Water stocks are a multi-decade opportunity.
Water investments, once a quiet spot, are starting to gurgle.
For centuries, water has been seen as a free public good, with no price attached.
But as droughts, population growth and farming demand deplete aquifers worldwide, water prices and demand for innovative water technology are set to steadily rise, said experts.
“The dry regions such as the American Southwest are getting drier,” said Simon Gottelier, an investment manager at Impax Asset Management in London.
Every place on the global map will need to spend money on water, said Gottelier. He predicts that the water industry will grow 5% to 7% each year on average.
Financial firms are meeting the demand for investable opportunities in some new ways. Texas-based Waterfund LLC, for one, is creating swaps, a derivative where one security is exchanged for another. The risk management firm has also teamed with IBM to craft a water index that finally pins a price on water use in the world’s 100 largest cities. Through these swaps, institutions can then hedge their risks when water prices rise.
The long view
Water stocks are a multi-decade opportunity, Gottelier said, for many reasons. One, and arguably the most urgent, is cleaning polluted water. The mighty Nile, which runs through nine nations and supports 80 million people throughout the region, is polluted, since heavy regulation only allocates water flow. Even though it’s polluted and carries diseases, the river water is used for farming, drinking and bathing.
And in water-starved China, 80% of the rivers and lakes are polluted, by World Bank estimates. Shanghai alone is spending tens of billions of yuan to fix the problem. India has a similar problem: over-polluted rivers such as the Ganges and Indus. The government is investing the equivalent of tens of millions of dollars on treatment facilities.
So, like many problems with a business-oriented solution, investors are seeking ways to profit from the surging demand for technology and systems to clean and filter contaminated water.
Companies are also eager to discover and extract more H2O. Seventy percent of the planet is covered in water, but only 3% of it is fresh. And that supply is mainly stashed in hard-to-reach places such as icecaps and deep underground reservoirs.
Easily gotten sources — reservoirs, lakes and rivers — are getting quickly depleted. The Aral Sea in Uzbekistan, for example, has shrunk so much that former fishing villages are now surrounded by desert land. Formerly part of the famous Silk Road, the Aral Sea will be completely dry within a decade.
Storied rivers such as the Nile and the Colorado in the US are also losing water as dams and other measures divert water from their flows for agricultural and other uses.
“Too much water is also being taken out of the Nile,” said Dr Jenny Kehl, director of the Center for Water Policy at the University of Wisconsin-Milwaukee. But the Nile isn’t alone, she added, since other great rivers such as the Jordan and the Mekong are also running drier as usage increases.
Deep underground aquifers, which store the freshest water, are also in rough shape as increased demand drains them dry. The problem is particularly acute in North Africa and the southwestern US, Kehl added.
Good news for water companies
Both dwindling supplies and dirtier water are translating into tighter water management. And that’s good news for the 300 global companies plying the water market. Most are in the US, followed by Europe, said Gottelier. Japan is a serious player, too.
Unlike taming carbon, water is a cheerier story.
“There are already lots of solutions in place,” said Cate Lamb, head of Carbon Disclosure Project’s water program. “So water management can shift much more rapidly than carbon.”
Repairing and monitoring crumbling, leaky pipes, pumps and valves is a key part of the water market. There are about 50 to 100 years of underinvestment in water supply upgrades in parts of Europe, said Gottelier, which leads to lots of leakage. In the US, the EPA estimates that upgrades to its aged water infrastructure will cost as much as $400 billion.
Water needs will translate into recurring business for infrastructure manufacturers such as Swiss-based Pentair Ltd, Texas based Flowserve Corp, and New York-based Xylem, said Matthew Sheldon, a portfolio manager for the Calvert Global Water Fund. “They all have very strong business models,” he said.
No surprise, then, that the $197 million Calvert fund’s largest holding is infrastructure stocks, along with technology plays for leak detection. Canada-based Pure Technologies Ltd which inspects and monitors pipelines, is a player in the water efficiency niche. The company is growing 20% to 30% per year, added Sheldon. UK-based Halma PLC also makes leak detection equipment.
Reusing water is the fastest growing niche though, said Sheldon. So water treatment and filtration companies such as Kurita Water Industries Ltd in Japan and China Everbright International in Hong Kong are set to prosper, said Sheldon.
“Much of the world is catching up with purification,” added Neil Berlant, a partner at Crowell, Weedon & Co, a brokerage and money management firm in Los Angeles. “Water treatment transcends all borders.”
Desalination, which removes salt from water, is being heavily used in Israel, Spain and Australia. The main reason: its price is decreasing.
“Up until now, desalination has been a small part of the water industry,” said Sheldon. “But it should begin accelerating next year.” Desalination players include big water utility companies such as VeoliaEnvironnement and Suez Environnement in France and the smaller pure-play company Energy Recovery in the US.
Oddly, few innovative emerging water companies are making waves. The initial public offering market, like the broader market, is still suffering. And new biological treatments for recovering energy and nutrients from waste water are still in their infancy, said Sheldon.
“But there will be a lot more IPOs in the next few years,” he added, especially since demand for clean, plentiful water will only increase.