Strategic investors show thirst for world's most liquid market: water

IT MIGHT seem to be a fairly common substance, but fresh water&rsquo;s growing scarcity means that it is quickly becoming known as blue gold in development and investment circles. While the amount of water in the world is finite &ndash; and fresh water only accounts for 1 per cent of the total &ndash; demand for water is growing rapidly. There are three main reasons for this.<br /><br />Firstly and most importantly, the world population is still growing. The global population is expected to reach somewhere between 8bn and 11bn by 2050, according to the UN.<br /><br />Each additional person on the planet will add to the total consumption of water, both directly through drinking and indirectly through eating. What&rsquo;s more, some of the fastest growing regions such as Sub-Saharan Africa are also the regions with the least rainfall. This uneven distribution of fresh water will mean there&rsquo;s plenty of work for the industry.<br /><br />Secondly, growing per capita incomes in emerging economies such as China and India as well as parts of Latin America &ndash; which together account for about a third of the world&rsquo;s population &ndash; will also boost the demand for fresh water. This is because there will be an increasing demand for food, for plumbing and we will also see industry expanding.<br /><br />Take into account that agriculture accounts for about 70 per cent of global usage of fresh water, but is very inefficient, with an estimated 80 per cent lost before it reaches its final destination, and you start to see how much more water we will need. As an indication of what this all means, once you take into account the growing, shipping and production, it takes 140 litres of water to produce one cup of coffee, say industry analysts.<br /><br />Thirdly, climate change is starting to play its part in fresh water scarcity by reducing the water table in low-lying coastal countries such as Bangladesh.<br /><br />All three factors mean that significant investment is going to be required in the water industry in the coming years. Even for a developed country like the US, it is estimated that around $325bn will have to be invested in drinking water over the next 20 years.<br /><br />All of this will increase the attractiveness of companies that develop water treatment technology and those that provide it, such as utilities companies. But aside from investing in such businesses, it has been difficult for investors to gain exposure to water. It is not a centrally priced commodity and there is a lot of regional-based price trading.<br /><br />This where exchange-traded funds (ETFs) really come into their own.<br /><br /><strong>UNDERLYING INDEX</strong><br />Most of the big providers now have water ETFs, which tend to be based on an underlying water index. For example, the Invesco Powershares global water portfolio is based on the Palisades Global Water index, which tries to identify a group of global companies that focuses on the provision of drinking water, the treatment of water and technology and services that are directly related to global water consumption. These include French companies Suez Environnement and Veolia Environnement and Finnish water treatment company Kemira.<br /><br />ETF Securities&rsquo; Global Water fund is based on the Janney Global Water index, and is composed of approximately 60 global water utilities and companies engaged in water infrastructure and technology development. Daniel Wills, senior analyst at ETF Securities, says that to be included in its water ETF, companies must derive at least 25 per cent of their revenues from water-related activities and overall, the composite index generates well over 50 per cent of its total revenues from water-related activities.&rdquo;<br /><br />Wills adds that the index is designed to capture as much global reach as possible but notes that the weighting by market capitalisation will naturally favour some of the more developed country-based firms. But he points out that these companies can of course have operations/sales in developing economy markets. Market capitalisation and minimum trading liquidity requirements are also both important developments for inclusion in the underlying index.<br /><br />Like all equities, these ETFs have performed well in the past few months. Those looking to invest, though, ought to look for a long-term investment rather than hope to nip in and out of the market. The water ETFs are driven by long-term macro themes, which obviously means that they are more appropriate for the strategic investor with a longer-term view. Investors looking for a growth area should take notice.