Investing in Water -Claudia Quiroz, Fund Manager at Quilter Cheviot, an Old Mutual Group Company

Population growth is driving higher water demand, while changing weather patterns are decreasing the supply of fresh water across the world. These issues are causing utilities and regulators to consider numerous solutions, including new infrastructure (reservoirs, water pipelines and desalination), and new operating models in order to improve water efficiency.

According to the United Nations, the world population is set to increase to 9.6 billion people by 2050, and the demand for fresh water is expected to increase by more than 50%. To meet the increasing demand, particularly from emerging economies, we anticipate significant investment by both the private and the public sector, alongside important government and political support around the world. We believe these projects will provide attractive investment opportunities.

RISING WATER INFRASTRUCTURE INVESTMENT

The world’s water demand and supply imbalance has been well documented, with the Global Water Intelligence (GWI) identifying that an investment of US$1 trillion is needed globally for water infrastructure and water preservation by 2022. This is expected to create a US$500 billion infrastructure market, growing at 6% per annum.

AGRICULTURE

Agriculture is a thirsty industry, currently consuming more than two-thirds of the world’s fresh water. Agricultural water uses include both irrigation and livestock rearing. For example, depending on age, weight and the season, a cow consumes around 95 to 190 litres of water per day, compared to 150 litres per day per person in the developed world.

When it comes to growing cereal crops, farmers using conventional methods of irrigation can waste up to 40% of total water withdrawals, particularly in developing countries. Therefore, efficient and economic irrigation is fundamental to conserving water in the agricultural sector. Lindsay Corporation, for example, has developed central pivot mechanised irrigation with very low rates (around 5%) of water waste. Manufacturers of irrigation and agriculture equipment include Jain Irrigation (India), Kubota (Japan), Lindsay Corporation (United States) and Toro Co (United States).

WATER UTILITIES

With budget-constrained governments, the private sector is moving in to supply water and dispose of wastewater across the world. There is an increasing need for water utilities companies to focus on cost savings and customer service in order to thrive in this newly competitive marketplace.

We have seen increasing regulatory support for water utilities, particularly in emerging markets. Compania de Saneamento Basico do Est de Sao Paulo (SABESP), in Brazil, operates water, sewage and industrial wastewater systems and provides sanitation services.

The water utility segment includes companies like American Water Works (United States), Pennon Group (United Kingdom), Hera (Italy), Veolia Environnement (France) and SABESP (Brazil).

INVESTING IN WATER

WATER CONSERVATION TECHNOLOGIES

There is an array of companies offering solutions to preserve and conserve water, not only for industrial users but also for households. In the UK, for example, we use more water per person per day than in Germany - 150 litres compared to 110 litres.

A growing population plus an increase in the usage of water per capita is driving the adoption of once considered “luxury technologies” into everyday life. For example, Geberit has developed behind-the-wall cisterns for the residential and commercial sectors, reducing water flush volume by about a third. The company is a beneficiary of rising living standards and demand for environmentally friendly products.

Companies involved in water products and technologies to drive water conservation and preservation include Ecolab (United States), Geberit (Switzerland), Kurita Water Industries (Japan) and Pentair (United States).

DESALINATION

Desalination, the process of converting salt water to drinking water, remains energy and carbon intensive. As water is heavy and incompressible, specialist pumps, piping and innovative technologies are required to deliver fresh water to where it is needed. Nevertheless, within the right conditions, desalination is a viable alternative to provide fresh water to coastal and drought prone areas.

According to GWI the global annual spending on desalination will rise 60% to US$16 billion by 2020. Currently, there are about 14,500 desalination plants operating worldwide, with another 244 plants under construction. In the UK, for example, Thames Water opened the first large-scale desalination plant in London in 2010, designed to provide up to 150 million litres of drinking water per day.

Global manufacturers of desalination plants include General Electric (United States), Befesa Medio Ambiente (Spain), Suez Environnement (France), Hyflux (Singapore) and Acciona (Spain).

PORTFOLIO CONSTRUCTION

The water industry includes a very broad range of companies such as water utilities; pipe manufacturers; specialty chemical producers; measurement, monitoring and testing firms; equipment manufacturers; irrigation companies; and membrane manufacturers, just to mention a few.

From a portfolio construction point of view, the diversity of the water industry is attractive, in our view, and exposure to innovative water technologies means portfolio managers can position their fund according to the current economic cycle. Exposure can be gained via a spread of asset classes, including equity, bonds and private equity.

IN SUMMARY

The estimated US$1 trillion needed globally for water infrastructure and water preservation represents an attractive investment opportunity for investors seeking to understand the water supply and demand imbalance, and the accompanying opportunities.