Now is a good time to consider investing in the growth potential of a wide range of innovative sustainable food and agriculture companies. Sector specialists at Impax Asset Management explain the investment case.1
Our sustainable food strategy managed by Impax invests in solutions that address environmental and societal challenges in the food and agriculture value chain. Despite tough conditions in the past two years, the next 12 months should see the strategy offering 10% earnings growth versus 8% for global equity markets as represented by the MSCI ACWI index.2
We believe this reflects the robust trends in the sustainable food sector and that now is an opportune time to invest as valuation dislocations present compelling entry points for long-term growth.
Compelling investment case
The sustainable food strategy focuses on companies that reduce the environmental impact of food production, provide nutritious and healthy food, enhance food safety, and promote higher animal welfare standards.
The investment opportunity arises from a significant global shift away from conventional practices towards sustainable production and consumption.
This transition is projected to require an additional USD 300 billion in capital investment annually through 2030. The drivers include consumer preferences increasingly leaning towards healthier, less environmentally impactful options. Regulatory bodies are implementing stricter measures to promote sustainability across the food supply chain.
As this transition accelerates, it is creating risks for traditional food companies and opportunities for forward-thinking investors.
Solution providers set to grow
The strategy benefits from exposure to strong growth trends:
- Food testing: This industry has benefited from greater industry regulation and consumer demand.
- Healthy food regulation: For instance, UK laws targeting products that are high in fat, salt or sugar (HFSS) have spurred food ingredient companies to reformulate products to include healthier, natural components.
These are just two examples of how regulatory shifts, increasing consumer awareness and demand for transparency are unlocking growth for solution providers.
Positive momentum in major sectors
Over the last 18 months, investor attention has been diverted by mega-cap technology stocks. Even so, the sustainable food strategy’s absolute returns have remained positive and we see positive momentum emerging from certain sectors:
- Consumer staples: Packaged food companies faced volume concerns as high food inflation and rising interest rates weakened consumer spending. However, as inflation starts to normalise, consumer confidence and spending power should recover
- Industrials: Agricultural machinery firms were hit by lower commodity prices and higher input costs. This constrained capital expenditure by farmers. However, the agricultural cycle is now expected to bottom out, setting the stage for a recovery.
Against this backdrop, the strategy is well positioned to capture opportunities among fast- growing, mid-cap companies, especially as investor sentiment shifts towards sectors with strong growth potential and attractive stock market valuations.
The valuation dislocation seen over the last 18 months, in our view, creates a temporary opportunity for investors. We believe the strategy’s premium is likely to return as market conditions stabilise and investors refocus on long-term growth and sustainability themes.
Farm-to-fork diversification
The broad exposure across the food and agriculture value chain ensures access to opportunities in both defensive and cyclical sectors. Looking ahead, we see the strongest opportunities across these sub-sectors and stocks:
- Precision agriculture: Compelling opportunities lie in technologies that reduce input waste and improve efficiency. Precision agriculture enhances productivity and helps optimise the use of resources such as water, fertilisers and pesticides.
- Sustainable packaging: The shift towards sustainable packaging is being driven by both consumer demand and regulatory requirements, with increasing restrictions on single-use plastics. Companies that provide innovative, eco-friendly packaging solutions are well positioned to benefit from this trend.
- Food ingredients: Growing consumer awareness of the health risks of ultra-processed foods is driving demand for natural and organic alternatives. Companies that offer high-quality, nutrient-dense products are benefiting as consumers seek healthier options that align with their wellness goals.
Well-positioned to capture upside potential
The transition to more sustainable and healthier food systems offers significant growth opportunities. We believe current valuations present compelling entry points for long-term investors.
With improving economic conditions and a growing focus on food industry sustainability, the strategy should be well-positioned to capture upside potential across the food and agriculture value chain.
[1] Also read the full investment update on the sustainable food strategy.
[2] On a weighted average basis; source: Impax, as of 30 November 2024.
