Investing in 3 inflation-fighting themes


Jay Jacobs Jul 22, 2022

KEY TAKEAWAYS

KEY TAKEAWAYS

  • Inflation is running at levels not seen in 40 years; whether or not it has peaked, we believe that moderation will be a long process.1 Despite the challenges inflation presents for the broader economy, there are several long-term structural themes that we believe could provide some resilience against higher inflation, either by producing solutions that may help reduce costs or through insulated business models. Specifically:
  • Rising food prices are a primary contributor to inflation. Agricultural technologies and alternative proteins represent critical solutions to lowering food costs.
  • Higher energy prices are making clean energy sources an attractive alternative given their steady power generation costs and relative insulation from geopolitical pressures.
  • The inelastic demand for infrastructure services, coupled with infrastructure companies’ long-term fixed debt servicing, relatively high dividend payments, and unprecedented public sector spending, underscore how infrastructure investments may offer some inflation-resilience alongside long-term growth potential.

    AGRICULTURAL TECHNOLOGY AND FOOD INNOVATION TO HELP COMBAT FOOD INFLATION

    AGRICULTURAL TECHNOLOGY AND FOOD INNOVATION TO HELP COMBAT FOOD INFLATION

    Dollar menus’ and dollar pizzas’ days are numbered

    We anticipate there could be significant investment in agricultural technology and food innovation in the face of continually rising food production costs. To the many consumers who still mourn the dollar menu, brace yourselves: Inflation might be coming for the whole meal – fast food menu prices were 7.4% higher this June compared to last year. And more broadly, the most recent CPI report showed domestic food prices increased at a 10.4% YoY pace, the largest jump in over forty years.2

    Precision agricultural and agricultural robots can produce more food, on less land, with significantly less water and other inputs, allowing for substantial efficiency gains and lower food production costs. This could prove game-changing for food supply chains, which are currently under duress as geopolitical conflict hits global grain stores. Take smart-crop monitoring, for example. This solution uses real-time sensors and imagery to direct delivery of water and nutrients within a farm system to where it is most needed; deployment could drive an additional $175 billion in global GDP.3 Agricultural producers were already turning to technology to increase output and drive profitability. The global market for precision agriculture reached an estimated $7 billion in 2021.4 Now, productivity benefits from this technology could help alleviate food shortages and combat inflation, while driving immediate revenues for agricultural technology companies. By 2030, precision agriculture sales are expected to reach $21 billion, growing at a 12.8% compound annual growth rate.5

    Precision agriculture can combat inflation by maximizing crop yields and reducing input requirements

    Precision agriculture efficiency gains vs. traditional farming methods (%)

    chart

    Source: Association of Equipment Manufacturers, "The Environmental Benefits of Precision Agriculture in the United States,"  2021.

    Chart Description: Column chart showing efficiency improvements in agricultural inputs and outputs precision agriculture technologies offer versus traditional farming methods. The chart shows how precision agriculture can dramatically reduce agricultural inputs, while maximizing outputs.


    Controlled environment agriculture (CEA) companies could similarly benefit. CEA enables efficient indoor crop cultivation, making it possible to produce food year-round in urban environments that are closer to consumers and therefore not reliant on strained supply chains. Produce grown in indoor vertical farms, for example, travels just 43 miles on average, compared to 2,000 miles for conventionally cultivated products.6 CEA companies could experience heightened near- and long-term revenue growth as the world grapples with the immediate reality of strained global food supply chains.

     

    Within food innovation, lab-grown meat is taking an entirely different approach to rethinking food production. Raising livestock is resource-intensive, requiring significant crops, land, and water before animals reach maturity. This makes animal products, like meat, extremely susceptible to stressed supply chains and food inflation. Lab-grown, or cultivated, meat, on the other hand, can be made from just a small sample of animal cells, minimizing the impact of exogenous factors on its availability and price. While lab-grown meat is still early-stage, we expect today’s challenges to accelerate development efforts, potentially benefitting the companies involved.

    CLEAN ENERGY TO COMBAT ENERGY INFLATION

    CLEAN ENERGY TO COMBAT ENERGY INFLATION

    Economically lean and environmentally clean

    Amid high inflation, clean energy is enjoying a renewed focus given its stable power generation costs, relative affordability, and local footprint. Ensuring the continuity of affordable energy supplies during the energy transition will require fossil fuels like natural gas for power and heating in certain regions.  But energy market shocks may also accelerate investments into renewable energy in places where energy security goals are aligned with decarbonization, since, for consumers, energy shocks are like carbon taxes that make renewable energy more competitive.

     

    Clean energy sources like wind and solar can generate energy in a variety of natural or geopolitical environments, making reliable production more shock resistant. Moreover, we see the price of clean power generation is currently generally stable, rather than variable, because inputs are not linked to volatile commodities like oil. While environmental factors can vary, optimized systems featuring multiple clean energy sources, and supportive infrastructure like smart grids and energy storage, can offer reliable and consistent energy. As of 2021, clean power is already significantly more affordable than fossil fuel energy – on a levelized cost of electricity basis, solar and wind power are now 1/3 of the price of coal and a little less than 2/3 of the price of natural gas.7 Additionally, clean power tends to be generated locally, rather than imported, offering economies greater control over their energy supply amid inflation-inducing supply chain disruptions.

    Clean power is more affordable than fossil fuels

    Levelized cost of electricity, by source (2020 USD/kWh)

    Source: IRENA, "Renewable Power Generation Costs in 2020," June 2021.

    Line chart showing the levelized cost of electricity, or the price electricity must sell for in order for a power source to breakeven over its lifetime, across wind sources, solar sources, and fossil fuels. The chart shows how power from wind and solar sources is generally more affordable than power generated by fossil fuels.


    The energy transition will not happen overnight, but clean energy’s characteristics are accelerating the transition and can drive immediate revenues for clean energy companies. We are already seeing meaningful commitments to ramp up clean energy generation amid today’s supply shock. In late-February, Germany announced its intention to fully transition to clean power by 2035, 15 years sooner than its previous target.8 And, just a week later, the European Union announced plans to fast-track clean energy adoption and phase out Russian fossil fuels “well before 2030.”9

    INFRASTRUCTURE AS A POTENTIAL BUFFER AGAINST INFLATION

    INFRASTRUCTURE AS A POTENTIAL BUFFER AGAINST INFLATION

    Cementing a place in portfolios

    Infrastructure stocks could prove resilient amid high inflation and rising rates. They tend to hail from value-oriented sectors like utilities, industrials, and materials, where valuations are driven primarily by near-term cash flows rather than long-term growth expectations. Many infrastructure asset owners have additional lines of defense against inflation, including: (1) 10- to 20-year contracts that reset their pricing in parallel with changes in inflation; (2) long-term fixed interest rate debt that erodes in relative cost as inflation rises (i.e., their interest payments remain the same, even as the dollar depreciates); and (3) a tendency to pay large dividend payments — dividends often increase during inflationary periods.10

    Public sector spending serves as an additional tailwind for infrastructure investments. In the U.S., the Infrastructure Investment and Jobs Act (IIJA) is directing $1.2 trillion in government spending to rebuild and enhance U.S. infrastructure, regardless of a changing market environment. At the same time, global infrastructure spending is accelerating as an intentional solution to many of inflation’s drivers – most specifically, supply chain pressures. In our view, this spending could mute the impact of today’s macroeconomic challenges and provide investors a compelling growth opportunity.

    CONCLUSION

    CONCLUSION

    Thematic approach to inflationary challenges

    Long-term structural themes are not only resilient to inflation today but could help alleviate inflationary pressures tomorrow. Investors looking to access these long-term structural themes may want to consider Megatrend ETFs to gain exposure to themes, such as emergent food and agricultural technology, clean energy, and infrastructure to seek long-term growth potential and to help hedge against rising inflation.

     

    Jay Jacobs

    Jay Jacobs

    U.S. Head of Thematics and Active Equity ETFs, at BlackRock

    Andrew Little

    Megatrend Strategist

    Contributor

    Mariah Ward

    Megatrend Strategist

    Contributor

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