There is no product more essential than water. But global supply is declining as climate change accelerates. It is a good time, therefore, to consider the possibility of making an investment in alternative stocks to refresh our portfolios with water.
Why the water?
As the world's population grows and becomes richer, the demand for fresh, clean water grows with it. And not just for drinking: a reliable water supply is essential for the world's food sources. A report of the United Nations on climate change has been a timely reminder that the world is warming rapidly, putting pressure on agricultural land. Among the many alarming findings, the report notes that many areas are already experiencing declining water availability.
Diagram of global freshwater use as a proportion of available resources in 2018. Source: UN
After all, 15.000 liters of water are needed to produce a kilo of beef, and an astonishing 12 liters for a single almond. So, as the world gets richer and eats better, the U.N. esteem that global water supply will be 40% less than demand by the end of the decade. There is no arguing that these figures are terrifying. But for some investors, this dramatic discrepancy between supply and demand is an opportunity to profit on stock investment alternatives. Among the most prominent water investors is Michael Burry: the doctor who left health centers to become a hedge fund manager. His story inspired the movie The Big Short, where Burry has enormous success after correctly predicting the subprime crisis of 2008. But the movie ends with this message:
Final shot of The Big Short
How can we make an investment in water stocks?綠
Unlike wheat or coffee, water is one of the few commodities that cannot be purchased on agricultural futures markets. What you can do is make an investment in shares of one of the many companies that supply water or that develop the technology that helps them function. Water suppliers are companies public services regulated companies that operate under strict limits on how much they can charge clients and how much profit they can generate. Utility companies, such as Pennon (PNN), can be a good investment in attractive, stable stocks, and often pay dividends with good returns. But if you're looking for a more risk-reward strategy, water technology companies like Nomura Micro Science (6254) could be very profitable options.
And are there investment funds in water shares?狀
There are quite a few exchange-traded funds (ETFs) that invest in companies in the water sector. Just keep in mind that they usually charge higher fees than stock investment market ETFs that track the S&P 500 or FTSE 100. The largest by assets is the iShares Global Water ETF (IH2O), which tracks the S&P index. Global Water 50. This fund has delivered profits to investors for 11 consecutive quarters and has risen much faster than the overall equity investment market. Since its inception it has risen nearly 250% compared to roughly doubling the MSCI All-Country World Index.
Comparison of returns of water ETFs. Source: Bloomberg
The second largest water ETF by assets is the Invesco Water Resources ETF (PHO), which tracks the Nasdaq OMX US Water Index, and the third is the Lyxor World Water ETF (WAT), which tracks the Societe Generale World Water Index.
Are there other ways to invest in water stocks?
We could copy Michael Burry and buy plots of irrigated farmland. After all, the U.N. esteem that 72% of all water is used for agriculture. However, it's not exactly practical to bid on farmland. We can, for example, make an investment in shares of real estate investment trusts (REITs) focused on agriculture, such as Gladstone Land Corp. (LAND) and Farmland Partners (FPI).
What are the disadvantages of investing in water?
Investments in stocks in this sector have no guarantee that the arable land will appreciate in value. Like most industries, agriculture is improving its efficiency with each passing year and new varieties of crops are being developed that are not as harmful to the environment. Producing more food from the same area of land, with less water, could put downward pressure on land prices. For example, the cost of land in the American Midwest, for example, has barely changed in the last decade.
Midwest farmland price changes. Source: Federal Reserve Bank of Chicago
Human beings will always need water, but a good investment in stocks moves between supply and demand. Ultimately, it is up to you to decide if the glass is half full or half empty when making this investment in alternative stocks.