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Portfolio Manager, Global Resource Equities
Sustainable food and water trends Q1 2023
The global food and water system faces a significant dual problem: unsustainable practices compounded by an ever-growing population. The crisis in Ukraine has also highlighted the importance of food security.
While 2022 was a challenging year for global markets and food security, company results across the food and water value chains were broadly better than expected. This has been reflected by robust performance in 2023.
Even as costs increased and inflation continued to dominate, strong pricing across most end markets and resilient consumer demand boosted company revenues.
In particular, food retailers performed well and were resilient in the market sell-off in February and early March. We are positive this subsector will remain resilient in a potential downturn.
Moreover, companies across the water value chain rerated rapidly as market sentiment picked up at the start of 2023.
One year on from the start of the Ukraine crisis, what’s the outlook for the sector?
A year on from the beginning of the Ukraine crisis, when there were concerns over food security, we see some signs of improvement. Fertiliser prices have returned to well below pre-Ukraine crisis levels even though supply is still short due to sanctions on Belarus and Russia. We expect prices to stabilise and increase as demand picks up.
Weather extremity is again being felt this year around the world. The drought in Argentina, for example, resulted in a 50% decline in harvested volumes of crops like wheat.
Looking forward, disruptions to Ukrainian exports will continue to influence wheat prices this year and the next as the conflict persists. Even in the event of a resolution, large parts of agricultural land in Ukraine have been damaged and mined. This will likely continue to put pressure on the supply of sunflower oil and wheat, among others.
Sustainable food and water outlook H2 2023
Whilst the sustainable food and water universe had a strong start to the year, we are more cautious about our expectations for the second half of the year. This is due to three key macro developments that may continue to challenge investors: high inflation; tightening credit conditions resulting from the banking fractures which could impact consumer and residential sectors in particular; and deteriorating macroeconomic data such as purchasing manager indices.
Given the high free cash flow yields, strong balance sheets and resilient end demand, we continue to like the food retailer sector.
We also like the agricultural and irrigation equipment sectors. We believe that demand for these products will be healthy this year, and should benefit if supply chains and semiconductor supplies start to ease in the second half of the year.
Against this backdrop, we remain cautious about the direction of short-term company and macroeconomic data, but are more positive on the long term for the food and water space. This is due to the cheaper valuation backdrop, structural growth drivers, and because many of the food and water subsectors are well positioned to face riskier times ahead.
Find out more about Schroders’ sustainability insights here.
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This is a sponsored article from Schroders.