Investment Adventures in Emerging Markets

Perspective

Happenstance, a ripe tomato and opportunity

In our new piece from the Franklin Templeton Institute, we examine the challenge of feeding a growing global population in the midst of climate change, geopolitical shocks and uncertainty. Mohieddine Kronfol from Franklin Templeton Fixed Income sees opportunity in controlled environment agriculture (CEA), a uniquely suitable industry for profitable, large-scale impact—truly doing good and doing well.

The following is an excerpt from the Institute’s recent paper, “Food innovation: Investing to feed our future.”

In recent months, my family has been buying delicious fresh from-the-vine tomatoes. Given the harsh climate and arid conditions surrounding Dubai, most fruits and vegetables consumed in the region are imported. Anything comparable grown locally is likely the product of hydroponic farming, as was the case with the delectable tomatoes we had been enjoying. As fate would have it, a few weeks later, an accomplished entrepreneur with a background in technology walks into our offices pitching an opportunity to participate in an equity raise for a venture he was pursuing. He and his partners, using controlled environment agriculture (CEA) technology, successfully recreated a Mediterranean climate in the middle of the desert in Abu Dhabi. They built sophisticated greenhouses that could yield more produce per square meter than the best farms in the Netherlands, doing so with a fraction of the water other processes require.

Before we get to the story of tomatoes and what they mean for future investing opportunities in the Gulf Cooperation Council (GCC),1 let’s talk about the evolution underway in the region, and aspects of change that may not be fully appreciated by the world. I have often observed that investors have a fundamental misunderstanding of the risks in the GCC region. They tend to associate GCC bonds with volatile oil prices, or worse, volatile geopolitics. Thus, GCC states are thought to be behind the curve in terms of applying environmental, social and governance (ESG) best practices. In our view, this is a misconception, particularly as it pertains to the “E” in ESG. GCC states are in fact pushing the policymaking envelope with programs to address sustainability challenges, in areas such as carbon emissions and food security.

In recent years, countries in the GCC have established ambitious food sustainability and security programs aimed at improving food production in the region. Member countries have been sponsoring and funding research and development of new and innovative farming technologies, such as drip irrigation, vertical farming, hydroponics, aeroponics and aquaponics. In addition, initiatives like seawater harvesting, soil improvement techniques, microalgae production and groundwater conservation have all played a part in improving food production. These programs are critical to food production in the region due to the arid and inhospitable climate in the GCC, as well as the lack of fertile land.

Although the food and agriculture sector in the GCC is transforming due to innovation and state-sponsored policies, the change is slow and many challenges remain. Of note, despite the bold and ambitious policymaking and programming, the GCC is still on average only 31% food secure.2 In addition, production, storage and transportation of locally cultivated produce is still very inefficient.

While there are clearly tremendous challenges facing the Gulf region as it seeks to achieve food security, there are also significant opportunities for investment. According to ADQ,3 it is estimated that US$200 billion of investment is required annually until 2050 to meet the GCC food supply and demand gap.4 Which brings us back to the delicious tomatoes my family and I enjoy over dinner, and the investment opportunity we see in technologies such as CEA.

As we have observed, demand for produce is high in the region and growing. Furthermore, given the increase in lifestyle diseases and obesity, there is heightened awareness of the need for healthy eating habits. Awareness has increased interest in locally sourced and organically grown fruits and vegetables. CEA is ideally suited to meet this demand. Through technology, regulated environments can yield resource-efficient food anywhere in the Gulf, year-round. These farming methods are more sustainable as well, and we believe they offer the most competitive solution for products with short shelf lives and low value-to-weight ratios in terms of transportation logistics. The bottom line is that CEA is a uniquely suitable industry for profitable, large-scale impact—truly doing good and doing well.

In summary, we saw an opportunity to invest in a company that could disrupt the business model of trading imported food to the GCC into a technologically advanced industrial production model. This coincides with recently articulated policies around food security, sustainable practices and water conservation. To take advantage of these opportunities, investors would do well to consider credit in emerging markets, particularly those with a commercial environment and macro policy framework that support investments in similar growth opportunities.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors or general market conditions. Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector—prices of such securities can be volatile, particularly over the short term. Small- and mid-capitalization companies can be particularly sensitive to changing economic conditions, and their prospects for growth are less certain than those of larger, more established companies. Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same factors. Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay principal on its sovereign debt. Investments in fast-growing industries like the technology and health care sectors (which have historically been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement. Real estate securities involve special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector. Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio. Franklin Templeton and our Specialist Investment Managers have certain environmental, sustainability and governance (ESG) goals or capabilities; however, not all strategies are managed to “ESG” oriented objectives.

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton. 

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal. 

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data.  Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. 

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction. 

Issued in the U.S. by Franklin Distributors, LLC, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com – Franklin Distributors, LLC, member FINRA/SIPC, is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

____________

1. The Gulf Cooperation Council (GCC) is a political and economic union of Arab states bordering the Persian Gulf. Established in 1981, its six members are the United Arab Emirates, Saudi Arabia, Qatar, Oman, Kuwait and Bahrain.

2. Sources: FCSA of UAE, NCSI of Oman, CIO of Bahrain, MDPS Qatar, GAS of Saudi Arabia, FAO.

3. ADQ is one of the UAE’s largest holding companies, with a broad portfolio of major enterprises spanning key sectors of Abu Dhabi’s diversified economy. It is both an asset owner and investor in target sectors, locally and internationally, which align with the Abu Dhabi leadership’s economic vision. Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

4. Source: ADQ, Cultivating the Future of Food, Bolstering Food Resilience, September 7, 2021.

Get Content Alerts in My Inbox

Receive email alerts when a new blog is posted.

Leave a reply

Your email address will not be published. Required fields are marked *