Growing up, there was hardly an option for extended showers or bubble baths in my house; water was expensive, and the quarterly assessment caused quite a few family feuds. Being the city dwellers we are today, it is easy to assume that things have changed for the better. As with many other items, water has become part of an extended “amenity package” in our everyday lives, with the true cost not obvious or seemingly inexpensive compared to other items. Taking this notion to the global stage, however, we find that the reality is a much drier one.
Water has never been so scarce, given the rapid growth of our global population, the impact of climate change, and the vast industrialization of emerging societies; in fact, it is estimated that by the year 2030, nearly half of the world¹s population will be living in areas with high water stress. In an almost “ironic twist of creation,” there is a significant geographic imbalance of water supply and demand in most emerging, heavily inhabited regions. For example, China, with over 21% of the world¹s population, controls only 7% of the water available.
Water is rare and cannot easily be created. Earth’s existing supply continuously moves through the water cycle (evaporation, condensation, precipitation, etc.), and we have yet to develop a reliable process to manufacture more of it. This aspect is concerning, as the demand for water is expected to double every twenty years, more than twice the rate of anticipated population growth. Related, it is unfathomable that large volumes of water are polluted and thereby not of use for regular consumption. Eighty percent of sewage, mostly in developing countries, flows unfiltered back into the environment. And in the developed world, nearly half of all distributed clean water is lost due to leakage from outdated infrastructure.
Given our predicament, there are distinct opportunities from the perspective of investors:
1. Water is the commodity of the future. Most investors in commodities still “lump” the opportunity together, with a strong focus on energy and, to a degree, base/precious metals, with the latter often considered currency to begin with. Even though commodities (in general) can provide an efficient enhancement in the process of portfolio construction, investing has been a volatile ride for some years now. It appears to be more appropriate to pair the intention of a commodity investment with aspects of scarcity and a “good story.” Periods of volatility will be easier to bear.
2. With emerging societies and an inherent “upgrade” of living conditions and lifestyle, including the adaptation of higher protein diets, water is also intimately connected to the optimization of agricultural output. As with water, arable land in densely populated and expanding regions of the world is of limited-to-insufficient availability. Investments in water and (related) agriculture should be focused on regions and countries with an overabundance of those combined resources; the U.S. is one option, but Brazil is another “wonderland of resources.” Please see my past entry, Undefeated Brazil, for more information.
3. Over the next 20 years, nearly $22 trillion will need to be invested in water-related infrastructure projects just to maintain the current status quo. Echoing this assessment, China, as part of the country's 5-year plan, has considered a sizable increase of up to 35% to be invested in waste-water recycling and treatment facilities. For investors familiar with the recent “hype” surrounding natural gas, fracking, etc., who have bought into the stated need for upgrading the U.S. energy infrastructure through Master Limited Partnerships (MLPs), applying the same logic leads us to water.
Water is already the reason for numerous conflicts around the world, especially border conflicts with respect to territorial ownership of relevant supplies of precious H2O. Critical observers need to understand that water is not only a vital commodity, but also a universal human right. Both aspects require the focus of global policymakers as well as the flow of investment funds. We are only at the beginning of the next wave of water-related developments.
Matthias Paul Kuhlmey is a Partner and Head of Global Investment Solutions (GIS) at HighTower Advisors. He serves as wealth manager to High Net Worth and Ultra-High Net Worth Individuals, Family Offices, and Institutions. For the rest of his blog posts, visit here. You can also follow him on Twitter @MoneyClipBlog.
