Environment

How to Invest and Profit from Long Run Water Scarcity

Without water there is no life on earth. And while apparently 70% of our planet is water, only 3% of that is potable. Per estimates of the WWF,  1.1 billion people currently lack access to drinking water, while by 2025 two-thirds of the world’s population across every continent may face water shortages. Not only drinking water is an issue, as hygienic sanitation is tightly linked to it and inadequacy in that area risks the spread of diseases.

There is sufficient fresh water available on earth for everyone, but distribution and usage is unequal which is increasingly going to cause socio-economic issues. Global warming only exacerbates these trends and is going to add a full 20% to water scarcity this century. By 2030, demand could be higher than supply by some 40%. Besides global warming, issues like ageing infrastructure and increased irrigation in agriculture (which consumes 70% of all water) play a role.

Water is such a fundamental part of our lives that it plays a role in practically every segment of business, making this supposed undervaluation of a commodity without substitutes an excellent longer term theme to invest some of your money in.

What assets to invest in to benefit from this trend?

That’s perhaps not the best way to phrase it. People are suffering from physical and economic water scarcity, and the first question should probably not be how to profit from that. Nevertheless, it is unquestionably a massive global trend and investing for it may actually do some social good.

Unlike other commodities like oil or gold, investing directly into water is not possible. Exposure has to be gained by investing in companies that handle, process or deliver water to consumers and businesses. Here are some of the classic ways to gain access to water in your investment portfolio

  1. Water Utilities. Obviously, publicly traded stocks from the water utilities sector should be your first stop. They are responsible for bringing water to your doorstep and stand to benefit from improving the quality and quantity of water available. Usually monopolies. Think American Water Works, Aqua America and Veolia
  2. Desalination. As fresh water is scarce, increasingly countries are turning to desalination techniques where ocean or sea water is treated to remove minerals and salt in order to make it potable. Water companies like Veolia and Doosan are involved in the business of desalination, and a few companies like Consolidated Water which offer direct exposure to this thriving business
  3. Water value chain. improvements will be needed along the entire water value chain and for each component there will be companies worth investing in: from abstraction and pumping, pipes and pumps manufacturers to sewerage, filtration and waste water treatment. Each of these sub sectors offer opportunities
  4. Beverages. Out of the scope of most of the above are manufacturers of bottled water, which could prove an interesting investment as well

Portfolio construction: water, water, water

  • The constructed portfolio consists of two ETFs with relatively similar exposure. Guggenheim has slightly more US and utilities exposure than PowerShares.
  • The portfolio’s volatility is medium to high at 9.6%. Its return since 2008 would have been +140%
  • Given that this does not quite reach ETF-like diversification, I am suggesting an allocation of 0%-10%. I have great faith in this theme playing out
CategoryNameIDTERAlloc %
WaterPowerShares Global Water Portfolio ETFPIO0.75%50.0%
WaterGuggenheim S&P Global Water Index ETFCGW0.65%50.0%

Risk, diversification and allocation

  • Risk level: medium to high
  • Diversification: low
  • For risk and total return since initiation see Portfolios
  • Probability of this theme playing out in the next 3-10 years: 50%-90%

Portfolio characteristics (full look-through, from USD perspective)

  • Dividend yield: 1.4%
  • Ex-ante predicted volatility: 9.6%
  • 1 year 95% Value-at-Risk: -15.5%
  • Scenario 2008 Lehman Brothers default period: -22.6%
  • Scenario Interest rates +100bps: +4.0%
  • Scenario 2008-2009: -21.2%
  • Scenario 2010 onwards: +140%

 

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52 week Range -
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Categories: Environment, Micro, Society, Themes

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