Taking the future of water into your hands August 2021

Alex Martens, Fund Manager & Sector Analyst Industrials, KBC Asset Management
“Water is occupying an increasingly prominent place on the economic and political agenda. As a result of climate change, we will have to contend with more extreme weather conditions. These can lead to both flooding and water shortages. Companies which are looking for solutions to the water issue deserve our attention more than ever.”

Three ways to invest in shares of water companies

  1. Structural shortage of potable water creates a need for investments
  2. Stable revenue growth translates into solid earnings growth
  3. Correct valuation offers opportunities
1. Structural shortage of potable water creates a need for investments

Potable water is scarce and not equally distributed.

70% of the Earth’s surface consists of water, but only 1% can be used as drinking water. That water is moreover very unevenly distributed. Four countries – Brazil, Russia, Canada and the US – contain 10% of the world’s population but almost 40% of its water reserves. By contrast, China and India have more than 30% of the global population but only 10% of the water reserves.

Our consumption is high.

70% of global water consumption is used in agriculture and stock farming; industry uses 20%, while 10% ends up in our domestic taps. On average, each of us consumes more than 100 litres of water per day.

Demand is increasing.

  • There are more of us. That also means more of us to consume water. The global population is projected to grow by around two billion by 2050, to almost 10 billion.
  • On top of that, water consumption is rising twice as fast as population growth, because our living standards are also rising. That is a particularly significant factor in emerging countries such as India and China. More households are gaining access to basic comforts such as a shower, toilet, washing machine, etc. And they are also consuming more: think of smartphones, cars, etc.: their production processes also consume thousands of litres of water.

The supply is declining.

More investments are needed.

To bridge the gap between supply and demand, we not only need to use water more sustainably. It is also crucial to invest. As a result of climate change, we will have to contend with more extreme weather conditions. To bridge periods of drought, but also to counteract flooding during periods of heavy rainfall, investments are needed in extra space to store water, such as in buffer and waiting basins, infiltration wells and cisterns.

According to research by McKinsey, no less than 11 700 billion USD is needed for investments in infrastructure in order to meet the demand for water by 2030. American President Biden's infrastructure plan seems to be a step in the right direction.

2. Stable revenue growth translates into solid earnings growth.

The shortage of drinking water, the need to maintain and expand infrastructure, and higher standards for water quality, create stable revenue growth for water companies. This revenue growth in turn translates into solid earnings growth and explains their strong performance on the stock markets over the last ten years.

Bron: Thomson Reuters Datastream

Investing in water is partly cyclical and partly non-cyclical.

  • Water infrastructure, for example, is highly cyclical. When the economy is doing well, more houses are built, public investment increases and companies make bigger investments in maintenance and expansion. The recovery in economic growth after the coronavirus crisis, combined with extra government investments, should provide a stimulus for these companies.
  • Companies active in areas such as testing water quality or water treatment are less dependent on the economic cycle. They often operate in niche markets, and boast strong balance sheets and high liquidity.

Demand for water will always be there, whatever happens, creating an endless growth narrative for water companies.

3. Correct valuation offers opportunities

There is one caveat to the growth narrative of water: the price/earnings ratio is traditionally higher than for the broad market. This premium is justified if higher economic growth can be expected. However, since the corona crisis, this premium has disappeared. Now that the economy is recovering from the corona crisis and government investments are finding their way into new infrastructure works, water companies can benefit from this.

What exactly are these ‘water companies’?

Did you know that...

… there is music in leak detection technology

‘Acoustic monitoring‘ helps detect expensive leaks in pipelines and thus water losses. Special equipment is used at night to listen for ‘leakage sounds’ or vibrations. These acoustic monitors are generally used in conjunction with smart meters. The data is collected, forwarded and analysed. This makes it easy to establish the physical location of a leak, enabling repairs to be carried out faster and more efficiently.

Edited to 03.08.2021. This document is a publication of KBC asset management NV (KBC AM). The information may be changed without notice and offers no guarantee for the future. No part of this document may be reproduced without the prior express written consent of KBC AM. This information is governed by the laws of belgium and is subject to the exclusive jurisdiction of its courts. Investing in the stock market is uncertain and involves risks