Water is the world’s most valuable resource, and it is only going to get more valuable as the global population expands. According to the World Wildlife Fund, 1.1 billion people lack access to fresh water and 2.7 billion experience water scarcity at least one month a year. By 2025, two-thirds of the world's population may be facing water shortages. Already one person in five has no access to safe drinking water and by 2025, 1.8 billion people will experience absolute water scarcity.
Considering how quickly the world is developing on other fronts, these water scarcity figures are staggering.
Companies are expected to step up and meet some of the demand for the improvement in water supply, recycling and design of technologies to reduce water consumption. The water market is expected to grow from $600 billion globally in 2016 to $1 trillion by the end of this decade.
Investing in a growing market
Unfortunately, profiting from rising demand for water, or the development of tech to help improve the world’s water situation, is not easy. Investors essentially have four options:
- Own water rights, which may not be the most suitable advice for the average investor. Water rights are costly, and it is difficult to build a diversified portfolio of water rights assets.
- Own a stake in infrastructure projects. The transportation of water from where it is to where it is needed.
- Companies that provide equipment to the water industry, which is perhaps a more viable strategy for most investors looking to gain exposure to the sector.
- Own shares of a utility company.
Of these four, numbers three and four are probably the most viable options for the everyday investor. But there is another issue to consider.
In developed markets, water is a highly regulated, mature market with little room for growth. Since the financial crisis, developed market water companies have acted as bond proxies for investors seeking low-risk income. As a result, developed market-focused water stocks today trade at unappealing valuations with low dividend yields and no growth prospects.
The alternative to developed market utilities is emerging market utilities, and it is here I believe the best opportunities for investors can be found.
One such company is China Everbright International Ltd. (HKSE:00257, Financial), which has invested in more than 70 projects in 20 Chinese cities in environmental energy, environmental water and alternative energy and continues to have a strong project pipeline with local authorities in China. This is more of a broad-based play on China’s growth rather than a particular water pick.
If you would rather buy an exchange-traded fund (ETF) to gain exposure to multiple companies, the S&P Global Water Index (SPGTAQUA) is the index to track. This index provides liquid and tradable exposure to 50 companies from around the world that are involved in water-related businesses. Constituents are distributed equally between water utilities and infrastructure and water equipment and materials.
One of the top 10 constituents of the S&P Global Water Index is a company called Xylem Inc. (XYL, Financial), which regularly comes out on top as one of the best businesses to surf the water wave.
Xylem’s motto is "Let’s Solve Water." The company provides water pumps, meters and other devices to help monitor the flow of water and enable the sustainable use of water globally. The company is at the forefront of water economics and is one of the better investments in the water sector.
Shares currently trade at a forward price-earnings (P/E) ratio of 24.3 and support a dividend yield of 1.2%. After stagnating for several years, earnings per share are expected to jump by 22% for 2017 thanks to the acquisition of smart meter company Sensus for $1.7 billion last year. This is definitely one company to keep an eye on if you are interested in the water trade.
Disclosure: The author owns no share mentioned.
