Water – an investment opportunty

I wouldn't be a true Brit if I didn't mention the weather in a blog. We complain about it all the time – it's too hot or too cold, too wet or too dry. Whatever it is, it is notoriously difficult to predict and we often get it wrong.

Take 2012 as an example. The people at Thames Water were convinced that we would be reduced to using standpipes in London during the Olympics. They launched an advertising campaign to encourage water conservation, only to be rewarded with the wettest summer for 100 years.

Water Surfeit
They were about a year early - last year we had the driest summer in a decade, followed sharply by the wettest winter in the UK since records began in 1910, with 517.6mm hitting the ground between 1st December 2013 and 25th February 2014*. Many people, all around the country, had a miserable Christmas and New Year as floods hit entire communities. We are not alone with the extremes. Water shortages – and excesses in the form of flooding – are becoming a real problem in much of the world.

In the UK we are very lucky and really take access to clean, fresh water for granted. So consequently, water as a commodity, or indeed as an investment asset class, has not traditionally been at the forefront of many investors' minds. Unlike most commodities, it is not traded so there is is no market and no 'price' to speak of. But as the extremes intensify, will this always be the case?

So it was with interest that I met a few people from WHEB Asset Management, one of the few specialists in this area. They believe water to be the most poorly-managed natural resource, but that the investment opportunities are now really starting to open up. No longer are we confined to investing in utilities companies.

Water Shortage
Demand for water globally is forecast to outstrip supply by 40% by 2030**. This makes sense as the supply is essentially static, but demand will increase as the global population grows, and more people can afford such items as washing machines. And we take it for granted in the developed world, using far more than we really need. This surge in demand has implications for many companies aside from utilities: water storage and transport and environmental and water technologies to name just two areas.

It's not just in developing markets where the problems lie. The US needs US$300billion-$1trillion to be invested in water infrastructure over the next 20 years***. Colorado needs to halve its water consumption by 2050****.

Water contamination is also a growing problem. There are already 2.5 billion people in the world without access to basic sanitation services and 894 million without access to fresh, safe water**. 70% of industrial waste is dumped untreated into waters in developing countries*****. In China, 60% of it's ground water is unfit for human consumption**. The good news is that the technologies to address these issues have been readily available for years (there have just been flimsy regulations and a lack of political will to do anything about it), and as the severity of the situation increases, their uptake will become more widespread. Waste water treatment is expected to have a compound annual growth rate of 10% in the next couple of years alone**. So there are plenty of issues to address and investment opportunities to exploit.

For now, the sun continues to shine, the grass yellows, gardeners worry about a hosepipe ban and we argue over the strength of the air-conditioning in the office. I've got a BBQ planned for 23rd August though. What better forecast for rain do we need?

Water may not be the sexist of investment themes, but I believe that it not only offers diversification, but also a credible investment opportunity for long-term investors who are prepared to expose themselves to a higher degree of risk.

By Harry Driscoll, senior research analyst, Chelsea

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Harry's views are his own and do not constitute financial advice.

 *Source: Met Office
**Source: WHEB
***Source: Altprofits
****Water Resources Group
*****Source: UN Water

Published on 01/08/2014