Should You Be Investing in Water Business

There are opportunities to invest in water scarcity in both emerging markets and the U.S. 

With political uncertainty soaring around the globe and most stock markets fully valued, investors need to make sure their portfolios include investments that will provide attractive returns over an extended period of time.

Opportunities that benefit from demographic trends or from the increasing effects of climate change are particularly attractive to investors with a long time horizon.

Water scarcity is a global theme that combines demographics and climate change. There is no substitute for water. As the world’s population continues to grow and becomes wealthier, demand for water is rising fast.

According to the UN, by 2025, 1.8 billion people will be living in countries or regions with absolute water scarcity, and two-thirds of the world population could be under water stress. From human consumption to industrial and agricultural use, global demand for water and water services are expected to outpace current supply.

The International Food Policy Research Institute suggests that there will be a 40% gap between water demand and supply over the next 15 years. Agriculture is the largest user of water (70%), followed by industry (20%) and individuals (10%). Every person drinks 2-4 liters of water a day and eats 2,000-5,000 liters of virtual water in the food they consume.

There are opportunities to invest in water scarcity in both emerging markets and the U.S. In China, 80% of rivers are too toxic for fish, let along human consumption.

In its twelfth Five Year Plan, the Chinese government allocated about $110 billion per year to environmental protection and pollution control, including wastewater and solid waste treatment. A similar or higher amount will be needed in the next five-year plan to address continued water scarcity issues.

The U.S. will also require significant investment in water treatment and transportation in the near future. For example, the poor infrastructure that caused lead poisoning in Flint, Michigan is not an anomaly. In California, governments are spending about $20 billion annually on their water supply, a number that is also expected to increase.

Investments are needed along the entire water-value chain, and global water-infrastructure projects alone are expected to see annual growth of 5%-8% according to Bank of America Merrill Lynch.

Companies that focus on addressing the increasing demand for and limited supply of water may represent some of the best growth opportunities for investors. While water itself is not (yet) a traded commodity, you can invest in companies that derive revenue from this limited resource in three ways:

• Expanding the water supply.  Exploration, desalination and wastewater treatment plants are developing new water infrastructure and creating sustainable and reliable supply systems.
• Increasing current water efficiency . Companies that are developing improved irrigation, leakage detection and smart meters are creating effective solutions for reducing demand and promoting sustainable use of available resources.
• Improving water quality and treatment facilities.  This includes companies that are developing cutting-edge filtration technologies and disinfection chemicals.

Many firms are pursuing these opportunities, including utilities, manufacturing and technology companies. For example, Danaher Corporation is a leader in water quality analysis and treatment systems. Danaher provides instrumentation and disinfection systems to help analyze and manage the quality of water in residential, commercial and industrial applications. Xylem is a global water technology provider with a diversified line of energy efficient water pumps. Companies like these are well positioned to benefit from the challenges of water scarcity.

While water scarcity will not become acute tomorrow, it is the kind of long-term theme that farsighted family offices include in their portfolios. In today’s turbulent markets, all investors can benefit from this same approach.

Blog by Todd Millay

Source: Forbes