Tap the source of profit

Kathleen Brooks
AS austerity measures kick in, growth in the UK is expected to be fairly lacklustre for the next few years. An investment expected to outpace economic growth in the coming years is water. And the investment case is – excuse the pun – watertight. Demand for water is growing strongly, yet investment in infrastructure has lagged behind. But this is about to change. Analysts at Pictet’s water fund note that currently the global water market is worth just over $500bn and is growing at a respectable 6 per cent a year. But this should ramp up – Pictet analysts argue that $1 trillion of investment is needed to keep up with anticipated demand.

Klaus Kaempf, head of sustainability research at Sarasin Sustainable Water Fund, expects the global water industry, which includes production, water efficiency and water waste management services, to grow at 10 per cent per annum for the long term: “At the moment, less than 1 per cent of global GDP is spent on water services, but in 15-20 years time we expect it to be well above this level.”

The interesting thing about water is that the growth trajectory is strong for both emerging and developed markets. “For industrialised countries, the big problem is outdated infrastructure and renewal in this area is huge. But in developing economies they don’t have the infrastructure in the first place and need to start from scratch,” says Kaempf.

Developing economies, especially, have set ambitious targets; for example, in China the authorities want 60 per cent of all urban dwellings to have direct access to a clean water supply in the next five years.

Water is rarely considered an individual sector of the equity market; instead it tends to be grouped under utilities. But it is becoming more important in its own right. Since the start of this decade water tariffs in the US and the UK have been growing faster than inflation. Crucially, since water is considered a human right, nationalisation of supply remains a risk; for example, in the 1970s the local authorities in the UK took control of the water supply in England and Wales. However, overall the decoupling of water regulation schemes from politics in recent years has led to reduced uncertainty and tariffs subsidies, which has made for a more competitive market.

Pictet’s top ten holdings include French company Veolia Environment and American Water. Sarasin’s Sustainable Water Fund is 35 per cent invested in the US and its top sector holdings include 27 per cent in utilities companies and 20 per cent in pipes, pumps and plumbing. And the results are good too. Pictet’s water fund has returned more than 10 per cent since the start of the year, while the Sarasin Sustainable Water Fund has returned 8.86 per cent.

In the current environment it will be hard to find stronger economic fundamentals than the water industry.