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          Thematic Commentary – 31 July

          Thematic Investing

          Written by: Tom Barker, CAIA

          Published: 13 August 2023

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          In today’s rapidly evolving market, investors need to stay on top of the latest trends and themes that fuel growth. In this monthly publication, we offer our market commentary across our themes, covering new opportunities and potential challenges. By providing a deeper understanding of our themes, we aim to help you make more informed investment decisions and achieve your investment goals.

           

          Circular Economy1 2

          In July there were major developments evidencing how the transition to a circular economy is gaining traction.

          Firstly, the European Union announced the adoption of new regulation on batteries and waste batteries. The regulation aims to promote a circular economy by regulating the entire life cycle of batteries, from production to reuse and recycling, ensuring that they are safe, sustainable and competitive.

          It includes seven key provisions:

          • A compulsory carbon footprint declaration and label for certain types of batteries.
          • Designing portable batteries in appliances so consumers can easily remove and replace them.
          • A digital battery passport for certain types of batteries.
          • A due diligence policy for all economic operators, except for SMEs.
          • Stricter waste collection targets for portable and LMT batteries.
          • Minimum levels of materials recovered from waste batteries.
          • Minimum levels of recycled content from manufacturing and consumer waste for use in new batteries.

          Meanwhile, we had an important update from Li-Cycle, a global lithium-ion battery resource recovery company and North America’s largest lithium-ion battery recycler. Established in 2016, this innovative company recovers critical battery-grade materials, creating a domestic closed-loop battery supply chain. In July, the company announced the start of commercial operations at its first Spoke facility in Europe, located in Magdeburg, Germany.

          Spoke facilities process and sort waste locally before sending it to larger Hub facilities for further resource recovery. This distribution network is known as the “The hub and spoke model.” Li-Cycle’s new facility can process up to 30,000 tonnes of lithium-ion battery material annually, making it the largest in their portfolio and one of the continent’s largest. Furthermore, there are plans to establish additional Spokes in France and Norway, aiming for a global Spoke network with over 100,000 tonnes of battery material processing capacity per year. Li-Cycle is also constructing a commercial Hub facility in New York and planning another one in Italy, which will contribute significantly to Europe’s battery recycling industry. These developments showcase Li-Cycle’s ability to deploy its modular technology globally and reflect the soaring global demand for re-cycled battery components.

          Sustainable Food3

          In July, Russia refused to renew the wartime deal that allowed the safe shipment of Ukrainian grain through its ports in the Black Sea. Ukraine and Russia are two of the world’s largest agricultural producers and almost 33 million metric tonnes of grain have been exported since the Black Sea Grain Initiative was brokered a year ago. Russia’s foreign ministry said the termination of the deal also means the

          withdrawal of navigation safety guarantees, curtailment of the maritime humanitarian corridor, and restoration of the regime of a temporarily dangerous area in the northwestern Black Sea”.

          Russia has since attacked targets in the Odesa region including critical river port facilities and grain silos. These developments could spell trouble for food prices, as well as global food security, just as inflationary pressures are easing. Impacts have been felt on global markets with wheat, maize and soybean oil prices rising notably in July. The UN’s food-price index, which measures prices across a basket of commodities globally, rose by 1.3% in July reversing a downward trend that has seen the index fall -6.0% this year to the end of July.

           

          Environmental Impact4 5

          Recent developments have served a timely reminder that climate risks are financial risks. The withdrawal of insurance giants (Allstate, Statefarm Insurance and AIG) from high-risk areas like California is a clear wake-up call for the industry. Climate-related natural catastrophes are happening more frequently and intensifying. Even if we are somehow able to achieve the elusive 1.5°C Paris Agreement target by 2030, nearly half the world’s population will still face climate hazards. Whilst sustainability-minded investors typically look at the mitigation trade, accelerating adaptation investments are a crucial component of the green transition.

          Building resilient infrastructure is a key aspect of climate adaptation. Arcadis, NV5, and Great Lakes Dredge & Dock Company, LLC are all leading the way in engineering and infrastructure solutions. Arcadis, for example, focuses on designing and engineering infrastructure that can withstand the impacts of climate change, such as extreme weather events, rising sea levels, and flooding. This includes resilient transportation systems, water management solutions, and urban planning. With the imminent flood of investments in adaptation-related industries, there are numerous opportunities available for impact investors who look beyond crowded clean energy and climate mitigation trades.

           

          EdTech6

          The rapid advancement of technology and the ease of content creation has led to an abundance of online learning materials, making them difficult to manage and navigate.

          While platforms like ChatGPT and TikTok offer quick answers, finding rigorous educational experiences has become increasingly challenging in an era of ever-narrowing attention spans! Grasp, an online learning platform, has raised €EUR 3.6 million in seed funding led by Balderton Capital to address this issue.

          Co-founded in 2022 by former Revolut employees Ed Matthews and Jacob Sidorov, Grasp aims to accelerate human learning and become a central hub for comprehensive learning in various fields. Grasp is developing tools to provide optimal online learning experiences, initially focusing on modern vocational skills like programming. The platform’s mission is to help people accelerate learning, deepen knowledge, and expand skill sets.

           

          Cybersecurity7 8

          July was an eventful and transformative month in the realm of cybersecurity, with both hackers and defenders making significant moves. Several cybersecurity companies, including Palo Alto Networks, Fortinet, and Netskope, announced product launches. For example, Palo launched its CI/CD Security module to provide integrated software delivery pipeline security. The U.S. Securities and Exchange Commission introduced two crucial cyber incident disclosure regulations, requiring publicly traded companies to disclose cyberattacks in an 8-K filing within four business days and provide annual information on cybersecurity risk management and board oversight. These regulations are expected to have a substantial impact, incentivizing companies to take cybersecurity more seriously. One of the highest profile attacks in July involved hackers exploiting a software vulnerability in Revolut’s payment systems, resulting in the theft of approximately $20 million. The cyber incident persisted for months in 2022 before being closed.

          The vulnerability caused communication issues between Revolut’s European and US payment systems, enabling criminals to exploit the system and steal around $USD 23 million. Revolut managed to recover some funds, but the company still suffered a net loss of $20 million.

          Medical Cannabis9

          As patients around the world are becoming increasingly cognisant of the negative side effects associated with traditional pharmaceutical drugs such as anti-depressants, there is a pressing need to find viable alternatives. A recent study by the University of Massachusetts and the University of Utah, in collaboration with cannabis research institutes, revealed that over 90% of U.S. military veterans using medical marijuana experienced an enhanced quality of life. The research analysed self-reported data from 510 veterans who consumed marijuana, with two-thirds using it daily and one-third using it to reduce reliance on other medications, such as anti-depressants and

          non-steroidal anti-inflammatories. About 21% reported a decrease in opioid-based medication use with cannabis. The study suggests medicinal cannabis could serve as a harm-reduction tool, particularly for veterans seeking to reduce pharmaceutical drug usage. However, the study has limitations, including self-reported data and potential funding biases. Furthermore, congressional efforts to explore marijuana’s medical potential for veterans have encountered obstacles.

           

          Digital Payments10

          In July we had quarterly earnings results from card payment networks Visa and Mastercard. The closely monitored earnings reports for these companies act as a global barometer of payments activity. In Q2 2023, Visa and Mastercard experienced revenue growth driven by cross-border volumes thanks to resilient consumer spending and a gradual return to travel. However, the year-over-year growth rates were slower due to the current macroeconomic environment that contrasts to the post-Covid travel surge from the previous year.

          Visa reported a 14% increase in international transaction revenues, significantly lower than the 48% growth seen during the travel recovery period. Nevertheless, cross-border card transactions remained strong, with Visa’s travel-related cross-border volumes up 41% compared to four years ago. Mastercard saw a 24% growth in cross-border volume, higher than Visa’s, but slower than the previous year.

          Both companies also provided updates on their B2B offerings, with Visa mentioning a partnership with Alchemy Pay in Mexico and Mastercard launching Mastercard Cross-Border Services Express to accelerate customer onboarding.

          Petcare11

          Conglomerate Nestlé has not historically been known as a significant player in the pet care industry but revenues attributable to its pet care division have grown over the last few years, reflecting the growth of the industry. This trend showed no signs of abatement as Nestlé released its half year results in July.

          Its Purina pet care division was the main driver behind the company’s positive financial performance in H1 2023, generating sales of CHF 9.37 billion. Organic growth for its pet care segment reached 13.9%, led by popular products like Purina ONE, Purina Pro Plan, and Friskies.

          The category also experienced the most significant impact of price increases among all Nestlé’s businesses, with prices rising by 12.1% during the first half of the year. In Europe and North America, Purina PetCare played a crucial role in driving growth, with differentiated offerings in premium brands like Felix, Gourmet, and Purina ONE. In Asia, Purina achieved high single-digit growth, and particularly in China, double-digit growth was reported due to the popularity of Purina Pro Plan and Fancy Feast. Nestlé has an optimistic outlook for the rest of 2023, expecting 7-8% organic sales growth and an improvement in gross margin.

           

          Emerging Markets12

          In July, global market sentiment remained upbeat as developed market inflation declined and GDP data showed resilience. Emerging markets (“EM”) were a strong beneficiary, with the MSCI Emerging Markets index returning 6.3%, surpassing the 3.4% return in developed markets.

          Looking ahead, the outlook for EM appears promising. These markets continue to offer attractive valuations, with analysts anticipating higher growth rates in 2024 compared to their developed counterparts. The emergence of generative AI and tech-related gains, particularly in the Information Technology sector (the second-largest sector in the MSCI Emerging Markets Index by weight at approximately 20%), have also been beneficial for equities in EM. Moreover, central banks in EM economies have been proactive in addressing inflationary risks, implementing a series of rate hikes in 2021 that extended into early 2023. This timely response has enabled them to reap the benefits of reduced core inflation ahead of the developed world. Overall, these factors contribute to the positive outlook for EM economies and further strengthen their position in the global economic landscape.

          References

          1

          Li-cycle, “Li-Cycle Starts Operations at its First European Lithium-Ion Battery Recycling Facility, One of the Largest on the Continent”, August 2023. Available at: https://li-cycle.com/press-releases/li-cycle-starts-operations-at-its-first-european-lithium-ion-battery-recycling-facility/

          2

          European Council, “Council adopts new regulation on batteries and waste batteries”, July 2023. Available at: https://www.consilium.europa.eu/en/press/press-releases/2023/07/10/council-adopts-new-regulation-on-batteries-and-waste-batteries/

          3

          Reuters, “Russia bombs Ukraine ports, threatens ships, as Kyiv deploys cluster munitions”, July 2023. Available at: https://www.reuters.com/world/europe/russia-warns-ships-black-sea-ukraine-create-temporary-grains-export-route-2023-07-19/

          4

          Sustainable Market Strategies, July 2023

          5

          The Real Deal, “AIG joins pack of insurers reducing coverage in climate-risk areas”, June 2023. Available at: https://therealdeal.com/national/2023/06/08/aig-joins-pack-of-insurers-reducing-coverage-in-climate-risk-areas/

          6

          EU Startups, “London-based edtech Grasp raises €3.6 million to increase the rate at which humans learn”, August 2023. Available at: https://www.eu-startups.com/2023/08/london-based-edtech-grasp-raises-e3-6-million-to-increase-the-rate-at-which-humans-learn/

          7

          CRN, “10 Cybersecurity Companies Making Moves: July 2023”, August 2023. Available at: https://www.crn.com/news/security/10-cybersecurity-companies-making-moves-july-2023

          8

          CS Hub, “The top 6 cyber security incidents in July 2023”, July 2023. Available at: https://www.cshub.com/attacks/articles/the-top-6-cyber-security-incidents-in-july-2023

          9

          Leafie, “Cannabis use ‘significantly improves quality of life’ for US Veterans, study finds”, July 2023. Available at: https://www.leafie.co.uk/news/cannabis-improves-quality-life-veterans/

          10

          FXC Intelligence, “Cross-border growth slows for Visa and Mastercard in Q2 23” ”, July 2023. Available at: https://www.fxcintel.com/research/analysis/cross-border-growth-slows-visa-mastercard-q2-23

          11

          Nestle, “2023 Half-year results”, July 2023. Available at: https://www.nestle.com/media/mediaeventscalendar/allevents/2023-half-year-results

          12

          Bloomberg, July 2023.

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