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Water scarcity is a long-term investment theme

As the taps threaten to run dry in Cape Town, Garry White looks at how to invest in world's water infrastructure

Garry white employee

by
Garry White

in Features

29.01.2018

Within weeks, the taps could run dry in Cape Town, one of Southern Africa’s wealthiest and most attractive cities. Its residents have been told the water supply in their homes will be switched off on April 12, as the City is short of water following a lengthy period without rain. These are not idle threats – the reservoirs really are running dry and a water crisis is looming.

Water scarcity is going to become an increasingly widespread problem in coming decades, driven by sharp rises in population, gentrification and industrialisation. Richer people use more water and industrial thirst can lead to rivers and aquifers running dry. Indeed, last year there were protests against Coca-Cola in India arguing it was unsustainable for a drought hit region such as Tamil Nadu to have a factory there that used 400 litres of water to make one litre of fizzy drink. The issue looks likely to escalate. The United Nations has calculated that by 2025, 1.8 billion people will be living in countries or regions with absolute water scarcity, with two-thirds of the world's population likely to be living under water-stressed conditions. From Cape Town to Asia to the south western United States, there are already significant signs of severe water stress. Large rises in population are also expected to happen in already water-stressed areas such as the Middle East and Africa, which is likely to exacerbate the issue.

Water is undoubtedly the most valuable commodity that there is. Without any water to drink, a typical human being will die within four days. However, water is not yet traded on a traditional commodity exchange – unlike oil, natural gas or copper – so its real value is often underestimated. But current demographic trends and climate change are likely to increase the value of this commodity significantly over time – and this provides an opportunity for investors.

Managing the world’s water resources is going to be increasingly important over the next few decades – and there is likely to be substantial investment in infrastructure and technology. Money will come from governments, private organisations and charities, with companies making major technological advances likely to become very valuable indeed. It’s important to spot these investment megatrends early, particularly as an eight-year bull market has now made equity valuations in general appear quite high. Luckily, the rise of exchange-traded funds (ETFs) has made it much easier to turn thematic ideas into real investments.

There are thousands of ETFs all playing general themes – and often these funds are a good place to start researching the main players in the industry. Water-focused ETFs include the iShares Global Water ETF (IH2O) and the Lyxor World Water ETF (WATL), which invest in a basket of shares that are exposed to all aspects of the water industry. These low-cost funds can be an ideal way to play a theme, but they can also be a good starting point for an investor willing to dig a little deeper.

For example, the iShares ETF invests in lots of industrial companies that could show great upside over the longer term, but 45% of the fund’s money is invested in relatively defensive utilities. This includes 3.85% of the fund invested in United Utilities, 3.59% in Severn Trent and 2.3% in Pennon. With almost 10% of the fund invested in UK water businesses, the ETF could also easily overlap with some of the other holdings in your portfolio, skewing its overall sector weightings. It is also arguably not quite as exciting an investment as the water scarcity megatrend would suggest.

However, these passive funds are very transparent. It is easy to see their entire holdings on their website, something that a more expensive fund run by an active fund manager will not do. This means they are brilliant research tools for investors looking to drill down into an investment theme and make more targeted investments.

For example, there has been a renaissance in desalination technology. French infrastructure giant Veolia is generally regarded as a waste and rubbish disposal company in the UK, but is actually a global leader in seawater desalination technology. It has built more than 1,950 desalination systems in 85 countries during the last four decades and it is for this this reason that it is included in the iShares ETF as its fourth largest holding. The ETF’s list of other investments include companies such as Olin Corp, which makes water treatment chemicals, irrigation equipment maker Aalberts Industries, flow measuring equipment maker Badger Meter, Mueller Water which is making products to tackle leakage from old water pipes such as are found in the UK – and many, many others. About 41% of the funds money is deployed in industrial businesses such as these that are making the architectures of the world’s future water management systems.

Investment trends can sometimes be difficult to identify, but ones that involve population demographics such as water demand, healthcare development, ageing populations, rising demand for food and agriculture equipment and so on are pretty obvious. The rise of ETFs has given investors diverse, low-cost investments to themes to shove in their ISAs or self-invested personal pensions (SIPP) that play an identified investment theme. They are a very welcome addition to an investor’s toolkit. But their transparency provides also a great window into an investment theme for those interested in delving deeper. 

A version of this article appeared in Friday’s Daily Telegraph.

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