3 Animal trackers / livestock wearables

What if farmers could keep track of their cattle 24/7 using wearable devices? You could limit certain parasite treatments to only animals who frequently go outside. Or you could couple it with technology that can automatically sound the alarm when livestock puts itself in danger.

#4 Sustainable food and meat substitutes

Not only is caloric intake set to rise, but the consumption of meat is expected to similarly go up across the globe. We are destined to see an increasing amount of sustainable food options and meat substitutes in our supermarkets.

#5 AI: Automated irrigation, crop monitoring and predictive analytics

What if there were techniques that were able to constantly monitor the fields, ensuring that soil conditions remained just right and only irrigating precisely when needed and as much as needed? The savings in water consumption could be significant. And what if the farmer had a system that could give him a live status monitor of his crops, making use of crop data and weather forecasts to highlight the optimal days to harvest? Artificial Intelligence could provide the technologies upon which such features are built.

Why agriculture makes sense for investors

One of the last things people are going to save on in any economic downturn is food. Coupled with very strong fundamental prospects and rising prices over the long run, agriculture should make a good addition to any longer term portfolio.

Portfolio construction: Agribusiness and agriculture

  • I construct a portfolio consisting of three ETFs, with TER ranging from 39bps to 70bps, overweighing the former.
  • The largest exposure is to the VEGI ETF, which offers exposure to “companies that produce fertilizers and agricultural chemicals, farm machinery, and packaged foods, and meats”. It has 120+ holdings of which the largest is Monsanto (14%). It’s holdings are roughly 50% in the US and 50% elsewhere
  • The MOO ETF has a similar profile with a smaller number of firms, while the FTAG ETF contains a larger portion of non-US holdings and focuses on firms improving agricultural yields
CategoryNameIDTERAlloc %
All AgricultureFirst Trust Index Global Agriculture ETFFTAG0.70%20.0%
ProducersiShares MSCI Global Agriculture Producers ETFVEGI0.39%50.0%
AgribusinessVaneck Vectors Agribusiness ETFMOO0.54%30.0%

Risk, Diversification And Allocation

  • Risk level: high 
  • Diversification: low
  • For risk and total return since initiation see Portfolios
  • Probability of this theme playing out in the next 3-10 years: 25%-50%

Portfolio Characteristics (Full Look-Through, From USD Perspective)

  • Dividend yield: 1.62%
  • Ex-ante predicted volatility: 10.1%
  • 1 year 95% Value-at-Risk: -15.8%
  • Scenario: 2008 Lehman Brothers default period: -26.0%
  • Scenario: Interest rates +100bps: +4.9%
  • Scenario: 2008-2009: -13.4%
  • Scenario: 2010 onwards: +169%

 

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How to Invest and Profit from Long Run Water Scarcity

Without water there is no life on earth. And while apparently 70% of our planet is water, only 3% of that is potable. Per estimates of the WWF,  1.1 billion people currently lack access to drinking water, while by 2025 two-thirds of the world’s population across every continent may face water shortages. Not only drinking water is an issue, as hygienic sanitation is tightly linked to it and inadequacy in that area risks the spread of diseases.

There is sufficient fresh water available on earth for everyone, but distribution and usage is unequal which is increasingly going to cause socio-economic issues. Global warming only exacerbates these trends and is going to add a full 20% to water scarcity this century. By 2030, demand could be higher than supply by some 40%. Besides global warming, issues like ageing infrastructure and increased irrigation in agriculture (which consumes 70% of all water) play a role.

Water is such a fundamental part of our lives that it plays a role in practically every segment of business, making this supposed undervaluation of a commodity without substitutes an excellent longer term theme to invest some of your money in.

What assets to invest in to benefit from this trend?

That’s perhaps not the best way to phrase it. People are suffering from physical and economic water scarcity, and the first question should probably not be how to profit from that. Nevertheless, it is unquestionably a massive global trend and investing for it may actually do some social good.

Unlike other commodities like oil or gold, investing directly into water is not possible. Exposure has to be gained by investing in companies that handle, process or deliver water to consumers and businesses. Here are some of the classic ways to gain access to water in your investment portfolio

  1. Water Utilities. Obviously, publicly traded stocks from the water utilities sector should be your first stop. They are responsible for bringing water to your doorstep and stand to benefit from improving the quality and quantity of water available. Usually monopolies. Think American Water Works, Aqua America and Veolia
  2. Desalination. As fresh water is scarce, increasingly countries are turning to desalination techniques where ocean or sea water is treated to remove minerals and salt in order to make it potable. Water companies like Veolia and Doosan are involved in the business of desalination, and a few companies like Consolidated Water which offer direct exposure to this thriving business
  3. Water value chain. improvements will be needed along the entire water value chain and for each component there will be companies worth investing in: from abstraction and pumping, pipes and pumps manufacturers to sewerage, filtration and waste water treatment. Each of these sub sectors offer opportunities
  4. Beverages. Out of the scope of most of the above are manufacturers of bottled water, which could prove an interesting investment as well

Portfolio construction: water, water, water

  • The constructed portfolio consists of two ETFs with relatively similar exposure. Guggenheim has slightly more US and utilities exposure than PowerShares.
  • The portfolio’s volatility is medium to high at 9.6%. Its return since 2008 would have been +140%
  • Given that this does not quite reach ETF-like diversification, I am suggesting an allocation of 0%-10%. I have great faith in this theme playing out
CategoryNameIDTERAlloc %
WaterPowerShares Global Water Portfolio ETFPIO0.75%50.0%
WaterGuggenheim S&P Global Water Index ETFCGW0.65%50.0%

Risk, diversification and allocation

  • Risk level: medium to high
  • Diversification: low
  • For risk and total return since initiation see Portfolios
  • Probability of this theme playing out in the next 3-10 years: 50%-90%

Portfolio characteristics (full look-through, from USD perspective)

  • Dividend yield: 1.4%
  • Ex-ante predicted volatility: 9.6%
  • 1 year 95% Value-at-Risk: -15.5%
  • Scenario 2008 Lehman Brothers default period: -22.6%
  • Scenario Interest rates +100bps: +4.0%
  • Scenario 2008-2009: -21.2%
  • Scenario 2010 onwards: +140%

 

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