The sustainable growth of the water market is driven by several long-term trends – the global water scarcity, the climate change, the increasing amount of water pollution and the globally aging and partially ailing water infrastructure.
Water as a sustainable Common Stock Investment
Therefore, the global stock exchanges increasingly perceive water investments as promising and long-term beneficial investments even though private investors can only participate via stock investments, whereas precious metals or even agricultural products can be bought physically. However, since December 2020 it is possible to speculate on the development of water prices in California via the futures market. The basis for trading the water futures is compiled by the Nasdaq Veles California Water Index.
For private investors, however, this is absolutely not a recommendable investment option, as the futures market as a whole is very complex and associated with high risks. In addition, trading in water futures should be critically scrutinized from an ethical perspective, as their actual benefit is doubtful. When it comes to water as an investment oppurtunity, however, it is much less about increasing the value of a unit of water – as it is the case with water futures – but rather about participating profitably in the development of water management in the long term. But even when you take a look at the development of the water tariffs in the USA , it becomes clear that the water prices are increasing slowly but continuously. Nevertheless, the costs of water and wastewater in the USA are still well below European prices, which should dictate the development of US- water prices for the coming years. First and foremost, water suppliers benefit from constant water tariff increases. Water suppliers- as the name already suggests – mainly operate as drinking water suppliers and wastewater treatment companies in certain regions. The advantages of water suppliers often lie in the stable and relative high dividend yield as well as in a constant cash flow. They also offer a better protection against inflation, since water suppliers can react more flexibly in times of rising inflation rates and can better adjust their prices to the current inflation rate or have the legal right to do so. For example, the US water utility American States Water has been paying a dividend every quarter since 1931. Since 1955 this has even been increased gradually every year. The US water utility York Water has been paying dividends uninterruptedly since 1818, making it the longest dividend history in America.
Investing in different Water Sectors
Nowadays, the investor can invest in specific sectors of the water industry through the stock exchange. So water technology is also an interesting and promising investment sector, if you bear in mind that by 2025 – especially in the southern part of the world – a so-called Economic Water Scarcity will most probably prevail. This denotes a water shortage that exists due to a lack of missing and underdeveloped water technologies. However, these technologies are imperative in order to be able to use the existing water resources efficiently and, above all, to make them drinkable for the population.
Even though the required water does exist, it can not be used due to a lack of technology and infrastructure as well as a lack of funding. Companies from different private sectors will also suffer from this water shortage, as they are dependent on enormous amounts of water for their production processes. Therefore, increased fixed asset investments by private sector companies in water technology and infrastructure are also expected in the coming years, as water is rightly considered a cornerstone of the economy. But the water problem is also an emerging political challenge in the western part of the world. The USA still has some wooden water pipes for example. The reason for the generally ailing state of the US water infrastructure is the lack of public funds. However, the private sector is already partially taking over these tasks from the states. The maintenance of the water infrastructure is thus being gradually privatized in the USA, which opens up further interesting and long-term investment opportunities. Taking into account the fact that around 80% of the US water supply is still in the public sector, it can be determined what potential still lies in the water management for public companies. Investors should therefore proceed pragmatically in their investment behavior. In this way, water losses can be reduced enormously by the renovation of pipeline systems. Companies that specialize in the detection of leaks would benefit greatly from these investment measures. Companies that in turn offer intelligent water meters or water systems for shower heads or toilet flushes would also benefit from the advance of governments around the world to use water more efficiently and economically. The long term possibilities for investors are therefore broadly diversified, but of course associated with sufficient preparatory work.
- Water Utility Stocks – The stable demand for water and wastewater services is independent of the economic environment. In addition, consolidations and water price adjustments offer sustainable growth potential.
- Water Infrastructure Stocks – Decades of underinvestment have led to a creeping decline in water infrastructure around the world. As a result, an enormous investment backlog has built up. This will not be reduced over the next few years, but rather over the next few decades.
- Water Technology Stocks – The almost same amount of water must be made available for more and more people. Water technology can use artificial intelligence to make water consumption more efficient. This is especially true in agriculture, where highly intelligent irrigation technologies are desperately needed.
Diversification and a final critical View
As you probably already know, ETFs can also be used to invest in water. The advantage of an ETF is its broader diversification within the water industry, for which an annual fee of round about 0.6% has to be paid. In general, investments in the water industry have the advantage that they are less dependent on economic developments. That said, the investor should never invest all of their money in water stocks, even if investing in different water sectors is guaranteed. The core principle of investing ensures a reasonable diversification which in turn excludes investing all the available money in less than three stocks. Keep in mind the financial crisis of 2007 as an example. Shares in water technology, water infrastructure and even water supply companies did fall considerably. The reason was the decline in investments by both the private sector and the public sector, even though this decline was partially offset by the subsequent economic stimulus programs in the following years. However, regardless of how promising an investment topic is, critical consideration must always be the superior part of stock analysis. Companies in the water industry can go bankrupt at any time and of course they have already gone bankrupt. As it is quite normal for a free market economy, companies face also cost pressure and competition in the water industry. However, as mentioned above, the greatest risk water suppliers face in the coming years are politically-related risks, since (left-wing) governments around the world are demanding a (partial) nationalization of water suppliers or stronger regulations on water tariffs.
The stock exchange is opening up more and more to water investments – be it through funds, ETFs or, above all, through companies from the water industry that are going public. The global water market is facing major but feasible challenges in the next 20-30 years, which in turn will need huge capital investments. The funds must necessarily be provided proportionally by private investors and cannot be generated entirely from taxpayers’ money. Be it through regular and secure dividend payments or price increases in securities, private investors with a medium to long-term investment horizon should increasingly devote their time to water as an investment topic.