Expecting Multifold Returns on Water

Includes: CGW, FIW, PHO, PNR, SBS
by: Disruptive Investor

It is often said in the field of investment that the biggest investment opportunities can be found in regions or sectors that face the biggest challenges. If this be true, investors globally can expect multifold returns from investment in the most valuable commodity in the world – Water

The Challenges

1) Of the total water resources present in the world, only 2.6% is fresh water. Further, only 0.77% counts for the water cycle. This broadly outlines the supply scenario

2) The world population is expected to increase by 24% from the current 6.1 billion to 8.7 billion by 2025. The United Nations food and agriculture organization estimates that agricultural production has to increase by 50% in order to match the demand. This will meaningfully increase the demand for fresh water

3) The United Nations also estimates that 1.1 billion of the world population have no access to fresh drinking water. Further, by 2025, nearly two-thirds of the world’s population could be living under stressed water conditions

4) China, which is expected to continue growing at a robust pace in the long-term, has almost one quarter of the world’s population, but only 6% of the world’s fresh water resources. Further, water efficiency in China is also significantly below the developed world

5) India, which is home to another over a billion population is facing water shortage already in several regions

6) Nearly 10% of the diseases globally are water borne. With rising healthcare cost for individuals and governments, having clean water supply is a absolute necessity

The challenges might be endless and it encapsulates and negatively impacts more than one industry, economy, government or country.

So, where are the opportunities in the midst of these challenges?

The Opportunities

It is estimated that USD22.6 trillion of the estimated USD41 trillion of cumulative global infrastructure spending (2005-2030) is directed towards water infrastructure. Clearly, water infrastructure presents an attractive investment option. This is especially true for China, India and countries in the African continent, where water infrastructure is very poor relative to the developed Western World.

With waterborne diseases being one of the major challenges, wastewater treatment companies are also expected to be in the limelight along with companies providing water purification system for households.

I must point out here that Asian rivers are the most polluted in the world. With Governments becoming increasing conscious about health related risk and preservation of the water system, there is immense growth opportunity for global water treatment companies to profit from government initiatives.

Besides water infrastructure and waste water treatment, packaged drinking water market also has immense growth potential. Europe is the world’s largest bottled water market. However, as standards of living rise in Asia, the key growth for the bottled water industry will come from this region.

Specific Investment Options

One of the best ways to consider exposure to the water investment theme would be through water ETF’s. For investors in the United States, several options are available, which would give a diversified portfolio (in terms of investment globally in Water industry).

Some of these options are –

1) First Trust ISE Water Index Fund (NYSEARCA:FIW) – This ETF, with net assets of USD69 million, consist of 36 stocks that derive their revenue from the potable and wastewater industries. In my opinion, this could be an excellent long-term investment option

2) PowerShares Water Resources (NASDAQ:PHO) – This ETF, with net assets of USD1.16 billion is a purely domestic play with 100% exposure to American corporations. The sub-sector focus is primarily on investing in companies providing provision of potable water, water treatment and technology and services directly related to water consumption

3) Claymore S&P Global Water Index ETF (NYSEARCA:CGW) – This ETF, with net assets of USD250.6 million has exposure to the water industry in the United States, Europe, Brazil and Hong Kong. The investment focus is on 25 water utilities and infrastructure companies and 25 water equipment and materials companies based upon Standard & Poor's Capital IQ (CIQ) industry classification

In terms of specific companies, investors can consider exposure to –

1) Pentair, Inc (NYSE:PNR) – The Company primarily operates in the water and technical products segment. The water segment is a global provider of movement, storage and treatment of water. The stock does look a good buy for long-term with a current PE of 14.8 and decent growth prospects. As PNR forays further into Emerging Asia, growth would be supported at higher levels

2) Kurita Water Industries Ltd. (TYO: 6370) – In terms of investing in companies outside the United States, Kurita provides an attractive investment option. Kurita is primarily engaged in provision of water treatment related products and technology and maintenance services. With a PE of 15, and an order book of 182 billion Yen (as of end December 2010), Kurita has revenue and growth visibility for the foreseeable future

3) Companhia de Saneamento Basico do Estado de Sao Paulo-SABESP (NYSE:SBS) – Another good investment option, SBS is majority owned by state of Sao Paulo.SBS provides water and sewage services in 365 of the 645 municipalities in the State of Sao Paulo. SBS also sells water on wholesale basis to six municipalities. Being a state owned entity, SBS is not restricted from investing abroad. With a current PE of 6.2 the stock does look attractive considering the upside potential the industry has

In conclusion, water might be in 2011 what oil was in 2001. Further, the demand drivers are just too strong to ignore the investment theme (especially when demand comes from over 2.5 billion people in emerging Asia).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.