AIMCo's Jonathan Braams on the Benefit of Total Landscape Management
Despite the prevalence of farming in its home province, the Alberta Investment Management Corp.’s agricultural portfolio is just 13 years old, the product of a 2010 investment in converted farmland held by Australian timber producer Great Southern Group.
The properties proved too arid for tree growth and were converted back to croplands for canola, wheat and barley, planting the seed that would grow into the AIMCo’s agriculture investment mandate in 2016.
“I think one of the biggest things we realized is, when we buy land investments, we don’t necessarily need to restrict ourselves to either just doing trees or just doing crops,” says Jonathan Braams, manager of the organization’s infrastructure and renewable resources portfolio.
“We saw the benefit of total landscape management — you plant what’s most suitable based on the soil types [and] the topography of the area, the climate zones and even the microclimates within some of these larger properties that we bought.
“We found that agriculture had a lot of the same characteristics of timberland, but was a little bit different at the same time — we love timberland because we found that big land-based holdings had very good inflation protection.”
With both inflation and global temperatures climbing, agriculture is set to play a larger role in institutional investors’ portfolios in the future.
A growing concern
Since 2016, the AIMCo has continued to expand its agricultural focus to domestic investments, such as those made through farmland manager Bonnefield Inc.
The investment organization also continues to invest in Australian agriculture: in 2021, it became a co-owner of Lawson Grains — which produces more than 200,000 tonnes of cereals and vegetable oils per year — through a partnership with investment management firm New Forests Ltd.
The AIMCo’s agriculture investments in Western Australia and New South Wales have provided substantial diversification, says Braams, noting the two regions represent different markets and purposes. “Western Australia is primarily an export-oriented market for grants and then New South Wales is primarily domestic customers. [These properties are also] within five different climatic zones with different rainfall patterns, so there was diversification because of the significant geographic spread.”
Other Canadian institutional investors have made similar investments in recent years. In 2020, the Caisse de dépôt et placement du Québec and a partner launched a co-investment to support ventures that aim to make the food and agriculture industry more sustainable and climate friendly. Last year, the Public Sector Pension Investment Board entered a strategic alliance with Spanish produce vendor Citri & Co. and also acquired a portfolio of 35 Australian vineyards, including associated water entitlements, crops and equipment. And in March 2023, the Australian agricultural arm of the Ontario Teachers’ Pension Plan purchased a majority stake in Mitolo Family Farms Ltd., which grows, harvests and packages onions and potatoes.
As global markets make stronger-than-expected recoveries from the economic impact of the coronavirus pandemic, the spectre of rising inflation remains ever present. In July, the Bank of Canada increased its benchmark interest rate by 25 basis points to five per cent following the exact same increase the previous month. And while the U.S. Federal Reserve held its rate at five per cent to 5.25 per cent, it remains the highest in 16 years.
Over the last year, agriculture’s inflation hedging qualities have helped the AIMCo weather economic turbulence due to land price appreciation of properties in its portfolio, says Braams, adding institutional investors’ increasing demand for agricultural lands — particularly those owned by farmers seeking to expand operations — is driving up prices and partially offsetting some of the upward pressure of interest rates.
“We have not seen significant compression in valuations — we’ve actually seen the opposite. You would expect discount rates would tick up on assets globally and that would bring down valuations, but that certainly hasn’t been the case.”
By investing in agriculture assets beyond the land itself — such as agricultural services and fertilizer or chemical companies — institutional investors can also access operational leverage and make their investments outperform amid rising inflation, says Chris Faulkner-MacDonagh, co-portfolio manager of T. Rowe Price’s real assets fund. “What we’ve found is particularly helpful for our [institutional investor] clients is that high elasticity. You want a highly volatile sector that responds quite positively on the upside when inflation comes.”
Turning up the heat
According to a 2023 report by the United Nations’ intergovernmental panel on climate change, the global temperature currently sits at 1.1 degrees Celsius above pre-industrial levels and continues to climb towards 1.5 degrees, the target temperature of the 2015 Paris Agreement.
While the report found there are still measures that could be taken to slow or halt rising temperatures, the impacts of climate change are increasing in the form of catastrophic weather events — such as the wild fires raging across Canada — and record heat.
One reason institutional investors may consider agriculture is that the increased severity of climactic events is putting additional pressure on cost curves for agriculture companies and enhancing their ability to generate outsized profits, says Faulkner-MacDonagh. However, he notes climate change is also increasing the volatility and uncertainty of economic shocks.
In addition to inflation and climate change, rising geopolitical tensions are also impacting agriculture investments, he adds, pointing to Russia’s invasion of Ukraine in February 2022 when global wheat prices skyrocketed. “[Agricultural investments] provide a steady stream of real income because they’re tied to agricultural prices and farmland income.”
While the world’s growing population will put finite resources under increasing pressures, the need for a global food supply will always remain, making agriculture an attractive asset class to institutional investors seeking to grow plan members’ money over the long term while exacerbating the threat of climate change, says John Cook, Mackenzie Investments’ senior vice-president, portfolio manager and co-lead of the Greenchip team.
“We’ve got a very crowded planet. And currently, a lot of that population is eating a developing market diet and they’re striving for a middle class or Western diet, which requires more [energy] input and is more carbon intensive.”
However, the challenges posed by an expanding populace and climate change also provide opportunities for investors to innovate. For example, as farmlands are at the increased environmental risk of a warming planet, investments in products such as herbicides, fungicides and insecticides are becoming increasingly attractive, says Cook, as are fertilizers that are less carbon-intensive such as those made from blue and green ammonia.
Technology that limits water usage — such as drip irrigation and tractors outfitted with cameras that allow farmers to direct water to crops and away from weeds — also provides lucrative investment opportunities while preserving resources, he adds. “All of these technologies are coming together to really reduce the amount of energy needed to make farmland productive — and it’s a really, really rich investment space.”
Energy-efficient technology can also help institutional investors extract more value from the farmland they own while reducing their carbon footprints. On the AIMCo’s Australian properties, it uses state-of-the-art farming equipment that allows farmers to monitor fertilizer and chemical levels and apply them in targeted applications instead of blanket spraying entire fields, says Braams.
“We not only save costs, but it’s also more environmentally friendly by putting less inputs on the farm. And that’s been especially important recently with input prices having gone up [during the pandemic].”
Challenges from climate change and inflation are also reshaping investments in livestock, says SofÃa Condés, head of investor outreach at the Farm Animal Investment Risk & Return initiative, noting the global food system is highly dependent on a very limited amount of crops for both human and animal consumption, such as corn and soy. In addition, the Russia-Ukraine conflict and lingering supply chain disruptions from the pandemic have similarly impacted the sector. “This has resulted in the production of animal feed to skyrocket in cost and companies that depend on animal feed have been really badly hit.”
Meanwhile, the growing market for alternative proteins from non-animal sources is providing institutional investors with another opportunity to generate higher returns. While this market has grown substantially in recent years, it requires investors to take a long-term view, she says. “This is not the type of [investment] play where, in two years, you’re going to see this company take 50 per cent of the market. Little by little, [alternative protein] market share is growing faster than its traditional meat counterpart.”
ESG considerations
As institutional investors increasingly make commitments to net-zero emissions, agriculture can also play a role in reducing carbon footprints and meeting environmental, social and governance targets.
By maintaining both timberland and cropland investments, the AIMCo is looking to strike a balance, says Braams, adding while forestry investments generally sequester more carbon, the investment organization is also exploring opportunities to sequester more carbon within its agricultural lands through practices such as no-till farming.
“Generally, forestry investments are sequestering more carbon than we’re emitting [and] we’ll continue to look at those opportunities and decide whether there’s a way for us to potentially offset emissions elsewhere in our portfolio, monetize those credits elsewhere or whether we’d rather just hold the credits — [the latter gives us] the flexibility of whether we want to monetize carbon revenues going forward or sell more logs.
“We’ll have to see how those programs develop through time and also how we can measure the amount of carbon within the soil [of our croplands],” he continues. “That’s one thing that is quite expensive right now. But the price will come down over time and there will be different methods that we can use to measure it going forward.”
For those of you who are not aware, AIMCo's Renewable Resources team manages $3.0 billion in timberland and agricultural investments situated primarily in Australia and North America:
The figures above are from pages 31 and 32 of the 2022 Annual Report which you can download here (scroll to the end to download PDF file).
As you can see, AIMCo's Renewable Resources portfolio represents 1.9% of the total portfolio ($3B out of $158B).
I note the following:
The AIMCo Renewable Resources team manages $3.0 billion in timberland and agricultural investments situated primarily in Australia and North America. During 2022, the Renewable Resources team deployed capital in two investments: Lawson Grains, one of Australia’s largest corporate grains businesses; and Caddo Sustainable Timberlands, a large-scale, high-quality timberland plantation located in Texas and Louisiana.
For 2022, the portfolio return was 25.7% which exceeded the benchmark. This strong performance was driven by significant rural land price appreciation globally, strong commodity prices, and positive operating results across much of the portfolio. High input costs, constrained labour markets, and adverse weather and fire events were challenges experienced by portfolio companies during the past year.The Renewable Resources portfolio continues to perform well over the long term as investor interest in the positive attributes of the asset class remains high. Supporting continued strong performance is the robust global demand for agricultural and timber products which is expected to continue to increase, and alternative revenue streams such as carbon, conservation, biodiversity, and partnership opportunities with renewable energy producers. While their impact has been relatively limited to date, global macroeconomic uncertainty and rising interest rates could serve to moderate forward-looking returns in the short to medium term.
Now, the benchmark for Renewable Resources (on page 19) is Total CPI 1 Month Lagged + 450 bps (5-year rolling average) and as stated above, the 26% gain last year was driven by significant rural land price appreciation globally, strong commodity prices, and positive operating results across much of the portfolio.
I caution my readers that whenever you see such outperformance in any asset class, take it with a grain of salt and look at long-term returns to better gauge what you can expect.
No doubt, agriculture did well last year but 26% is an outlier, a positive one but an outlier nonetheless.
For example, PSP Investments' Natural Resources portfolio which is the biggest and most developed in terms of agriculture among large institutional portfolios and represents 5% of total portfolio as at the end of March ($12.3B of $243.7B), registered and annualized return of 10.9% in fiscal 2024, and 8.5% and 11.2% annualized over a 5 and 10-year period:
It is an asset class that has peaked the interest of some (not all) of Canada's large pension investment managers.
However, only PSP has developed it (through a painstaking approach, one farm at a time) to a point where it has a meaningful impact on the overall returns.
I asked Kent Wilmore, President and CEO of AGInvest Farmland Properties Canada, his thoughts on the article above and here is what he shared with me:
This is a good article touching on many of the benefits of investing in farmland.
We see many institutional investors as well as many other types of investors attempting to deploy capital into farmland and/or food security related investments.
Investing in farmland has always been a good investment and likely always will be for many of the reasons mentioned in the article. Farmland is an excellent inflation hedge and is asymmetrical to most other financial assets. Technology continues to drive increased levels of productivity on the farm and demand continues to accelerate alongside global population growth.
It's worthy to note that most urban centres on planet earth began by having access to farmland and water. Over time, urban expansion and population growth has devoured tens of millions of acres of highly productive farmland and this trend continues at an alarming rate.
Climate change has a role when investing and the counter to climate change is that carbon sequestration can be part of the farmland investment thesis as well as an ESG strategy.
AGinvest Properties Canada takes into account all of these benefits and has a sharp focus on investing in highly productive farmland that can be optimized. We focus on farmland with exceptional soil quality, consistent rainfall (free irrigation) and quality heat units. This unique combination of natural characteristics combine to create a foundation on which farm families can produce hundreds of crop types therefore creating diversification in crop selection which results in a low-risk, high return investment.
We are seeing that interest in farmland continues to increase which requires a great deal of investor education. Liquidity is typically the tricky part when investing in farmland and a patient approach should be the attitude when investing in this asset.
In Canada less then 1% of farmland is owned by institutional investors compared to the US where institutional investment is approximately 14%.
When you boil this investment down and simplify - humans need a few key things for survival, with the top 3 being Air, Water and Food. By Investing in farmland with a quality farmland manager you can partake in all three of these essentials that humans rely upon every day.
No doubt, investing in farmland takes expertise and I invite you to read Kent's earlier comment on my blog here to really appreciate the nuances.
Joelle Faulkner, founder and CEO of Area One Farms also sent me a comment on this article from Daniel Bacon, Vice President, Investments:
Benefits Canada’s article on how climate change and inflation are impacting agricultural investments is correct: agricultural asset returns have continued to outperform inflation. In recent times, consumers worldwide have felt the unmistakable effects of food inflation.
Global factors, from climate change to political unrest such as the Ukraine war, have pushed food prices upward. Particularly in climate-resilient regions like Canada, farms with consistent water supplies have seen their profitability rise. Crops now hold greater value than before the recent surge in inflation. Profits have risen faster than interest rates. This means crops are worth more today than before this period of rising inflation. In the midst of global upheavals, climate-resilient farmland has appreciated in value.
While inflation and climate change are important, a broader perspective is required to generate long-term, sustainable returns. Investors must think critically about how to invest and achieve socially responsible value as well environmental resilience. Social sustainability lies in investors actively creating value and then sharing some of that value with farmers and their communities. One approach is to collaborate with farmers through partnerships. Partnerships create sustainable value because investors and farmers are aligned in seeking long-term growth and low risk. The investment restrictions placed by certain jurisdictions in Canada and the U.S. might stem from insufficient sustainable investment practices.
An example of active value creation, converting brushland or retired farmland back into productive cropland offers tangible benefits to both rural communities and investors. This land restoration boosts job opportunities within the supply chain and for farmers and can lead to increased wages. However, as both Area One Farms and AIMCo, mentioned in the article, have learned, these land improvement projects demand extensive expertise, experience, and patience. With $40 million invested in Northern Ontario restoration projects, Area One has experienced firsthand both the challenges and the value potential for rural communities and investors.
For investors targeting low-risk, stable returns in farmland, aligning with farmers is critical. Direct, collaborative relationships where value is shared, ensure aligned interests, and lead to enhanced long-term returns. While some strategies may emphasize profit alone, they risk sidelining this crucial partnership dynamic that reflects the reality that productive farmland requires farmers. As a result, investment models that restrict farmer ownership of farmland may increase risk to investors. Through the partnership approach, farmers not only benefit from shared income and capital gains but also gain financial stability, fostering reinvestment in their communities. Investors amplify the farms' economic, environmental, and social benefits, while the farmland is managed for long-term profitability. Different to traditional approaches, farmers are incentivized to scale farms through off-market purchases. Decision-making remains local, driven by families with deep community ties. Farmers, relying on the sustainability of their land as a renewable resource, naturally are its best stewards. Empowering farmers is the best way to achieve increases in farm productivity and farmland value appreciation.
Focusing on a broader approach to sustainability is crucial for investors as they have direct control over methods to attain sustainable value, unlike the unpredictable nature of inflation and climate change. Proactive measures by investors today can create value for all and secure sustainability for the long term.
I thank Joelle and Daniel for sharing this.
You can read an older comment on Canadian farmland Joelle published on my blog here.
As far as AI and farming, the jury is still out.
The World Economic Forum put out a video on how agriculture is embracing robotics:
Agriculture is embracing robotics.
— World Economic Forum (@wef) April 29, 2021
🔎 Learn more about how robots are transforming farming: https://t.co/i8SRCyLjSW pic.twitter.com/hIySw5arGM
Pretty cool, right?
Then I read a bunch of critical comments on LinkedIn which got me thinking maybe this isn't such a great idea, like this one from Miguel Camacho:
So much misguided innovation!! As if mass mono-cultivation was the ‘right’ way to go agriculture and soil health, biodiversity, carbon capture by the soil and sustainability be damned. This kind of thinking has us at the mercy of Big AgriPharma, who push their patented manipulated seeds onto producers to ensure they extort maximum revenue from them, and consumer and planet health be damned.
Or this one from Isabel van Waveren:
This is very dangerous intensive farming resulting into a lot of dust in the troposphere and T O T A L destroying biodiversity retaining the soils … we need hedge rows (giving shade and thus retaining humidity) and fallow (allowing for soils to rest and get some Nitrates back). The WEF should lobby for taxes when fields are larger than a particular size, and request hedge rows…check out my Tedx talk on my LinkedIn blog: it is explained.
There are plenty of experts on biodiversity and farming who are not keen on the idea of embracing robotics in farming.
Anyway, AIMCo's Renewable Resources portfolio is doing well but it needs to grow to 5% or more of the total portfolio over time to add meaningful diversification benefits and that's no easy feat (it takes time).
In other related news, AIMCo's Chair Mark Wiseman who is stepping down from that post at the end of the year (when his 3-year term ends) has been busy lately writing a comment on the new nature of risk and return:
The world is undergoing a paradigm shift, both politically and economically. This is the first in a four-part series that examines a series of changes, including the energy transition opportunity, evolving dynamics with emerging markets, and how North America can leverage its comparative advantages to strengthen its position in global market.
There are two fundamentals at the heart of investing: risk and return. The past two years have witnessed a tectonic shift in these factors and their interplay, reshaping the bedrock upon which investment strategies are built as the world has become a more uncertain and unpredictable place, both economically and geopolitically.
First, persistent higher inflation has made it harder to achieve inflation-adjusted returns, a reality that higher interest-rates are unable to rectify quickly, fundamentally changing the outlook for the foreseeable future.
Second, international relations have had an impact on investment calculus. Tensions between the United States and China, as well as the war in Ukraine, have ricocheted throughout markets, altering the structure of the global economy.
There’s also climate change, which is redefining government policy, and generative-AI technology, which is developing so rapidly that it is changing how we should view companies and how investment decisions are made.
To begin looking at the changing risk-return dynamic, one must start with an analysis of the impact of higher interest rates and the financial institutions that have borne the brunt of these challenges. Losses for lenders insured by the U.S. Federal Deposit Insurance Corporation ballooned from $8-billion in 2021 to more than $620-billion at the end of 2022, illustrating the scale of the problem.
The highest-profile examples can all be traced to the rate environment. Forty-four per cent of the venture-backed technology and health-care IPOs were clients of Silicon Valley Bank last year. Signature Bank was a leader in real-estate lending. And many of First Republic’s investments were in real-estate loans and municipal securities.
The failures of those banks, if not predictable, were structural. Similar valuation adjustments are likely to rip through the asset landscape. It’s a simple financial math problem: Discounted cash flows determine an asset’s present value based on projections of how much money that asset will likely generate in the future. The higher the interest rate climbs, the lower the present value of those future cash flows. This is true for every asset, including equities, bonds, real estate and infrastructure.
High-growth technology stocks, where predicted cash flows are far out in the future, are highly impacted by increasing discount rates. And, of course, borrowing (including mortgages) is more expensive, with many future cash-flow assumptions insufficiently accounting for higher interest rates.
These cases illustrate just how much risk has changed. Through much of our lifetimes, liquidity tests would look at a 25-basis-point or 50-basis-point move, but the fate of U.S. regional banks and persistence of inflation dictate that banks and investors should have been examining what happens if rates go up by 100 or 200 basis points quickly, to adequately manage their risk exposure.
Moreover, recent turmoil in equity and bond markets has, for now, done away with the notion of a “traditional” portfolio composition of 60-per-cent equities and 40-per-cent fixed income. With more reliable income potential on bonds than equities, given the rapid change in interest rates, investors might wonder why they would buy equities at all and not just invest in U.S. treasury bills.
But inflation and subsequent rate rises are only one factor contributing to the uncertain investment environment. It has been driven equally by the overwhelming and concerning rise of geopolitical instability. With the war in Ukraine and rising U.S.-China tensions, the broader context and impact of global politics has become crucial for global investors to comprehend. This knowledge, once confined to a small group of experts, is becoming table stakes, evidenced by the number of investment firms and consultancies establishing dedicated geopolitical risk-evaluation units.
The consequences of these issues are broader and farther reaching than a surface-level analysis would have predicted. For instance, Russia’s attack on Ukraine halted half the world’s neon output – an essential ingredient for chip manufacturing. It is little wonder that in the week of the attack in February, 2022, the S&P 500 dropped to a nine-month low, losing more than 500 points and erasing billions in shareholder value.
Moreover, de-coupling from China has changed many global cost dynamics, demonstrating that politics matter more and more. The highly consequential politics of this relationship may continue to shake markets as Washington considers expanded oversight on outbound American investments in China.
Investors will always be required to respond to unpredictable global events, but pro-actively identifying the trend lines can produce enormous value. While investors fancy themselves as masters of both the microeconomic and macroeconomic, recent worldwide shock waves have underscored the multitude of things out of their control.
Anyone doing that work must acknowledge the friction in international relations over the past years. I’m a globalist by default and always look to diversify internationally, but in the tense geopolitical climate we presently face – defined by near-shoring and supply-chain diversification – many investors have increased emphasis on the opportunities at home.
The new strained nature of risk and return is even more complex than it was in the 2007-2009 financial crisis. It demands a fresh perspective, the courage to adapt, and the wisdom to navigate through uncertainty. Rapid financial, geopolitical and technological change is the new normal.
By cultivating resilience and adaptability, investors can respond effectively and safeguard their assets in a landscape where disruptions are not only more frequent but also carry greater impact. There are spoils that lie ahead for those who can anticipate them and turn them into opportunities.
Mark followed up by writing a comment on why energy transition is the new gold rush and a third comment on the new face of emerging markets: India brings both promise and complexity for global investors:
The world is undergoing a paradigm shift, both politically and economically. This article is the third in a four-part series that examines several changes, including the opportunity afforded by the energy transition, the evolving dynamics of emerging markets and how North America can leverage its comparative advantages to strengthen its position in the global market.
Seismic alterations in the global economy, brought on by geopolitical developments and pandemic-induced fluctuations, have compelled Western investors to adjust their strategies and reassess their risk appetite for markets and asset classes beyond conventional allocations.
Until very recently, the path forward for those in search of diversification and higher potential returns (with commensurate risk) lay, in large part, in emerging markets. But the new world has made investing in these markets far more complicated, and the retreat from several jurisdictions is likely to endure, illustrated by the growing demand for Asian investment products that exclude China.
Yet, in many respects, emerging markets are even more attractive today than they have been in the past because, unlike in the past decade, they are less likely to track the outcomes of American and European markets. Since there is now less monetary and geopolitical harmony throughout the world, it’s likelier that emerging markets will provide true diversification to portfolios – and we know diversification is the only “free lunch” in investing. At the same time, diversification plans need to be balanced against the inherent risk in emerging markets.
Goldman Sachs economist Jim O’Neill coined the term BRICs (Brazil, Russia, India and China) in 2001 to describe fast-growing countries projected to dominate the global economy by 2050. However, political unrest and a faltering economy in Brazil, tensions between China and the West and Russia’s invasion of Ukraine have severely affected opportunities for investors and raised risk substantially. As it stands, only one “BRIC” remains with the potential to navigate demographic and political headwinds: India.
After recently overtaking China as the world’s most populous country, India poses the strongest macroeconomic promise for massive scale and development, providing opportunities to discover outsized returns and balance risk with the benefit of international diversification. Its demographic trends, geopolitics, sector strengths and domestic economic policies are core factors that globally minded investors should consider as they seek to diversify their portfolios.
It starts with people. India possesses a young, rapidly growing work force that will grow richer before aging sets in. By way of comparison, China’s dependency ratio (the proportion of retirees to working-age people) is expected to increase, giving India a major advantage and providing perhaps the best predictor of long-term economic health.
For foreign investors, India’s demographics promise a growing consumer base that will drive demand in sectors such as technology and consumer goods.
However, the country is not without political challenges. While India has been placed by Canadian, U.S. and other allied governments at the centre of foreign policies in the Asia Pacific, India’s official policy is more complicated. And domestically, growing Hindu nationalism risks setting the country back and unwinding some of its demographic advantages.
Since the Cold War, India has been a leader in the Non-Aligned Movement, which effectively makes it a middleman rather than a participant in any political rivalry. To that end, India has not joined the West in condemning the Russian invasion of Ukraine and continues to be a leading buyer of Russian oil. If the U.S. were to go to war with China over Taiwan, India’s reliability as a partner is hardly predictable, as its trade with China is double that with the U.S.
Despite these challenges, North American businesses and governments see an opportunity to strengthen relations with India. Most recently, Indian Prime Minister Narendra Modi visited the U.S., shoring up defence agreements and seeking out audiences with private-sector heavyweights such as Tesla owner Elon Musk, enticing them to invest more in his country. All, no doubt, much to Beijing’s chagrin.
To be clear, one should not gloss over significant doubts among foreign investors looking at India. It’s hard to find reliable data on the economy. The size of India’s middle class remains a black box. Many Indians work outside the formal economy, in tax-exempt agricultural roles, or do not earn enough to pay income taxes, forcing analysts to rely on estimates. In the 2021-22 fiscal year, for example, only 54 million individual tax returns were filed.
The country needs to harness its demographic dividend by addressing its shortage of skilled labour, improving income growth and economic opportunities for women, and building infrastructure capable of supporting industries that will thrive in the 21st century. These systemic changes will be critical in convincing foreign investors that the investment risk is worth it in India. The challenge also lies in enhancing export capabilities and fostering a business environment that attracts North American investment.
This is no small feat and will require significant reform to an education system that currently favours a select few. This year, the employment rate for Indian working-age women fell to 24 per cent. For under-25s, it dropped to 12 per cent. If half the population remain outside the labour force, India’s potential will not be realized.
India does excel in technology, agriculture and health, with companies such as Tata and Infosys leading the charge. It also has a famously excellent managerial class, the majority of whom are English-speaking.
With technology in particular, government and businesses are working to leap from an outsourcing relationship with Western partners to one of collaboration. American tech leaders such as Tim Cook have taken note, with the Apple chief executive recently proclaiming that India presents a “huge opportunity” for continued expansion. Large semiconductor companies such as Micron and Applied Materials also used Mr. Modi’s U.S. visit to announce significant investments in India.
But the controls of key levers of the economy sometimes rest with a handful of well-connected individuals and families (e.g., Ambani, Adani), boxing international investors out of major growth sectors. To access these sectors, institutional investors often turn to private investment, which, like in any market, requires boots on the ground and the right partners.
A US$2-billion tax dispute between the British telecom Vodafone and the Indian government, as well as Walmart’s hurdles in establishing a retail footprint in India, highlight the country’s sometimes unfavourable regulatory environment.
Investing in emerging markets poses immense challenges. India is clearly no exception, sitting on the precipice of unprecedented prospect, balancing inherent challenges with the promise of a sustained economic takeoff. The decisions it makes today, and the global events that follow, will determine whether it emerges as the world’s next great economic power and foreign investment destination.
Mark Wiseman is a very wise man, always worth reading his thoughts and even though I share some of his geopolitical concerns, I'm not entirely sure on the new nature of risk and return (remains to be seen).
On India, no doubt, great demographics and it's the largest democracy but it is run by a handful of powerful families (some of which lost a fortune last year) and it has a bureaucratic cancer that is hard to navigate (unless you team up with one of those powerful families).
At the tender age of 52, I've seen so much in my investment career that I take everything with a shaker, not a grain, of salt.
It takes a lot to impress me so whenever I hear investment bankers trying to sell me their India thesis, I recall a trip I took to London in 2005 to attend a commodities conference right before that bubble burst.
When it comes to these big mega trends, don't get excited, THINK about risks and opportunities and have a strategy in place that limits downside surprises as much as possible.
By the way, I'm not convinced the linkages between emerging markets and the US and European economies are less today than in the past. Give me one major US and European economic recession (it's coming) and I'll bet emerging markets will get roiled.
Alright, let me end it there, I do not get paid enough to share so much content with my readers.
To all the institutional readers who support my efforts, thank you.
Below, Mark Wiseman, chair of AIMCo and former CPPIB CEO, joins BNN Bloomberg to discuss why investors need to be invested in the energy transition, the new gold rush.
Great discussion and I agree, energy transition is hugely important and we are still in early innings. How it evolves and the role investors play in it remains to be seen.
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