Water – A Source of Life and Investment Opportunity July 15, 2020

Summary

• Access to water is crucial for the wellbeing of a nation’s population and its economic performance
• The rapidly growing population is creating an insatiable demand for water
• However, climate change is reducing the freshwater supply on earth and aggravating the water scarcity crisis
• The growing demand and depleting supply of water represent defensive and offensive investment opportunities in the water industry
• Investors can gain exposure to the water industry via ETFs like PHO, FIW and PIO

Introduction

Water is one of the planet’s most precious and widely used resources. In addition to being vital for our survival, water is a key component in our domestic, industrial, manufacturing, agricultural, energy and food production activities. Access to water is a basic human right and it is crucial for the wellbeing of a nation’s population and its economic performance.

Unlike other more illustrious commodities, such as oil and gold, we often take water for granted in our daily lives due to the abundance and availability of this liquid in most developed cities around the world. However, water scarcity is a growing global threat.

Insatiable Demand for Water

According to the World Health Organisation (WHO), 785 million of the world’s population do not have access to basic drinking water services and at least 2 billion people draw their drinking water from contaminated sources.¹

The predicament is unlikely to improve in the future. It is estimated that the world’s population will reach 9.7 billion by 2050 and the demographic changes will accelerate the surge in demand for water.² The rapid population growth will escalate competition between water users and the planet may face a 40 percent shortfall in water supply by as early as 2030.³

As an essential commodity, demand for water will continue to rise in tandem with the growing population. Hence, demand for water is less dependent on the economic cycle. This translates into more consistent revenue streams for water companies and the ability to distribute reliable dividends to their shareholders. For example, America Water Works (NYSE: AWK), the largest publicly-listed water company in the US, has been steadily increasing its quarterly dividend payout for the last ten years.⁴

Depleting Supply of Water

Although two-thirds of Earth is covered by water, only a fraction of it is available for drinking and global warming may affect this limited freshwater supplies. The long-term impact of climate change is uncertain but it is predicted that these changes will further aggravate water scarcity.⁵

The warmer climate will intensify the rate of evaporation and reduce water level in water bodies – directly diminishing the water supply from these natural sources. The rising rate of evaporation will heighten precipitation but the increased rainfall or snowfall will not be distributed evenly. The resultant effect will be more frequent extreme weather conditions like flash floods and prolonged droughts in different parts of the world.⁶

Regions experiencing drier conditions will encounter water shortages whereas wetter regions having heavier burst of precipitation may be faced with incessant flooding. Heavier rainstorms will increase surface runoff, that flushes pollutants and sediments into nearby water bodies. The decline in water quality will increase the cost of water purification, reduce the potential volume of water available for use and affect the health of the surrounding inhabitants.

Extreme weather conditions can also damage water infrastructures, making infrastructure management and maintenance even more complex and costly for water companies. To illustrate, the damaged pipelines or dams may cause water loss through leakages and inadvertently reduce the supply of water.

Growth Opportunities in the Water and Water-Related Industry

For many companies, water efficiency is both a business necessity and commercial opportunity. The growing global population and economies are placing a huge burden on the already-depleted water supplies.

As a result, water usage and prices are heavily regulated by the authorities to ensure that the local populace have rights and priority of access to the resource. In 2004, PepsiCo (NASDAQ: PEP) and Coca-Cola (NYSE: KO) were forced to shut down their bottling plants in India after concerns were raised that they were competing with the local farmers and cities inhabitants for water.⁷ Global water scarcity can potentially cease businesses and companies must adapt their operations in order to survive.

Given the water scarcity crisis, there is a pressing need for countries and companies to increase their spending on water and wastewater treatment facilities. According to the Global Water Intelligence, operating and capital expenditures by utilities and industrial water users on water and wastewater, is expected to grow from US$770 billion in 2018 to US$914.9 billion by 2023.⁷

The growth opportunities for water products and services can be found when the productivity of these three areas is improved – (i) water treatment and distribution, (ii) water-intensive industrial and power processes and (iii) water usage in agricultural activities.

Examples of Infrastructures and Technologies Used to Increase Water Efficiency⁶

Exchange Traded Funds

Water-themed Exchange Traded Funds (ETFs) provide investors access to a wide variety of stocks in the water industry, including water utilities, infrastructure, equipment and materials companies.

ETF information is accurate as of 22 June 2020

Conclusion

The water industry is thriving with an immeasurable and growing demand. The stable demand for water means that water companies may be suitable as a defensive position in an investment portfolio.

Furthermore, the dwindling natural supply sources may provide an offensive play for investors as water companies look for innovative ways to conserve and purify water for its consumers. Investing in the water industry is an alternative option for investors looking for long term growth opportunities.

If current structural trends were to continue and water companies continue to adopt emerging technologies, the water industry may just be the catalyst for investors to diversify and tip their investment portfolio over the boiling point.

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