Investing in the world’s most valuable resource

Each week, a professional investor tells us where he’d put his money. This week: Louis Veilleux, Senior Investment Manager, Pictet Water fund.

Water is a vital natural resource. Unfortunately, less than 1% of all water on the planet is available and accessible for human use. The United Nations reckons that by 2050 the global population will have grown by 2.5 billion, so it is more important than ever to pay close attention to companies that focus on making the most of this resource.

Water conservation, improved sanitation, recycling, water-quality testing and better distribution will be key to ensuring the sustainability of life on an increasingly crowded planet and, for investors, offer a potential source of long-term capital growth. Investing in water is supported by several “megatrends”: social, economic, political, and technological changes that go beyond short-term market fluctuations and affect society over a significant time horizon.

Urbanisation and recycling

With two out of three people expected to live in cities in future, demand for water and the resulting waste production should grow rapidly in urban areas. This is likely to drive more innovative recycling, which in turn creates opportunities for monetising waste streams (65% of which currently have no value in the US). Waste Management (NYSE: WM) will be a beneficiary. Increasing market consolidation in the US will strengthen its already established position in solid waste collection.

The firm could also profit significantly from developments in recycling automation over the coming years. Scarcity is another issue. Already, 50% of the global population lives under water stress. Increasingly uneven distribution of water resources requires better water conservation. Ecolab (NYSE: ECL) is a global leader in industrial water. It has created an innovative pricing mechanism, based around environmental Return on Investment (eROI), where it charges according to the water and energy savings made by its products.

Disease and infrastructure

Waterborne diseases account for more than 10% of the global burden of disease. Improved sanitation and water-quality testing is the solution, with consumer and regulatory pressure driving demand for monitoring equipment. China, for example, has committed $60bn to tackle water and waste-water quality. Danaher (NYSE: DHR) has three brands that focus specifically on water quality: Trojan, Hach and ChemTreat. Danaher’s gross margin stands at 55%, reflecting consumers’ trust in its equipment. The management team has also positioned the company to benefit from strong structural growth in life science and diagnostics.

Constraints on public purses have led to historical underinvestment in utilities, and the need to upgrade infrastructure is ever more pressing. Water-research specialist Envisager forecasts that the population served by privately funded water will grow by 50% from 2015 to 1.8 billion in 2030. Water utility Sabesp (Brazil: SBSP3) offers water services for 25 million customers and sewage treatment for 23 million across São Paolo, a city with low sanitation coverage.

Since the last national election, local government members have called for greater sanitation coverage via more private partnerships, providing long-term opportunities for investment. Public-private partnerships will be key to creating a sustainable future, a trend we expect to pick up pace in the coming years.