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?
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Have we hit peak water'?
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 clich. 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
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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John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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