Water – A sustainable long-term Investment
Sustainable growth in the water market is fueled by several long-term trends – global water scarcity, climate change, increasing environmental regulations, increasing levels of water pollution and aging water infrastructure as well as aspiring emerging markets where water infrastructure installations are imperative.
Engagements in the water industry are increasingly regarded as promising and long-term profitable investments. So far, private investors are offered this option only via the stock exchange, whereas precious metals or even agricultural products can be physically bought. However, the investment topic ‘water’ is much less about increasing the value of one unit of water, as is the case with one ounce of gold, but rather about the many opportunities and benefits that investment in the water industry can bring. But even the price per cubic meter of water shows an increase over the last few years. According to a study by IBM Research, the global water price in Q1 2008 to Q4 2013 increased by 16.6% in US-Dollars. In London, for example, over the same period by 9.4% and in Singapore by 50.0%. Water utilities, as the name implies are mainly active as drinking water suppliers in certain regions, are those companies benefiting most from rising water prices The advantages of utility stocks in general often lie in a higher dividend yield compared to other sectors, a more stable cash flow and a better inflation protection because utilities are more flexible in times of rising inflation as they can better adjust their prices to the current inflation rate. For example, the American water utility American States Water has been distributing a dividend every quarter since 1931. Since 1955, it has been gradually increasing its dividend each year.
However, the investor can nowadays invest in specific sectors of the water industry through the stock exchange. Thus, water technology is an interesting and promising sector when one considers that probably until 2025, especially in the southern part of the world, there will prevail a so-called “Economic Water Scarcity”. In other words, a water shortage which occurs due to a lack of technology to use the existing water resources properly.
The required water is theoretically available but it can not be used due to lack of technology and infrastructure which is a consequence of underfunding for many years by the companies and by the governments. Private-sector companies will also suffer from this lack of water as they are sometimes dependent on enormous amounts of water for their production processes. As a result, increased investment by private sector companies in water technology and infrastructure is expected as water is rightly seen as a cornerstone of the economy.
According to the Civil Society of Civil Engineers, the United States Civil Engineering Association, by 2020 approximately 45% of the water supply network in the US will be in a flawed to fragile state. This is the result of years of unsuccessful and underfunded investments in the US water infrastructure. In some cases, there are even still water pipes made of wood. The reason for the ailing state of the US water infrastructure is the lack of public funds. However, the private sector is already partially taking over these tasks from the state. Water infrastructure maintenance is being progressively privatized in the US resulting in further interesting and long-term investment opportunities. Only taking into account that about 80% of the water management is still controlled by the public sector, it should be noted what potential continues to lie in the US water industry for public companies.
Investors should take a pragmatic approach about their investment behavior. The rehabilitation of piping systems can reduce water losses enormously. Companies that specialize in detecting leaks would benefit greatly from these investment measures. By contrast, companies that offer intelligent water meters or toilet flush systems benefit from governments’ efforts to use water more efficiently and more economically. The opportunities for investors are thus widely spread, but of course also associated with a certain amount of preparation.
Similarly, an ETF can invest in the investment topic ‘water’. The advantage of an ETF is a wider diversification of the investor’s money, in other words, a higher diversification within the water industry itself. However, for this risk limitation, an annual fee of round about 0.6% of the fund’s total must be paid to the ETF management each year. In general, investing in the water industry has the advantage of being less dependent on economic activity. Nonetheless, investors should never invest all their money in water stocks even if they invest in different sectors. Here, investors should stick to the basic principles of investing, namely, always to ensure a reasonable diversification of your money and never tend to bet on a single stock or sector no matter how alluring it might seem. During and shortly after the financial crisis of 2007, water technology stocks, water infrastructure stocks and even water utilities fell together with the broader market. The reason for this was the decline in private and public investment in new technologies and in the maintenance of infrastructure as well as the reduced water consumption in general, even though these declines were well compensated by subsequent economic stimulus programs after 2007.
The stock market is opening up more and more to water as an investment topic, be it through funds and ETFs, certificates or companies in the water industry going public. The global water market faces huge challenges over the next 20-30 years, which in turn involve high levels of investments from which long term investors can benefit from by making the right investment decisions. Be it through regular and secure dividend payments or sustainable increases in the prices of stocks, investors with a medium to long-term investment horizon should increasingly devote themselves to water investment.