So you want to be like Michael Burry? Look at the Water trade – Caveat emptor!!
Water is rapidly becoming the hottest investment theme of this decade and it is easy to see why. Water is essential to human life but the amount of water available on the planet is finite. As the world’s population grows so will the demand for water the big problem is the additional supply is just not there.
According to a new report out from Summit Water Capital Advisors, the United Nations estimates the global population will hit 8.5 billion by 2030 putting pressure on already strained water sources. Not only are more people demanding more water but they are also demanding more of it on a per capita basis as industrialization advances in 1900 the global annual water use per capita was 350L per day, by the year 2000 that figure had risen to 640L.
An increase in the volume of water demand for consumption is only part of the problem. Agriculture production demands 70% of all freshwater produced around the world. Forecasts suggest food production must increase by as much as 60% by 2050 to feed the world’s growing population. Energy production is also heavily dependent on water. 27% of all water used in the United States outside the agricultural sector is used to help generate energy. It is estimated energy production will have to rise 33% by 2040 to meet growing population requirements.
So, it is clear the demand for water will explode over the next two decades and as the resource is finite, basic supply/demand rules imply investing in the industry could produce some very lucrative returns for investors.
Four Ways To Play The Water Trade
The problem is finding an asset to buy that will benefit from this trend. Here are some suggestions as detailed by Summit Water in its latest research report on the topic.
- US utilities in transition
US water utility firms, particularly small underperforming and mismanaged water systems are great slow and steady plays. The rollup of small underperforming water systems continued at an attractive rate last year with 56 water deals representing more than $622 million completed.
- International utilities in transition
international utilities are attractive for the same reason as US utilities. The Manila Water Company has built a solid platform for rollups in Vietnam with their first Vietnamese acquisition of Clark Water Company from Veolia and three subsequent purchases since. Other emerging market companies include the Phnom Penh Water Supply Co becoming the first domestically listed company on the new Cambodian Stock Exchange and Saigon Water Supply Corp, which is Vietnam’s largest water operator, which is set for an IPO in 2018.
- The evolution of industrials
industrial water companies along the supply chain have concentrated on debt repayment and cost-cutting since the financial crisis but now these companies have attracted activist investors, who are inspiring managements to invest more, improve margins further and reward shareholders SPX Corp, Flowserve, and Calgon Carbon all have found themselves in the crosshairs of activist groups seeking improvements with regard to operating margins, capital allocation and capital structure. Meanwhile, Sweitzer-Mauduit International a cigarette filter manufacturer has purchased water filtration materials producer Delstart.
Companies such as Toro, Valmont and Lindsay are providing innovative products the help improve water efficiency in agriculture such as intelligent on-demand water systems. Pump manufacturers such as Xylem are also helping to improve water use in this sector.
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