I was struck by a statistic I read in a research report the other day. There’s a commodity that we use every day without thinking about it. We rarely consider it as an investment either.
And yet, a basket of stocks related to this commodity has outperformed gold, oil and gas, and global stocks over the past ten years.
What is this miraculous substance?
Have we hit ‘peak water’?
We’ve covered water as an investment theme in MoneyWeek magazine on several occasions in the past. It may seem an odd choice – after all, water is not a globally traded commodity, like oil.
But in fact, it makes a lot of sense. There is always good profit potential in any area where there is an imbalance between supply and demand. You can make usually make good money from the companies working to correct that imbalance.
And with water, these two forces are more acute than in perhaps any other substance.
Demand is high and rising. Water is necessary for life. There’s no substitute. As the global population grows, and we all (hopefully) become wealthier, there will be more and more demand for it.
Meanwhile, supply is limited. Fresh water – water we can use – accounts for just 2.5% of all water in the world. And a big chunk of that is locked up in ice. So there’s actually not that much water to go around. The other problem is that the water often isn’t where it needs to be – ie where the people are. It’s surprisingly hard stuff to transport.
Bank of America Merrill Lynch reckons we may even have reached ‘peak water’. Now, ‘peak’ has become something of an investment world cliché. But you take their point. There’s a lot of stress on the water supply.
The UN reckons that around a fifth of the world’s population lives in areas where there is a physical shortage of water. Another quarter faces “economic water shortage”. This is where water is physically present, but the infrastructure isn’t there to get it from the source to the people who need it.
And this situation is only going to get worse. Between water pollution and depletion of underground aquifers, and the risks of extreme weather events becoming more frequent, the danger is that even as demand grows, supply is going to become more scarce.
In short, water poses a problem. And you can make money from the companies involved in solving this problem.
Water has been a cracking investment sector
The S&P Global Water index has returned 10.4% a year over the past ten years, according to BoA Merrill Lynch. That’s better than stocks, gold or oil and gas – a fantastic return, in other words.
You might find something distasteful about the idea of ‘investing’ and ‘water’ being in the same sentence. It sounds like something out of Total Recall, where the corporation running a Martian colony can cut the oxygen off if people haven’t paid their bills.
But if this is bugging you, then here’s a question: if we valued water more transparently – if we put an explicit price on it – how much of a difference would that make to the comparative costs for alternative energy? If every gallon of water pumped into the Canadian tar sands, or shoved down a fracking well, was properly accounted for, then how much more attractive would wind power or solar power look?
And how much more attractive would investment in water-efficient agriculture become (farming is the biggest user of water in the world, accounting for around 70% of total use)? In short, if we fully understood how valuable water is, we might make some of the necessary changes more rapidly than we’re otherwise going to.
Governments are making some small progress towards pricing water more accurately, and charging massive users more to reflect water’s scarcity. As water is increasingly recognised as a major issue, demand for the companies that can help us make better use of it will benefit.
BoA Merrill Lynch highlights several key areas set to profit. There are the companies that treat waste water, and help us to use water more efficiently. There are those that build the necessary infrastructure – sewers and pipelines and the like. And then there are water-friendly energy suppliers (this is basically a story of renewable energies versus coal, oil and nuclear).
There are some great opportunities out there, from companies that provide smart metering, to those that improve the efficiency of irrigation systems on industrial-scale farms. This is a ‘big picture’ theme that every investor should have some exposure to.
I’ll be writing more about this topic – along with many more tips – in the next issue of MoneyWeek magazine, out on Friday. If you’re not already a subscriber you can get your first three issues free, plus access to our entire online archive, by signing up here.
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