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- Water - investing in "blue gold"
- Climate change and population growth mean water is an increasingly valuable resource and economically lucrative.
- Water equities and funds are viewed as defensive investments with the chance of stable long-term returns.
- The water industry is subdivided into utilities and treatment plants, along with a broad spectrum of technology companies and service providers in the field of water management.
4 minutes to read
If you leave the tap running when brushing your teeth, you are wasting up to twelve litres of a valuable raw material.[1] The water from the tap is finite: it is the same H2O that came to us five billion years ago - probably via icy asteroids.[2] The dinosaurs drank this same water, which is constantly being recycled by the Earth's ecosystem and today comes out of the tap. But climate change and population growth are making water an increasingly scarce resource and thus economically important.
"The more we humans build conurbations, set up factories and plough up land for agriculture, the more industrial and drinking water must be extracted, channelled, pumped, dammed and treated," explains Nektarios Kessidis, manager of the DWS Global Water equity fund, which provides broad coverage of the water industry. "Private companies from the infrastructure and utility sectors are undertaking this work, and investors can target them.“
Two thirds of the earth is covered in water - but only 2.5 percent of this is fresh water potable for us humans.
Water companies can usually offer stable returns
Future growth in the water sector is very predictable. It roughly follows global population growth with the additional driver of rising standards of living. In 1900, humankind consumed around 400 cubic kilometres of fresh water per year, while the current figure is 4,600 cubic kilometres. By 2050, this volume is estimated to swell by a third to 6,000 cubic kilometres. In agriculture alone, demand is expected to increase by 60 percent by 2025.[3]
Water management’s compelling stock-market potential has now been proven. The S&P Global Water index, which is one of the most important stock-market indices in the H2O sector with the 50 largest and most liquid water companies worldwide, was first calculated 1 years ago. Since then it has more than quadrupled in value.
Sparkling profits with water shares
Water is considered to be an underestimated asset class, because comparatively few shares attract attention. However, the performance of the S&P Global Water Index shows that performance is impressive. The index tracks the 50 largest companies worldwide whose business is related to water.
Water shares are defensive and tend to be stable in value. "Many of these companies operate in regulated markets where water prices are set by the state,“ says Kessidis. "Water consumption by households, agriculture and industrial companies is almost entirely independent of economic cycles. These kinds of investments offer dividends that may not be excessively high but are steady. As they offer the possibility of stable earnings, water shares are therefore very suitable for investing over the long term investment and diversify riskier assets." In the medium term, prices are also likely to be supported by ongoing takeovers in the water sector. According to Kessidis, these have so far been rather small-scale.
Water scarcity creates opportunities for sustainable investment
From an investor's point of view, there is another advantage to the water sector: many companies meet sustainable investment criteria due to their business model. Investors and asset managers often like to choose such ESG- or SDG- oriented stocks to do something positive for the planet and help secure humanity’s long-term existence.
Let’s not forget that sufficient clean water is now rare in many places. According to the UN World Water Report 2019, almost two-thirds of the world's population now suffer from water shortages for at least one month a year.[4] The situation is likely to worsen further, as the usable freshwater resources in the Earth's ecosystem are limited to 2.5 percent of the global water volume.[5]
While supply problems have long been experienced in Latin America, Asia and Africa, climate change is now also causing water shortages, droughts and crop failures in Europe and the USA. According to the UN, investments would have to triple to as much as $ 114 billion a year in the coming decade[6] for one of the UN water targets set for 2030 be achievable: clean and affordable drinking water, sanitation and hygiene for all.[7]
The importance of investments in the water sector is likely to increase in parallel with global demand for water.
The global water market turns over 600 billion dollars per year - a third of which is attributable to utilities.
Water is a diversified industry
So which stocks and funds can investors choose to benefit from the global megatrend of water management? The global water market currently turns over around 600 billion dollars per year.[8] The companies that serve this market fall into two sub-categories. First, there are the traditional utilities - often privatised water companies - which have now merged into large corporations. They supply households and industry with water across regions or even entire countries and also handle waste water disposal and treatment. They represent about 35 percent of the sector.[8]
The rest of the sector is made up of a wide range of suppliers and service providers. Specialised construction companies build and modernise infrastructure in large cities, handling everything from dam construction to restoring pipe networks. Also included are plant construction firms that manufacture everything from desalination plants, filtration systems and irrigation robots to specialised valves and pumping systems: everything needed to treat water and bring it to where it is needed. The sector also includes more and more suppliers of water analysis and monitoring systems, as increasingly usable water resources are being polluted by intensive agriculture and a growing waste problem.
The entire value chain offers opportunities for returns
"Companies that cover the entire value chain around the topic of water look particularly promising, for example those that supply water but also produce fresh water through desalination," says Kessidis. Companies with technologies that enable efficient water use – for example, those whose solutions enable farmers to irrigate their fields in a more resource-efficient way – should also see growth opportunities.
"As with other investment themes, investors should be patient with water shares," says Kessidis. "It can take a while for individual companies to generate sustainable profits that will reach investors in the form of returns." And if you want to use "blue gold" as a defensive addition to a diversified portfolio, you should spread your investments as widely as possible - in other words, take into account different end markets, sectors and regions in the global water sector.
Long-term performance
|
Index |
09/15 - 09/16 |
09/16 - 09/17 |
09/17 - 09/18 |
09/18 - 09/19 |
09/19 - 09/20 |
|
S&P Global Water Index |
16.7% |
11.4% |
1.7% |
9.8% |
8.2% |
Past performance, [actual or simulated], is not a reliable indication of future performance. Source: Bloomberg L.P., DWS International GmbH, as of 30/09/2020.
