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How To Invest In Water StocksUtility companies have long been considered a vital component of every well-balanced portfolio.
And while they don’t always offer huge potential for capital appreciation, their role as an effective defensive hedge is undoubtedly true.
Indeed, utilities enjoy some unique characteristics that other companies lack, making them a particularly attractive option as a potential investment pick.
Among these is the fact that almost all utility firms operate in a tightly-regulated environment. This acts as a high barrier to entry for any business that wants to break into the industry, shielding existing companies from future competition.
In addition, because they provide basic amenities that are always in demand, utility companies can generate reliable and predictable revenue streams, meaning that they’re able to offer generous dividend payouts to loyal shareholders. Therefore, utility stocks are favored by many kinds of investors, especially those interested in receiving an income stream from their holdings.
Given this, you might think that all utilities are more or the less the same - but they’re not. In fact, one of the most intriguing utility sectors today is the water industry. Water is an indispensable necessity for human life and plays a crucial role in many other commercial and industrial applications too.
But despite its apparent ubiquity, our water is disappearing. And as it becomes more scarce, so too it becomes more valuable. For investors, this can present many opportunities.
So, let’s examine why water stocks are so fascinating and why the industry is in such a great position right now.
Water Is ImportantWater is perhaps our most precious commodity.
And yet, no matter how much we’re actually reliant on it, our reserves of it are rapidly diminishing. In fact, in some places, they’re running out altogether. Indeed, it can’t be overstated how serious a problem this is: in 2019, one-quarter of the world’s population faced extremely high levels of water stress, while 60% of the globe’s surface fresh water supplies were concentrated in only nine countries.
Growing demand for water has led to withdrawals more than doubling since the 1960s, and, with rising population levels showing no sign of abating, this trend is predicted to only get worse.
Other factors, such as climate change and urbanization, further compound the situation. Rainfall levels have become more variable, but demand continues to increase.
Solving this conundrum will involve a multi-agency response, but, without a doubt, the water industry will take a leading role.
There are solutions to mitigate the water crisis, all of which require a hefty dose of infrastructure building and upgrades, as well as significant injections of cash from governmental bodies. Indeed, the 2021 Infrastructure Investment & Jobs Act included a provision for $550 billion of new spending, of which $55 billion was allocated to wastewater, drinking water, and storm water funding.
Where there are inflows of new money into an industry, there will always be a revenue bonanza for the companies participating in it. And this will be no different for the water sector either. The IIJA mandates a whole raft of programs that will need to be worked on in the coming years, including a $15 billion plan to replace some of the nation’s lead piping infrastructure, as well as a $10 billion grant to address water contamination from PFAS pollutants.
Water Will Become More Valuable Over TimeSome academics have proposed a concept known as the “water wars thesis.” This idea asserts the notion that as water scarcity becomes more pronounced, so too will violent conflict escalate around the world.
Indeed, competition over dwindling water resources is already here. For instance, China has been building a series of dams along the Mekong River, primarily in a region known as the Upper Mekong Basin. The problem is that these dams impact communities living in the Lower Mekong Basin - particularly those in Thailand, Vietnam and Myanmar - and who rely on the river as an important source of water and food. And it’s not just China doing this; India has been doing the same to its neighbor Pakistan, while Turkey has been redirecting water from the Tigris and Euphrates rivers, denying it to Iraq and Syria further downstream.
It’s not inconceivable that water could become the new oil, taking on a central geopolitical significance similar to how fossil fuels have over the last half-century. In fact, former Secretary-General of the United Nations, Boutros Boutros-Ghali, once claimed that the next conflagration in the Middle East would be one “fought over water, not politics.”
Moreover, looking at any past conflict clearly demonstrates warfare's effect on commodity costs. If water wars do become a feature of geopolitics in the future, the price of this most vital substance will no doubt rise accordingly.
And while the thought of that eventually is unsettling, one thing is for sure: it will make the work that water companies undertake much more valuable, putting an added premium on their already indispensable expertise.
Extraction And Water Treatment Will IncreaseOnly around 2.5% of the world’s water is designated freshwater, most of which is immobilized in glaciers and frozen ice sheets. Indeed, roughly 96% of all liquid freshwater resides underground, with the rest either on the surface or in the air.
As such, it’s a job just getting the vast majority of freshwater we drink out from the ground and up to where it’s needed. In fact, the Earth’s largest irrigation project, the Great Man-Made River, draws water from the Nubian Sandstone Aquifer System under the Sahara Desert, and channels it to end destinations in and around Libya. The GMMR provides 70% of all freshwater used in that country, and was once described by the man who laid its foundation stone, Muammar Gaddafi, as possibly the Eighth Wonder of the World.
While the GMMR exemplifies the potential scale of operations needed to supply a population with potable water, it’s also a harbinger of the type of project water companies will be involved with in the future.
These massive national infrastructure works will be huge revenue generators for all kinds of utility firms, and will see earnings for water stocks explode in due time.
Water Has A Myriad Of UsesOn average, every American household uses around 300 gallons of water each day, of which about 70% is consumed indoors.
Water is also used in ways that aren’t always obvious to us. Even activities such as mining and the cooling of data centers all require the use of significant quantities of water. In fact, 45% of U.S. freshwater withdrawals are used to create thermoelectric power, while another 32% is used to grow the crops that contribute to our food supply.
Indeed, water is a major component of semiconductor manufacturing too. In this process, ultrapure water is required to cleanse impurities and contaminants from silicon wafers. In fact, the scale of water usage is immense: just a single 8-inch wafer - which makes around 100 chips - needs up to 2,000 gallons of ultrapure water to remove any undesired substances from its surface.
So intense is this procedure that companies are now looking at ways to create novel water recycling systems that reduce their water consumption. For example, Intel is developing a $600 million water reuse facility at its new D1X factory in Hillsboro, Oregon, where it hopes to return 100% of the roughly three billion gallons it uses every year.
Water Is A Growth Industry TooAlthough water appears to be an abundant resource in most of the world’s developed nations, that’s becoming less true as time wears on. As a matter of fact, many countries - including the United States - are now beginning to face increasing challenges regarding their access to clean water.
Greater recognition of the urgency with which First World countries need to tackle their own growing water crisis has led to a rise in water monitoring services.
For example, real-time surface water monitoring can assist the industry in better understanding how one aspect of the water cycle impacts another.
Indeed, plenty of companies are developing cutting-edge technologies in this field already. Some, like UK-based Watr, are designing solar-powered floating surface water monitors that can provide water quality data to users in real-time. Others, such as AquaRealTime, are using the Internet-of-Things to create a revolutionary automated early warning system for the detection of harmful algae blooms and other water-borne pollutants.
The benefit of all this innovation is that, for investors, these technologies create additional market demand for their products. This drives new revenue to the space, and acts as a kind of high-growth segment within the wider industry itself.
How To Invest In Water StocksOne of the easiest ways to invest in the water industry is through a passive index investing strategy. Passive index investing involves a fund manager creating a portfolio that mirrors the securities and assets of a particular index. For example, by purchasing shares in, say, the Invesco S&P Global Water Index ETF, you gain exposure to a wide variety of water-related businesses in different sectors and in other countries. Alternatively, if you don’t require your investments to be as diversified as this, you can choose to allocate your funds to individual stocks and shares instead. This route might be riskier, but if you make the right pick your upside will be greater.
How To Invest In Water Stocks: Closing ThoughtsScientists believe that the combination of climate change and a rising world population will continue to put pressure on global water supplies.
Indeed, with the likely threat of increasingly severe droughts - and the prospect of “water wars“ between states with and without access to adequate water reserves - it’s almost certain that water will become less abundant rather than more so over the next few decades.
Because of how this interplay between supply and demand will eventually work out, now is the perfect time to invest in water stocks.
The kind of securities you decide to opt for will depend on your own individual portfolio needs, and the level of risk tolerance you're comfortable with. More conservative investors will appreciate the dividend-paying benefits that most large-scale utility firms offer, while growth-minded traders will probably prefer to look for the type of exciting start-up that’s innovating in a water-themed sub-sector.
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