Highlight / January 2, 2021

Water Investment: the Commodity of the Future?

It’s one of the most valuable resources on Earth.

Between the 2020s and 2050, demand for this product will boom by 55%.

You need it to survive, and so does everyone else on the planet.

But it’s not as abundant as you might think – far from it. In fact, the scarcity of this resource will lead to massive investment opportunity in the very near future.

I’m talking about water.

H20 is the biggest investment no one is talking about. Or rather, not many people know how to talk about it. Some people don’t even want to touch the subject because water commodification is a hot issue.

However, regardless of what side of the moral ground you’re on, you know we’re going to need a lot more water in the future, and access is quickly diminishing.

Early investors are already making a fortune off it. Asia’s top billionaire surpassed Jack Ma with the profits of a bottled water empire. With legendary investors like Michael Burry of “The Big Short” piling in, there are plenty of reasons why water should be on your radar.

Why Water Investment?

We often take water access for granted in the developed world. 

But with a rising population, increasing pollution levels, and climate change, water is becoming an increasingly scarce resource.

It comes as no surprise that water could already be a $1 trillion market, and the chronic need for investment across the value chain should see annual growth of 5% to 8%.

I short, demand is soaring, and the supply is collapsing.

Nothing screams opportunity in any market more than a supply crunch due to breakneck demand. And that’s what is happening with water, especially potable (drinkable) water.

Consider this: global water use is growing at twice the rate of population. Estimated annual increases for water consumption rests between 1% and 1.8% — a total increase of 22% to 32% by 2050. The situation is clear: supply can’t keep up with demand.

Population growth and freshwater use worldwide (Source: AQUASTAT/FAO)

We’re only scratching the surface of the water crisis: as the population increases, so does the demand for wastewater management as sanitation needs rise. 

A few years ago, I had a 10-month stint on the Indian subcontinent. There’s not much as shocking about the human condition as the population-dense cities of India. Without exaggerating, I had stomach problems every single day on that trip due to the toxic water. 

And it’s not easy to revamp an entire country’s lousy plumbing. The American Society of Civil Engineers (ASCE) spotted an $84.4 billion gap this year between what the US is spending on water infrastructure and what we should be spending. The U.S. may already be out $416 billion in GDP in 2020 for that reason, and if we’re looking at India or parts of Africa, the costs are immeasurable and relentless. 

Supply is Down 

Urban freshwater supply could decline by 66% between 2015 and 2050 due to rising population and water depletion. 

The United Nations gives us until 2040 before the world enters a clean water crisis of species-level proportions. If you think governments and taxes will be enough to put the brakes on that, well, I urge you to consider the private sector’s current reach and involvement in the water sector.

The oceans aren’t the answer either. Desalination provides just 0.5% of the world’s fresh water, and filtering brine is difficult and energy-intensive to do. Desalination costs up to 10 times more compared to traditional water sources.

Over 20% of the world’s aquifers are currently over-exploited. The sinking water table in many regions of the world is shocking. We have a dire need to increase the replenishment rate to achieve water sustainability.

Is There Enough Surface Water?

Water pollution via runoff, erosion, and pesticide use concentrated in surface water is increasingly difficult to combat. The kids can’t even play in the mud anymore. Who knows what’s floating in that water.

Compounding the problem of unsafe surface water, over 80% of global wastewater goes untreated. That’s a trillion-dollar opportunity for anyone with pockets deep enough to change the script.

But let’s go granular. Just how can you gain exposure to this vital commodity in a sustainable way?

Opportunities in Water Investment

You’ll find a few different ways to gain exposure to water investment, including ETFs such as the S&P Global Water Index and the MSCI AC World Index. 

Talks of water scarcity have already hit the mainstream, as Californian water futures began trading late this year. 

“Climate change, droughts, population growth, and pollution are likely to make water scarcity issues and pricing a hot topic for years to come,” RBC Capital Markets managing director Deane Dray said to Bloomberg.

Water privatization is in full swing, and you’ve got options.

Other approaches include purchasing water rights or buying exposure to water utilities, infrastructure, and equipment. Several publicly traded companies offer exposure to the water infrastructure industry, such as American Water Works Company (AWK), Aqua America (WTR), and Xylem (XYL). I won’t go too deep into the details of these companies here.

ESG-focused investors have options as well.

The AllianzGI Global Water Fund climbed 17.16% through 2020. That’s a decent number for a fund that cares about water scarcity, especially in an era of near-zero interest rates. However, I expect the ROI of water investments to be much higher in the future.

And the best way to invest in water may not be through an index fund. If you want to combine exposure to water with a high sustainability factor and the many benefits of real, non-correlated assets, farmland may be what you’re looking for.

Investing in Water Through Farmland

Agriculture is 100% dependent on access to water. Some high-value crops are water guzzlers, like almonds. 

If you own an almond farm in an area high in natural rainfall, you’ve got the best of both worlds — abundant access to water, as well as a productive farm. Dr. Mike Burry thinks farmland is the best way to invest in water, and he’s added almonds to his portfolio for that reason.

But when it comes to water exposure, the true deciding factor isn’t crop sector – it’s regional water access. And South America has by far the most renewable freshwater sources in the world.

Infrastructure in South America is Catching Up

 

Water infrastructure requires sizeable up-front capital investment and pays abstract dividends that aren’t always immediately apparent. South America is one of the world’s largest beneficiaries of foreign capital investments, and their ESG investment scene is ripe for explosive growth. 

It’s a region well-positioned due to the global yield crunch and increasing capital inflows into emerging markets. And that’s not to mention the incoming commodities boom that will significantly benefit Latin America. 

But we’re here to talk about water. Countries like Colombia and Panama are excellent locations for water-hungry permanent fruit tree crops. With high annual rainfall and significant groundwater resources, these countries feature high levels of water security. 

Below is a graph of future precipitation globally. Some parts of the world will experience enormous changes. Others will have substantial increases while also being in a better position due to infrastructure to take full advantage of the extra rainfall, such as Latin America.

Conclusion

If you agree with the thesis that our future will hinge on water access, then you’ll see the confluence of value in water investments. Especially in the context of water-rich farmland in emerging markets.

Global water demand will explode over the next three decades, but the natural water supply isn’t budging. Some regions of the world will become wetter, including areas of Latin America.

Opportunities for direct ownership of water-rich farmland in emerging markets are few and far between. To learn more about how you can gain exposure to water through this type of asset, visit farmfolio.net/complex/

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