Back to blog

Global drought – how to react as an investor?

According to the European Association of Fruit and Vegetable Processors (PROFEL), extreme drought in 2018 caused vegetable processors the most serious problems in the last 40 years. Moreover, producers had been fighting with weather-related problems two years before. Drought and heat is still causing huge problems to farmers and the impacts are becoming more devastating. Therefore, the European Commission launched a public consultation on new EU strategy on adaptation to climate change, yet it has been postponed to 2021 due to the coronavirus pandemic. According to the latest report from the U.N. on climate change, the planet will reach a global temperature rise of 1.5 °C above pre-industrial levels as early as 2030.

Global drought – how to react as an investor?

We can already see some negative impacts of the climate change, such as low harvests due to drought and sudden hailstorms, extensive fires, floods, Atlantic coast erosion and many other changes.

It’s important to realize that temporary greenhouse gas emissions reduction due to the pandemic will hardly affect the climate change, whose impacts might be excessive to human health, food sufficiency, ecosystems, food industry, infrastructure or capital markets investment.

Investors are already preparing for these changes. They are beginning to invest into new, up until now rather “less” attractive segments, which may become key players in the capital markets in the future, just as Apple, Tesla or Amazon nowadays are.

Water Fund

Problems connected to drought are growing and the World Economic Forum has indicated lack of water to be one of the major problems for economic communities. This may be another reason why investing into so-called water funds is becoming more attractive. A company called Water Fund, based on scientific analysis of current alternative solutions to water resources, has informed of some current water funds. Funds based in Quito, São Paulo and Rio de Janeiro reportedly showed that investment into nature-based solutions of water resources is an effective alternative to water providing in these cities.

Quito study has showed savings of $2,15 per each dollar invested into maintaining sustainable management of El Cinto by Metropolitan Public Water and Sanitation Company (EPMAPS) for 20 years.

Reports from São Paolo showed that recovery of 4,000 hectares and maintaining former vegetation lowered soil erosion during 30 days. Similarly, displacement of soil and dirt into rivers supplied by the Cantareira system lowered by 36%, and net savings should represent roughly €69 million.

Rio de Janeiro administration focused on the recovery of 3,000 hectares, what should signify 13% of investment return for public water company CEDAE. The approximate investment necessary for a planned recovery was $25 million, what would mean savings of $60 million for expenditures necessary for water treatment and net profit of roughly $39 million during 30 years. This may serve as an example that water funds contribute to U.N. goals. Ensuring water sufficiency and forest and river protection could be an interesting form of investment.

Water ETFs, such as Invesco Water Resources ETF, ranked among the most interesting investment. Its annual output was 0,55% even after March drop. Furthermore, Invesco S&P Global Water Index ETF had annual output of 0,25% and First Trust ISE Water Index Fund reported an annual evaluation of 0,99% (based on data from 11th May 2020). Startups focusing on water shortage solutions may be the right opportunity.

Solar power stations

Solar panels on rooftops are becoming more common globally. The reason is simple, they save household costs for water heating, electricity and the environment. A few years ago, Elon Musk introduced his proposals on solar rooftops and last year he even suggested that solar power stations could supply whole the territory of the U. S. The idea is still being discussed and there are many opponents. Yet, as Elon Musk proved many times in the past, he know what he talks about and can make his plans real. Solar energy is used for example by Apple, which represents the largest company user of solar energy in the U.S., according to the report by Solar Means Business. There are other companies using photovoltaic solar panels such as Amazon, Target, Walmart, Switch, Google and Tesla, which also produces them. And China aims to have its own solar power station by 2025.

Canadian Solar Inc., SunPower Corp., and JinkoSolar Holding Co. Ltd. are the world‘s leading providers of photovoltaic and intelligent energy solutions. All these companies appeared in negative numbers in March, yet had showed significant valorization before the pandemic. Future development and a change in perception of the attractiveness of each company could lead to stock growth.

Problematic segments

On the contrary, if the situation worsens, farmers may face problems, and in particular these producing corn, rice, soy and barley, a commodity used for beer production. Similarly, producers of agricultural products would be impacted. Any shortage may cause problems not only to producers but also to customers, as the low offer is likely to cause price growth. Moreover, insurance companies would have to deal with losses of agricultural holdings.

Producers of electricity from hydropower plants represent another “endangered” group in case they wouldn’t adapt to the current situation and possible future problems.

Read more

Is GBPJPY overdue for a pullback?

Is GBPJPY overdue for a pullback?

GBPJPY traded with a bid tone for the entire last week. GBPJPY is famous for its extreme volatility that’s why the cross-pair is nicknamed "the dragon" and “the beast”. This article is about the fundamental and technical outlook of GBPJPY.