I’m drinking on the job again.
No, not that kind of drinking. I’m swigging away from a one litre bottle of fresh water. Like most folks, I thought nothing of it when I bought it. I took its availability for granted, even though it’s that cool Voss stuff all the way from Norway.
But sadly, that’s not the case for approximately 40% of the world’s population, which lacks adequate fresh water supplies. What’s more, the United Nations says that two out of three people will be living in areas under “water-stressed” conditions by 2025.
Water shortages currently affect 80 countries and within 50 years, more than half the global population will be living with water shortages.
But hang on a minute… isn’t 71% of the Earth’s surface made up of water?
Yes, that’s true. But 97.5% of it is seawater, leaving just 2.5% that is drinkable. And only about 0.1% of all water is readily available. Most of it is locked up in glaciers, groundwater, and soil.
And water supply problems are only going to get worse… which opens up some very good investment opportunities.
Here’s the deal…
More people = more pollution = less water
In 1900, there were about 1.6bnpeople on Earth. Today, there are 6.5bn. By 2025, the world population is expected to rise to 9bn.
But here’s the problem: During the 20th century, human water consumption swelled six-fold and global water demand already exceeds supplies by 17%, according to the Population Institute. And World Bank figures show that demand is doubling every 21 years. By 2020, two billion extra people will require 20% more water than is currently available, according to the International Food Policy Research Institute.
And speaking of food, global population growth leads to increased industrialisation and pollution. US energy production requires about 40% of fresh water withdrawals. And the fact that people are also living longer means not only less drinking water, but also less water available for food production.
Crop production already claims 65% of fresh water, compared to 25% for industry and 10% for households. 7,000 litres (1,540 gallons) of water are used for one kilogramme of grain-fed beef… 5,000 litres (1,100 gallons) for one kilo of rice… and 1,500 litres (330 gallons) for one kilo of corn, according to the US Geological Survey.
The point is… when it comes to water needs, it doesn’t matter one iota what the economy or stock market is doing. Every single person on the planet needs water… period. And with H2O in shorter supply, the world is set to invest approximately $800bn over the next decade to improve the situation. This is the time for smart investors to run with this opportunity…
The China problem
For all the talk of federal budget plans, economic bailouts, stimulus packages and all the other dizzying (and often demoralising numbers), money is no object when it comes to satisfying the world’s water needs.
Put bluntly, no water = no people. Certainly no need to worry about the economy, unemployment, the real estate and auto industry debacles, or anything else if you’re not actually alive!
Of that $800bn I just mentioned, China has set aside $200bn for its water infrastructure over the next decade. It makes the US government’s $8.4bn look like small potatoes in comparison – and woefully inadequate. The Environmental Protection Agency forecasts that the US will have to spend $277bn on water infrastructure by 2019. Nevertheless, China has some serious problems…
• Two-thirds of the country already faces water shortages. Its annual water shortage is 40bn cubic metres and it uses 30 more cubic kilometers of water than is replaced by rain.
• Of its 1.3bn people, 300m don’t have access to clean drinking water.
• According to Summit Global Management, “75% of China’s drinking water is unsuitable for drinking and cooking, and 80% of China’s seven major river systems no longer support fish.”
What’s worse is that at the current growth rate, China’s population is doubling every 12 years. More people = more food/drink needs = more agriculture development and industrialisation = more pressure on water supply and demand.
So what’s the solution?
Thirsty for profits? Try these water stocks…
Let’s kick off with a broad investment option. Because of their increased flexibility, lower costs, and the fact that they trade like stocks, I like ETFs (exchange-traded funds). With water, you can go for…
• PowerShares Water Resources (NYSE:PHO), which tracks the price and yield performance of the Palisades Water Index. The fund includes big water companies such as Veolia Environnement (NYSE:VE) and Ameron International Corp. (NYSE:AMN)
• Claymore S&P Global Water Index Fund (NYSE:CGW), whose results aim to replicate the performance of the S&P Global Water Index. Like PHO, it holds Veolia and Aqua America Inc. (NYSE:WTR), plus Danaher Corp. (NYSE:DHR) and Severn Trent (LON:SVT).
Breaking it down, Paris-based Veolia is one of the biggest water infrastructure stocks and is split into four groups: Water, Environmental Services, Energy Services, and Transportation. See a more detailed company profile here, and rundown of its water management operations – it has a very broad reach in the industry. With a P/E ratio of just nine, it’s trading at a hefty discount and coughs up a fat 15.8% dividend yield ($3.12 per share annually), too.
Aqua America’s fourth-quarter revenues rose 7%, resulting in 3% earnings growth. With an aggressive acquisition policy that has seen the firm tie up more than 100 buyout deals over the past few years, it has boosted its customer base from 245,000 in 1992 to 950,000 today. It applied for $80m-worth of price increases last year, with $61m approved. This resulted in a 10% revenue increase in 2008 and a 15.7% profit margin. It pays a 2.8% dividend.
• This article was written by Martin Denholm for the Smart Profits Report