Category Archives: Sustainable Food

Thematics Make Outsized Returns in 2020

Thematics Make Outsized Returns in 2020

To say 2020 was a year unlike any other is an understatement on several fronts but despite all of it, equities finished the year higher and once again the major indices were bested by several of Tematica Research’s thematic indices. That includes several of them topping the outsized (but fairly narrowly driven) 43.6% return for 2020 registered by the Nasdaq Composite Index.

Investing between February 19th and March 23rd was a clear example of “catching a falling knife” as the uncertainty of the impact of an unfolding global pandemic set in. While that uncertainty lingered well into the 2nd quarter, some trends started to emerge that forced changes in both consumer behavior and company business models. Going into the 3rd quarter, equities recovered as economic data and earnings were somewhere between better than expected and not as bad a feared. There were some setbacks in September and October as Covid case counts surged, but stocks were once again surging in early November due to a fresh shot of hopium following positive vaccine developments and the conclusion of the presidential election. 

The bulk of the 2020 gains for the Dow Jones Industrial Average and the S&P 500 came during the fourth quarter, despite the year-end haggling over the pandemic relief bill. The same was true with the small-cap heavy Russell 2000, which climbed 31% in the fourth quarter, outpacing the other major market barometers and enabled its positive return for all of 2020. By comparison, the Nasdaq Composite Index, which closed up more than 40% in 2020, benefited from a number of factors, including the pandemic inspired accelerated shift to digital shopping, work from home and learn from home. That pull-forward in both data consumption and data creation fueled incremental network capacity additions and set up the launch of 5G networks and devices in the second half of the year. The same shift, however, led to a year over year uptick in cyberattacks culminating with the Solar Winds attacks that compromised not just federal institutions and large companies, but also platforms of Microsoft (MSFT) and FireEye (FEYE). Those catalysts in particular led to the strong December quarter showing for Tematica’s Digital Infrastructure & Connectivity and Cybersecurity & Data Privacy investing themes.

What’s to come in 2021?

It’s great to enjoy the wins, but as we all know, the stock market is a forward-looking animal and that means not taking too much time to pat ourselves on the back, but rather preparing for what lies ahead. Even as the COVID-19 vaccine is being administered, it will take months before vaccines are readily available to all who need them. Then, and only then will many politicians feel comfortable fully reopening their economies. On January 4, for example, UK Prime Minister Boris Johnson just ordered a third national lockdown to be in place through mid-February. Yes, there is a light at the end of the tunnel, but we continue to see some economic speed bumps to be had — at least at the outset of the March quarter. 

In the coming weeks, President-elect Joe Biden will be sworn into office, and despite the lawsuits, promises of legislative (and other) disruptions, the machinery of government continues to move forward. Perhaps Capitol Hill will hammer out an infrastructure spending bill that will finally address the nation’s crumbling roads, bridges, ports, airports and highways. The ongoing trade issues with China will also need to be addressed, as well as President Biden’s own agenda items.

Before Biden takes the Oval Office, two known items that we’ll contend with are the CES 2021 tech conference and the start of the December-quarter earnings season. Much like other conferences and trade shows held during the pandemic, CES will be a virtual-only event for the first time in its history. It will still feature a number of keynotes that will prognosticate on what we are likely to expect in the coming year on the technology front and “virtual” vendor booths.  

In recent weeks we’ve seen GDP expectations for the start of 2021 drift lower as the pandemic has once again presented a headwind to the economy and efforts to contain it have expanded. We’re also learning of a new strain of Covid-19 that “spreads more efficiently” but “does not seem to evade the protection that’s afforded by vaccines that are currently being used,” according to Dr. Anthony Fauci. At the same time, the distribution of vaccines in the U.S. has gotten off to a slower-than-expected start. Expectations are that vaccine activity will increase in the coming weeks and we’ll be sure to keep tabs on vaccine-related data published on the CDC COVID Data Tracker website. As the number inoculated rises in the coming months, the closer we will be to the economy returning to normal. 

The issue is it will take some time to walk down this path, which to suggests things won’t begin to normalize until the second half of 2021. We also continue to think consensus expectations run the risk of an economic and earnings speed bump in 2021. Supporting that view is the retreat in the Citibank Economic Surprise Index in recent months, and also the slowing growth reported in the IHS Markit December Flash U.S. Composite PMI data. Part of that was due to the fall in new export sales, as renewed lockdowns in key export markets dampened foreign demand.

All of this is summed up rather well by Chris Williamson, Chief Business Economist at IHS Markit who said, “… December has seen companies rein in their expectations, given the higher virus case numbers and tougher lockdown stances adopted in some states. Lockdowns in other countries were meanwhile reported to have hit exports. While vaccine developments mean some of the clouds caused by the pandemic should lift as we head through 2021, rising case numbers continue to darken the near-term outlook.” 

Normally, there tends to be some step down in economic activity from the December quarter to the March one, as consumer spending wanes in comparison to the year-end holiday shopping season. The start of 2021 is expected to see a somewhat larger step down in GDP — to 1.9% during the March quarter vs. the expected 4.1% in the December 2020 quarter, according to data published by The Wall Street Journal’s Economic Forecasting Survey. That same survey goes on to forecast GDP of 3.7% for all of 2021, which means its expectation for the other three quarters of 2021 hover around 4.0%. 

While recent COVID-19 new cases have waned some in aggregate across the U.S., hot spots remain — and that has prompted the extension of virus-fighting measures even as a new strain of the virus that spreads quicker has been found inside the U.S. Similar to what we saw after Thanksgiving, odds are we will see a post-holiday rise in new case counts in early January. Should this come to pass, in all likelihood it will mean more restrictions that will be a headwind to the economy and corporate earnings.

Earnings expectations ahead

On the December-quarter earnings front, data from FactSet shows that so far in the quarter, more S&P 500 companies issued positive earnings guidance than average. More than 80 companies in the index have issued EPS guidance for the December quarter so far and of them, roughly 30 issued negative EPS guidance and more than 55 issued positive EPS guidance. That puts the percentage of companies issuing positive EPS guidance at more than 65%, well above the five-year average of 33%. This sounds positive, but keep in mind that the total number of companies issuing guidance remains well below the five- year average for the quarter and consensus expectation for December quarter EPS is still a year-over-year decline of around 10%.

Digging into the data, we see the S&P sectors that are driving that year-over-year decline for the December quarter.

But again, the stock market is a forward-looking animal, and current expectations call for a 22.7% rebound in S&P 500 EPS during 2021 vs. 2020, as well as a 4.1% increase compared to 2019.

Circling back to the Tematica Research indices that we shared at the outset, their EPS prospects over the 2019-2021 period are multiples greater than for the S&P 500. We attribute this to the pronounced tailwinds that are powering both each of those themes as well as the revenue, EPS and cash flow of the aggregated constituents. One rule of thumb on Wall Street is that faster EPS growth tends to spur multiple expansion, which is a pretty powerful one-two combination for stock prices and index constituents. Reflecting on the below data, it looks like 2021 will be another year of outperformance for several Tematica Research themes and indices.

Hershey Accused of Skirting Sustainability Program

Hershey Accused of Skirting Sustainability Program

How do you buy cocoa without buying cocoa? Apparently, through utilizing the cocoa futures market. Hershey seems to step out of some warm milk and into some hot water with its latest approach to procuring cocoa.

Ivory Coast and Ghana are cancelling all cocoa sustainability schemes that U.S.-based Hershey runs in their countries, accusing the chocolate maker of trying to avoid paying a cocoa premium aimed at combating farmer poverty.

Source: Ivory Coast, Ghana cancel cocoa sustainability schemes run by Hershey

Unilever targets $1.2 billion sales target for meat and dairy alternatives but it’s simply not good enough

Unilever targets $1.2 billion sales target for meat and dairy alternatives but it’s simply not good enough

The plant-based meat market is expected to grow enormously in the coming years given the shift in consumer preferences for sustainable. Barclays predicting the market will grow by more than 1,000% over the next 10 years to reach $140 billion by 2029. It comes as no surprise to us then that companies would look to capture that tailwind to drive revenues, profits and cash flow.

Recently Unilever (UL) announced plans to dramatically increase sales of plant-based meat and dairy alternatives as part of a new sustainability program designed to shrink the environmental footprint of its food brands. While the company targets $1.2 billion of plant-based foods and dairy alternatives over the next five to seven years, consensus revenue forecasts put the company’s 2023 revenue near $64.4 billion.

Despite Unilever’s good intentions, that context means less than 2% of its revenue in the coming years would be derived from plant-based foods and dairy alternatives. Under the Tematica scoring system that barely gives the company a low-level “1” score for our Sustainable Future of Food investing theme and index with Foxberry.

The Anglo-Dutch consumer goods giant said last week that it plans to sell more than $1.2 billion worth of plant-based foods and dairy alternatives within the next five to seven years, largely by boosting sales from its The Vegetarian Butcher brand and increasing the number of vegan alternatives across its extensive portfolio.

Unilever acquired plant-based meat company The Vegetarian Butcher in late 2018 and since has expanded the brand into more than 30 countries and secured a major supply deal for the firm’s vegan patties and nuggets with Burger King. In the same time frame, it has launched a number of vegan products for its most high profile brands, including Hellman’s, Magnum and Ben & Jerry’s.

“As one of the world’s largest food companies, we have a critical role to play in helping to transform the global food system,” said Hanneke Faber, president of Unilever’s food and refreshment division. “It’s not up to us to decide for people what they want to eat, but it is up to us to make healthier and plant-based options accessible to all. These are bold, stretching targets which demonstrate our commitment to being a force for good.”

 

Source: Unilever sets $1.2B sales target for meat and dairy alternatives | Greenbiz

Be The Change You Want to Eat?

Be The Change You Want to Eat?

After over 920 years, Oxford University has been prompted to make a bold step forward in making menu changes that will not only benefit the environment (assuming more institutions follow suit) but also help their students lean towards a healthier diet. No word on the fate of the “traditional English breakfast” – yet.

BURGERS and lamb chops may soon be off the menu after Oxford students voted to ban meat from the university.

Source: Students vote to ban meat from university

The Future of Agriculture is Now!

The Future of Agriculture is Now!

In as much as hydroponic farming was an agriculture curiosity in the 1980’s (and quickly relegated to growing “Hydro Weed”) that technology coupled with some clever algorithms and space planning has given rise to crop yields that would make Thomas Malthus himself throw up his hands in frustration.

95% less water. 99% less land. 400X more yield.

Source: This 2-Acre Vertical Farm Out-Produces 720 Acre ‘Flat Farms’

Thematics outperform the broader equity markets in October

Thematics outperform the broader equity markets in October

A confluence of factors weighed on equities in October including the resurgence of the coronavirus that resulted in fresh restrictions late in the month, scuttled fiscal stimulus talks in Washington, renewed US-China trade tensions, the continuation of Brexit talks, and the lead up to the final innings of the contentious 2020 US presidential election. The end result saw the major market indices record their worst month in several with the S&P 500 shedding 2.8%, which added to its September losses and left it up 1.2% through the first 10 months of 2020. The Dow Jones Industrial Average fell 4.6% in October, leaving it down 7.1% with two months left to go in 2020. In comparison, all six of Tematica Research’s thematic indices outperformed both of those major market barometers in October, once again confirming that only by thinking differently can investors hope to outperform.

With Election Day 2020 having finally arrived, investors are anxiously waiting for the presidential results and those for the U.S. Senate, which will determine its political composition for the next few years. There is chatter of a potential Blue Wave, but we are likely in for a nail biter of an evening.

Barring a landslide victory by either Trump or Biden, which, depending on your view of potential swing states is either highly probable or wishful thinking, the probability is high the next president will not be declared quickly. Indeed, we would not be surprised if a contested election emerges. When that happened in 2000, it took five weeks, complete with recounts and court rulings, to know the outcome of the presidential race, and in that time volatility was a recurring factor for U.S. equity markets.

If we get a split decision — a president from one party with the other party a majority in the Senate — odds are we are in for four years where little will get done in Washington. It wouldn’t be the first time.

Stepping back we have to ask: will a changing of the guard have a demonstrative impact on our investment themes and indices?

Will the shift to digital shopping slow in the near-term? Probably not, especially given what is unfolding with the COVID-19 pandemic.

Will people stop streaming video content? Not likely. Even Walt Disney (DIS) now refers to its box office facing business as a legacy one as it focuses on its Disney+ streaming service.

Are people going to stop looking for food and other products that have cleaner ingredients and environmentally friendly packaging? Will farmers stop buying agricultural equipment that will help drive crop yields and productivity? Doubtful on both counts.

Will the deployment of 5G networks and 5G smartphones come to a grinding halt? Again not likely.

And so on…

Yes, the players in Washington may change and during that process, there will be some immediate to short-term volatility but the structural changes that power Tematica’ investment themes will continue on. That said, we’ll be sure to watch policy changes and regulatory mandates in the coming quarters to identify any potential headwinds as well as new tailwinds that could further entrench the structural changes that underpin our investment themes and indices.

Impossible Foods Seeking World’s Best Scientists

Impossible Foods Seeking World’s Best Scientists

Not content to simply offer alternatives to beef production and consumption, Impossible Foods announces goal to “Eliminate Animal Agriculture”

With a mission to reverse global warming and halt catastrophic biodiversity collapse, Impossible Foods is replacing the world’s most destructive technology – the use of animals to transform plants into meat, fish and dairy foods.

Source: Impossible Foods Is Doubling Its R&D Team and Seeking World’s Best Scientists To Help Eliminate Animal Agriculture

What Is Precision Farming, And Who Are The Players To Watch?

What Is Precision Farming, And Who Are The Players To Watch?

Food is perhaps the best known consumable product, and the economic laws of supply and demand are pointing to an emerging pain point unlike any we have seen in recent history. To combat this looming problem, the agriculture industry is embracing technology, much of which is similar to that housed inside the smartphones we use today, giving rise to the precision agriculture market.

Read more here

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