Themes in focus: clean water

Five reasons we like the clean water investment theme.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 16th September 2020

The rise of developing economies over the last 20 years has seen a rapid increase in their demand for freshwater. Today, emerging nations like China and India account for over a third of global water usage (referred to in the industry as ‘withdrawals’) while developed nations are grappling with the reality of aging infrastructure being placed increasingly under stress.

We outline five key reasons we like this theme below:

1) There is no substitute for clean water

Though access to clean water is absolutely vital for life itself, domestic consumption only makes up 10% of global demand. Meanwhile agriculture, which accounts for around 70%, is often accused of being complicit in the depletion of groundwater resources in some regions due to inefficiencies around crop irrigation. Industrial use accounts for a further 20% and is an input in everything from semiconductor manufacturing to oil and gas, and from textiles to paper mills. Regardless of where water is used in our economy, it requires basic treatment such as desalination and filtering.

2) Investing in clean water isn’t just buying overly-indebted utilities

Water has an entire value chain with investable ideas which means that from a portfolio perspective, investing in the water theme does not mean you will end up with a bunch of over-indebted utility companies. From the intake of water at its source to storage in dams and reservoirs, there are companies out there manufacturing equipment like pumps and valves that will aid in transportation and distribution. Before being ready for consumption, there is an array of treatment and purification steps that require specialty chemicals, sensory equipment and advanced filtration systems.

3) Rising Asian economies will only add to clean water demand

A growing middle class in emerging markets has seen disposable incomes rapidly increase in recent years which in turn has driven consumption of goods that need large amounts of water to produce. As these populations continue to grow at a rate far greater than that of the global water supply, it’s increasingly likely that entire countries could begin to suffer from water scarcity which in turn will drive the need for wide scale efficiencies across the water value chain.

4) Infrastructure investment tailwinds are global

Ageing infrastructure in the developed world and new projects coming online in emerging markets are creating an extremely supportive environment for companies involved across water’s value chain. Governments in developed economies have historically been very poor at upgrading existing infrastructure due to tight fiscal budgets. Outsourcing therefore creates a large number of interesting opportunities in the private sector with regards to network repairs, construction projects and water efficiency enhancing technologies.

5) Regulation and health standards

As regulators – particularly in the developed world – become more environmentally minded and continue to develop supporting regulatory frameworks, companies will increasingly seek to address key environmental challenges such as those faced across the water value chain. Rising health standards across the emerging world may also drive the need for more advanced technologies like filtration systems and other such innovations as fresh water is increasingly viewed as a scarce commodity.

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About the author: Tertius Bonnin

Tertius joined EQ in 2016 and is responsible for covering investment ideas within US, Global and Thematic equities. He sits on the fund selection committee and also supports the portfolio managers across a range of other responsibilities.

He passed Level I of the CFA exam in 2018, holds the Investment Management Certificate and has a BA in Business with Finance. He enjoys a variety of sports including skiing, cycling and running – and when not in the office he experiments with Asian cuisine.

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