As Drought Rises: Is Water the “Blue Gold” for Investors?

The state of emergency in five northern Italian regions, severe forest fires in southern France or a historically low level of Great Salt Lake in the US state of Utah. There are three clear consequences this summer of one phenomenon: extreme, persistent drought. Also in Flanders, we are currently feeling the inflation bans in (parts of) the provinces of Antwerp, East and West Flanders.

We can expect droughts – and other extreme weather phenomena – to become more frequent in the coming years, climatologists predict. And then we have to adapt. International companies in the water sector are doing their best to find solutions. Is it smart to invest in stocks in these companies? We asked Alex Martens (sector analyst at KBC Asset Management) and Erik Joly (chief economist at ABN Amro) with five questions.

1. What do water companies do?

A “water company”, it is a fairly broad concept, but according to Alex Martens, one can roughly divide the companies in the water sector into three categories. “You have companies that focus on water infrastructure. For example, they are involved in the design, construction and maintenance of dams and pipes, or they make materials such as water pumps and smart water meters. “

“Another category is the companies that work on water treatment and or efficiency improvement. For example, companies that filter and purify water, check the quality or design water-saving toilets and shower heads. “

“And then there are the traditional ones utilities naturally. They are responsible for the production and distribution of the water that flows from our taps every day, “adds Martens.

2. Is it smart to invest in such a water company?

“Yes”, is the quick response from both Alex Martens and Erik Joly. Both experts have pretty much the same arguments in support of this answer.

Joly starts with a situation sketch. “About 70 percent of the earth is made up of water, but 97 percent of it is undrinkable seawater. So 3 percent is left, of which another two-thirds are trapped in glaciers, ice caps and the permafrost. That means there is still about 1 percent water. ” is for consumption, in other words: water is scarce. “

This means that about 1 percent of the water remains for human consumption

Erik Joly – Chief Economist at ABN Amro

Moreover the demand for water is rising, say both economists. “This is because we are becoming more and more, but also because people’s living standards are rising. And in general, economic growth also means more demand for water, because water is often needed in industrial processes,” Martens explains.

“In addition, there are also climate change“, Martens continues.” As a result, you get periods of extreme rainfall and drought. It is important that you have water buffers for moments when there is not much rain, but also that you can divert or store water somewhere during heavy rainfall. “

Good water management is therefore of great importance and for it investments required. Various – especially international – companies react to this and make big profits with their innovations. All of this means that shares in water companies can be an interesting investment, experts say. “Water is the blue gold, that’s right,” Joly says.

A dried up river bed in the Veneto region, Italy

AFP or licensors

3. Is investing in water companies a thriving business?

“Nothing is booming in the stock markets this year, but in recent years, water has certainly been one popular investment theme“, by Martens.” In recent years, investment in water funds has grown sharply. I think that just continues. To me, water really is one timeless growth history. “

Joly agrees. “The water issue has been a topic in investment land for a long time. The first water funds have been around for at least 20 years. So it is certainly nothing new, but it is of course understandable that these investments will come to the fore again with the drought.”

“There is no hype at the moment,” Joly continues. “The last real hype we saw in investments was in November last year. Then a lot of funds came out that were engaged in energy conversion. I think water is more of a established value is in a diversified portfolio. “

To me, water is truly a timeless growth story

Alex Martens – sector analyst at KBC Asset Management

4. And what are the risks?

Such a diversified portfolio is important, Joly emphasizes. “Water is a good investment from one long-term perspectivebut always in the context of a good diversified portfolio. By that I mean that you also buy shares in companies in other sectors, such as the pharmaceutical industry, the industry or the financial sector. ”

For the water sector is also not separate from the economy. “Overall, the water sector is more of a defensive sector. It is not too speculative, but it is not immune for a general stock market correction. The recent past has shown this. The war in Ukraine and the consequent inflation led to a rise in interest rates. And if the interest rate is raised, it is not good news for the stock markets in the first place. “

© Jonathan Knowlse 2018

It is not for all water companies impact same size, Martens explains. “Water infrastructure companies are more cyclical. That is, they are moving with the economy. When the economy is doing well, more is being built and those companies can benefit. But when things are going badly and savings are being made, it is a segment that “Companies in the water treatment sector have structural growth, whether the economy is doing well or less well, it is something that must always happen.”

Both experts therefore recommend that earlier in water products to invest. It gives you a wider spread of the water companies you invest in. “A water tracker is also an option,” Joly adds. “It will track a certain water index. The advantage of this is that the cost is lower than with a water fund.”

It is not an overly speculative sector, but it is not immune to a general stock market correction.

Erik Joly – Chief Economist at ABN Amro

5. How do I invest in water?

If you want to invest in water yourself, there are several options, says Joly. “I think if you do not know much about the fairs, it is best to always consult Bank. There you can ask the question whether they also have a water fund or whether they are promoting a particular tracker on water. That is the first step. “

“A next step could be to dive into the product sheet based on that information. It usually contains a top 10 of the largest companies in that fund. You can then always choose to buy certain shares directly there. But by act like this, you will of course be less diversified, ”he also warns.

Of course, investing is never without risk, and spreading stocks across different sectors is the rule of thumb if you want to limit your risks.

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