Since December 7, 2020, this resource has been listed on Wall Street, linked to the NASDAQ Veles California Water Index
Water is essential for life. However, it is a very scarce resource, which is why it is known as “blue gold” or “the gold of the 21st century”. Only 3% of the planet is fresh water and of that 3% 70% is frozen and of the remaining 30% 75% is contaminated.
Only 0.25% of the available water is drinkable. Thousands of people live without access to it. According to the UN, more than a third of the population lives without basic sanitation and 748 million do not have adequate access to drinking water.
This inadequate infrastructure causes the death of millions of people every year. And it could get worse. By 2050, up to 4 billion people could be living with “severe” water stress, compared to 1.2 billion today. In turn, the demand for water will continue to increase.
According to the United Nations World Water Development Report 2020 Water and Climate Change, water use has increased sixfold over the past 100 years and continues to rise at a steady rate of 1% per year, mainly due to economic development, population growth and changing consumption patterns.
Any product requires water: producing a cup of coffee requires 120 liters, a kilo of meat 15,000, six times more than for the same amount of rice and a microchip industry up to 40,000 distilled water/hour. Not to mention the higher incidence of droughts and floods.
The required investment in infrastructure globally ranges from $6.7 trillion in 2030 to $22.6 trillion in 2050. As an example we have the recent drought in Madras (India) where they have had to take trains to supply water to the population. In the developed world, Pennsylvania has announced an investment of $136 billion to improve water infrastructure.
Not to mention that with the pandemic and the blocking environment still weighing on the world economy, many nations are turning to fiscal and environmental stimulus programs to encourage activity, and that many of these programs could end up increasing spending on water infrastructure. From infrastructure spending in the U.S., to the EU’s Green Deal, to China’s upcoming 14th Five-Year Plan, all signs point to increased capital spending on water.
As an example, in the US, Biden’s $1.3 trillion infrastructure plan calls for approximately half of all spending to go to water. The initial proposal describes improvements to pipelines and sewer systems, lead pipe replacements, improvements to water treatment plants, greater integration of water efficiency and quality technologies, and improved protection of watersheds and drinking water infrastructure from natural disasters.
This framework makes water a present and future investment opportunity. In fact, this is one of the topics that has been talked about the most in recent weeks. The first boom was experienced in 2016, when it became known that Michael Burry, the investor who anticipated the 2008 financial crisis and achieved a high return by investing against the mortgage market, had abandoned all his positions and focused only on water. Now, this investment is booming again after WEC Group launched water futures contracts on December 7, allowing investors, farmers and other large users to bet on the future price of water.
Although it may seem a very attractive investment, it should only be for risky profiles
The contracts are linked to the NASDAQ Veles California Water Index, and while water will be traded like other commodities on the exchange, the contracts will be financially settled.
The launch of such a financial product indicates that large water users are increasingly concerned about the nature of the resource, while investors see an opportunity to make money from shortages. Futures allow farmers to protect themselves against price increases, which greatly affect their livelihoods, while investors can benefit from the scarcity of the resource.
But while it may seem like a very attractive investment, it should be the choice of only the riskiest profiles. Diversification should first be at the geographical level, not so much by sector or by trend.
However, it should be considered that if this diversification is already done, investors can go a step further and enter into specific themes. In any case, the experts recommend doing so in the long term because in the shorter term uncertainty can cause prices to vary. Furthermore, the best way to take a stand is through investment funds or, depending on the assets, through ETFs (Exchange-traded funds).
One of the funds that allow investment in water is Pictet Water. Pictet Water focuses on three segments along the water value chain. The utility segment includes infrastructure, with predictable cash flows and concessions of 30 years or more. These are companies with an average capitalisation of more than $10 billion, some of which are little known and highly specialised, such as Waste Management or American Water.
In addition, the industry is developing very rapidly through local companies in emerging markets, such as the Brazilian SABESP, which operates in São Paulo and half of the municipalities in the state. The other two segments correspond to environmental services, which include recycling and reuse and water technologies.
It is a market that can grow by 8% a year to approach $50 billion by 2023, according to GWI Water. This is the case of Ecolab, which has developed the SmartBall technology of free movement, capable of measuring acoustic activity to detect leaks, Danaher in diagnostics or Xylem in technology applicable to the entire water cycle.
Its profitability since its launch in euros in January 2000 has been 7.39% per year compared to 4.12% for the MSCI AC world index.
For its part, Allianz Global Water invests in companies that provide solutions to water shortages. Allianz Global Water enables customers to achieve profitability while driving positive environmental and social change. This water fund invests in companies that provide sustainable solutions to growing scarcity problems, both in supply and quality, and as the demand for these solutions grows, so will the opportunity for financial growth. The Allianz Global Water has a 2.50% share in the year and in 2019 achieved a 27.41% return.