A 10% correction since the January top in the S&P Global Water Index provides the spark for a renewed interest in the Water sector and its investment opportunities.
Of course, the current deflection in price is occurring after a banner year in 2017, when the sector followed the major indexes in double digit returns. From a technical standpoint, the index is practically sitting on a fairly important level of support at the 50-week moving average. Volume has also been decreasing since the last few weeks indicating short term indecision on the part of general investors.
While the short-term picture is inconclusive and probably clouded by interferences unrelated to the specificity of the sector such as tariffs spats, questions about the speed of interest rate rises, and various political theatres, the fundamentals of the Water industry seem to become increasingly compelling. Bill Gates, founder of Microsoft, certainly thinks so as, via his foundation, he has recently increased his exposure in water technology in significant fashion.
The economics and the social benefits of investing in improving and expanding access to clean water are undeniable. In the context of an uncomfortable dynamic of natural supply of earth’s potable water limited to only 1% and rapidly rising global demand, the need for radical improvements in access, efficiency and technological break-troughs is pressing.
Investing in the sector provides opportunities in three major areas:
- Improve or replace existing infrastructures. Much or our domestic underground pipes for example are reaching the end of their lifespan of 75 to 100 years. The American Society of Civil Engineers (ASCE) indicated that our system suffers an estimated 240,000 break-downs per year.
- Specific opportunities range from engineering and design, well drilling, capturing facilities, pumping stations, pipes, wastewater treatment facilities
- Automation control
- Sensor technology
- Irrigation equipment
- Quality Improvements
Allianz research estimates the size of the Water industry at $500 billion with the potential to reach $1 trillion by 2020. Water infrastructure projects alone are expected to grow at a 5% to 8% annualized rate of growth.
In terms of domestic demand, ASCE estimates a need for an additional $82 billion a year in water related infrastructures for the next 10 years in order to meet projected capital needs. Currently, aggregate spending in water infrastructures at the local, state and federal level is around $40 billion a year. Filling the gap between what is currently spent and meeting capital needs would only achieve a "good state of repair" (ASCE 2016). Currently, the federal investment per capita on water is estimated by the CBO at $11. That compares with per capita IT infrastructure spending of $251 and R&D for defense purposes at $245.
The favorable trends in terms of demand for clean and fresh water are undeniable: population growth, urbanization in developing economies, infrastructure maintenance and delivery systems redesigning are all elements converging toward a positive investment backdrop. Historically, investing in water has been a complex affair where an investor had to deal with governmental as well as private entities in addition to navigate three major different areas such as utilities, technology and industrials. However, a mixed approach based on a core satellite allocation can deliver interesting performance simultaneously anchored to broad Water indexes but also dedicated to the capitalization of unique opportunities across the water supply chain.
Please feel free to contact our team if you would like to discuss the Water Industry in more details.