Water shortages and a lack of access to clean water pose major economic and societal challenges all over the world. These problems are exacerbated by climate change, urbanization and population growth. Many countries lack the adequate infrastructure to meet current and future demand further amplifying the issue. These challenges have facilitated what I believe to be a ripe investment opportunity.
The primary justification for investing in water is scarcity. According to the Bureau of Reclamation California only 3% of the world’s water is fresh with approximately 2.5% of that 3% being locked up in glaciers, polar ice caps, the atmosphere and soil. Furthermore, Goldman Sachs stated that freshwater consumption is expected to double every 20 years.
At present, there are 20 countries and 22 territories without any rivers, with Saudi Arabia being the most prominent. A study by Chandrasekharam (2018) found that Saudi Arabia withdraws 20 billion cubic meters of ground water per year, while the annual recharge rate of ground water is only 2.4 billion cubic meters. The unsustainability of these figures prompted the Saudi government to employ drastic measures with the aim of safeguarding their current water supply. This was achieved by buying farmland in water rich countries such as Argentina and central Africa and producing their food abroad. However, according to Chandrasekharam (2018) this policy will reduce agricultural GDP contribution below 3% as 17,300 square kilometres of irrigated land shrink due to water shortages.
Cities such as Sao Paulo, London, Melbourne, Mexico City, Jakarta, Beijing, Istanbul, Tokyo, Bangalore and Southwest United States are all at risk of water supply shortages. For example, in 2015 Cape Town experienced a severe water crisis which caused spikes in poverty, inflation and food shortages across the city.
As countries struggle with water supply, they become increasingly reliant on importing water-based products that they are unable of producing themselves. Water-abundant countries and water-based firms would directly benefit from this situation. Goldman Sachs claimed that water will become the petroleum of the next century, stating that countries with water will be massive economic players similar to oil rich countries.
At present the list of major net importers of water products includes North Africa, the Middle East, Mexico, Japan, South Korea and Europe and is expected to include China, the U.S. and India. Meanwhile, the largest net exporters of water products include Russia, Brazil, Argentina, Central Africa, Nordic countries and Canada. These countries are poised to control the water market over the coming decades as water supply tightens.
This investment thesis has already been successful in many instances. For example, Canada saw their exports of water intensive crops like canola, lentils, oats and wheat increase by 50% since 2010. Furthermore, many hedge funds and banks have also invested heavily into land and infrastructure with large amounts of fresh water along with investing in water-based companies.
Investing in Water
The scarcity argument in favour of investing in water suggests significant potential gains. Brent Woyat, a portfolio manager stated that
“As time goes on, water will become more and more of a scarce commodity”.
This is mainly due to ground water not being a renewable resource, particularly in countries with low yearly rainfall. Although this area has performed relatively well in recent years (as seen by the below figure which depicts the performance of a $1000 investment over 5 years), it’s important to note that this strategy is long term in nature.
So, you’re convinced and would like to invest in this opportunity, how do you go about it?
The easiest way of investing in water is either by investing in ETFs such as the Invesco Water Resources ETF with a 28.68% return YTD or by investing in individual companies that operate within the space such as American Water Works or York Water Company amongst others.
Alternatively, one could adopt a similar strategy employed by Michael Burry where he stated that:
“What became clear to me is that food is the way to invest in water. That is, grow food in water-rich areas and transport it for sale in water-poor areas. This is the method for redistributing water that is least contentious, and ultimately it can be profitable, which will ensure that this redistribution is sustainable”.
Another way to invest in water is to purchase water-rich land and sell the rights to the water. Billionaire T. Boone Pickens adopted a similar strategy where he bought hundreds of thousands of acres of land with fresh ground water in west Texas and sold the right to the water once Texas experienced a draught in 2011.
Although the water situation looks dire in many countries, technological advancements are providing alternatives that can, in a way weaken the above investment thesis. As highlighted throughout this article, one of the primary uses of water is in agriculture. Efficient farming techniques such as drip irrigation or draught-tolerant crops have drastically reduced the amount of water needed to grow the same crop. This efficiency is able to regenerate a country’s water supply and hence reduce its reliance on foreign water-based products. However, these techniques can at times come at a premium which could discourage farmers from adopting them.
Furthermore, many nations such as the Netherlands, Malta, Saudi Arabia, Kuwait and Qatar have significantly invested in desalination plants which could reduce an economy’s dependence on ground water. For example, the desalination plant in Saudi Arabia, Ras Al Khair is capable of providing water to millions of citizens. However, this solution is extremely time consuming, expensive and requires further innovation to sustain an entire country.
Despite all of the innovations and solutions to the water crisis there will still likely be a big opportunity for water-rich countries to capitalize on and potentially control the world’s water supply. Similarly, water-based firms are set to enjoy increased revenue growth potential due to declines in water supplies throughout the world.