The world’s population stands at seven billion and the United Nations estimates more than 2.5 billion people need more water than they have access to. The OECD predicts that by 2030, four billion people will be impacted by severe water stress, which is roughly half the global population.
The UN forecasts the world’s population will reach nine billion by 2050, and there will need to be significant changes to the way we use, reuse and distribute the world’s fresh water by that time.
Urbanisation and rising standards of living mean greater use of water per person. A growing population and rising use make water demand very difficult to match with improved supply and distribution.
Stress factor
Earth’s freshwater resources are not uniformly distributed around the world and many water resources are becoming heavily polluted. Growing demand and a shrinking usable supply are creating significant stress around the globe, which is most pronounced in emerging economies.
According to the UN, approximately 90% of all waste water in developing countries is discharged untreated directly into the sea or rivers. Rapid urbanisation in emerging economies has created situations where the required infrastructure for urban dwellers has not kept pace.
A wild card that may have an impact on access to the world’s fresh water is potential climate change and more frequent extreme weather events. In regions where water is already scarce, it may become scarcer with more extreme weather patterns.
Supply and demand
According to the World Bank, the agricultural sector accounts for 70% of global use. The rise in incomes in emerging market populations has led to higher meat and dairy consumption. Agriculture used to feed livestock for meat and dairy is much more water-intensive than plant-based diets. As incomes rise, diets will improve and this increased water demand is unlikely to change. Domestic use accounts for 12% of water withdrawals and industrial use makes up the final 18%.
Growing demand, particularly in regions where water is already scarce, together with shrinking supply, creates risks to global peace and economic growth. As water is irreplaceable in many industries, and required to enable the urbanisation and improvement in wealth, its short supply may be a significant drag on the previous growth engines of the world. It also creates opportunities for significant growth in some sectors.
Global Water Intelligence estimates a world water industry market worth $316bn. We expect water sectors such as desalination, waste water treatment, irrigation technologies, water-efficiency and recycling technologies will be in a secular growth environment for many decades to come. We also believe that water utilities, even in developed markets, provide some very attractive characteristics.
As water demand continues to rise, there will be a very predictable tariff. The regulated nature of utilities means margin expansion will never be allowed but steady revenue growth, often linked directly to inflation, offers attractive properties in a low-yielding market environment.
A yield story
The biggest position in most of the funds I manage is the iShares Global Water 50 exchange-traded fund (IH2O). It tracks the Dow Jones Global Water 50 Index, which is made up of the 50 biggest and most liquid global water companies.
The potential growth of the water industry is promising and we believe the valuation is also very attractive. The average yield on the water index is 3%, that compares favourably with the S&P 500’s dividend yield of 2.4%. The average price-to-earnings ratio of this index is 15.21, which is a small premium to the S&P 500 p/e multiple of 14.97.
We believe this is justified given the higher growth of the industrials, and the defensive cashflows of the distribution companies.
We also have investments in the iShares S&P Emerging Markets Infrastructure ETF. This is exposed to the regions where the growth in demand is at its highest, and companies involved in all aspects of the water industry have very good prospects in these regions.
