Investing in Water

Investing and Markets šŸ“ˆ
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I enjoy the intellectual exercise of thrashing out an investment idea. For example, a recent track of mine has been as follows:

I come from a geography background and my thinking often focusses on future changes for human population and the impact we have on the environment. It is a well known fact that human population will continue to increase in the future (all else equal). Therefore, it would be a logical step to think about what effects these demographic changes will have on economies and financials.

It is difficult to predict how people will change in the future, but there are some fundamentals we can be confident about: more people will mean more food will need to be produced, more water will be needed (think drinking, farming, washing, & flushing toilets), and more space will be needed to house people - either spreading urban centres or intensifying existing ones with high-rise blocks, which will put pressure put further pressure on on food and water resources and supply chains.

Both farming and house building are industries that may be disrupted; farming techniques can be more intensive, or could move to a more efficient manner (vertical farming), and housing could be high-rise or co-habiting may become the norm. Therefore I have excluded these for now (notes have been scribbled for future referenceā€¦)

However, water seems like a more difficult beast to improve and disrupt. :droplet:

It is a fundamental for life, it is used not just as a pure product, but also intensively in farming and other consumables such as wine.

Ok, nice theory you may say but what are the numbers like?

ā€¢ Only 0.25% of the planetā€™s water can be used for drinking water, the rest is salt water, glacier and permanent snow cover, or polluted

ā€¢ Today 9 times more water is used globally compared to 1900

ā€¢ To grow a kilo of rice requires 2,400 litres of water, a kilo of beef requires 15,000 litres.

To put the growth of water consumption in perspective, global population has increased from 1.6 billion in 1900, to 7 billion in 2011. A 270% increase in population has seen a 900% increase in water use.

As a rule of thumb, investing in an asset with a limited supply but high demand is a good bet. If you could also predict that the demand is likely to increase over time then the bet looks increasingly attractive, right?

Ok, so population is predicted to increase to 8 billion in 2023, 9 billion in 2037, and 10 billion in 2055, respective increases of 14.3%, 28.6%, and 42.9%. If historic water use increases at the same rate compared to population growth, water use will increase by 3.3x population increase rate, i.e. 47.9%, 94.4%, and 141.6% over 12, 14 and 17 year timeframes.

Companies such as Xylem Inc, a US Company who provide water technology (transport, treatment, testing), and Severn Trent, a FTSE 100 listed company who are a major water provider in the UK, could potentially benefit from these future changes.

There are actively managed funds, as well as ETFs of course, with water as their focus, all invested in water-related equities.

Interested to hear thoughts for and against, and any equity/ETFs related to this (not advice of course!)

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When I first heard about this idea, it was mentioned at the end of The Big Short - that one of the main characters, who predicted the housing bubble / price crash in the US, is now investing in water - but it sounded like a crazy idea.

The next time it was being mentioned by a fund manager who was looking at it as part of their thesis, which sounded interesting but I still wasnā€™t sure why.

Now I understand the rationale so thanks a lot for sharing this, that was a really interesting read!

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Thank you for sharing this @HarryG . If defently seems like an interesting idea. I do think that itā€™s something that one can look at investing in but in the very long term. 14-17 years is what seems reasonable. However, the question is will those companies survive 14-17 years, which is why I think if someone wants to invest it would be better to invest in ETFs then individual company stocks.

I personally think this will be something I want to spend some more time looking into but mainly if I can find a good fund, not stocks.

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My concern about the U.K. water companies is that with increased demand, through population and climate changes, there will be greater pressure on them to fix leaks and generally spend more money fixing, maintaining and upgrading the infrastructure. Thereā€™s only so much that can be passed on to the consumer before the regulator steps in. So that will be a drop on profits and therefore share price

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Desalination

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Thatā€™s an interesting point - yes short term there is an increase in expenditure, but in the long run if the company is more efficient their margins would be better?

Iā€™ll need to dig out some numbers but I think the estimated water loss in the UK alone is shockingly bad! But yes you are right, short term may take a small hit on margins.

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Thames Water, the UKā€™s largest water company, said that while bills would be flat over the five-year period being reviewed it intended to invest some Ā£2.1bn to ā€œboost resilience and reduce leakageā€ after it was fined Ā£120 million in June over leakage failures.

Source: Water companies set out plans to cut bills

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Apparently someone else posted first XD. Anyway another article on the same topic, investments by the water company to fix the leaks.

Water companies unveil plans to invest Ā£50bn and slash bills

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To be honest, them saying that they will reduce leaks gives me no hope that they will actually will. Itā€™s like something companies have been saying for some time and will continue to say.

Also, itā€™s interesting to know if the statement from Thames Water about investing Ā£2.1bn come because of the Ā£120 million fine they got in June or because of the statements from the other two water companies planning to cut the bills.

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If the treat is nationalisation or give the contract to someone else might get things moving. Of course even in the case of nationalisation there are no guarantees that the service will be better or cheaper.

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Covers most factors discussed in this thread :tv: :

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I just read the following article and I thought that might be of interest as starting point for more research.

What I found interesting was something that I didnā€™t considered when I read this tread the first time that is all the company related to the water business like equipment instead, as I wrongly assumed at the beginning, only utility providers.

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