How to invest in water as droughts, shortages dominate the news
By Myra P Saefong
Not all water investments are winners: analyst
With drought conditions being widespread around the world and the water crisis in Jackson, Mississippi, water has become a popular topic these days. This does not automatically lead to a win-win situation when it comes to investing in this sector.
“While the water megatrends continue to grab the headlines, the investment implications are more complicated,” said Deane Dray, managing director and cross-industry analyst at RBC Capital Markets.
“One of the biggest myths is that all water investments have to be winners,” he says of all the imbalances between supply and demand, droughts and clean water fiascos like the one in Jackson. “Too many people think that just being in a water-related business is automatically a good investment. That’s just not the case.”
Most water exchange-traded funds were trading lower this year on September 6, with First Trust Water (FIW) down 18%, Invesco Global Water (PIO) down 28% and Invesco Water Resources (PHO) down 19%. Shares in water technology provider Xylem Inc. (XYL) are down 23% and public utility company American Water Works Co. (AWK) is down 21%.
Meanwhile, on the Chicago Mercantile Exchange (CME), water futures based on the Nasdaq Veles California Water Index traded at $1,165 per acre foot, up about 21% year-over-year.
Investors have a variety of ways to invest in water management, “from desalination technology to companies that provide water at the community level and those that transport water,” says Andrew Chanin, CEO of ProcureAM and publisher of the Procure Disaster Recovery Strategy ( FEMA). There’s no easy fix, so “diversification might be one approach investors are considering to tackle the growing water crisis,” he says.
Among investment choices, water futures can help determine if there are concerns about scarcity, adds Chanin. Investing in water ETFs, meanwhile, shows an understanding that “a crisis is imminent and that we depend even more on these companies to develop solutions.” And companies that provide technology, infrastructure and water transportation, as well as methods of obtaining drinking water such as desalination, could be “very important in cycles of drought and water scarcity.”
In a striking sign of how bad water shortages have gotten, the US Bureau of Reclamation reported that the water level at Lake Mead on the Arizona-Nevada border, the country’s largest reservoir, was only 28% full as of September 6.
“We expect the consequences of water scarcity to become more evident … leading to a corresponding increase in demand for companies that support more thoughtful approaches to water use,” said Alec Lucas, research analyst at Global X ETFs.
Lucas oversees his firm’s water and clean tech funds, such as Global X Clean Water (AQWA), which includes “pure plays” — companies that derive at least 50% of their revenue from operations related to the clean water industry achieve , he says. These companies include Xylem and American Water Works, as well as water distribution and metering products maker Mueller Water Products Inc. (MWA) and water treatment and purification technology developer Ecolab Inc. (ECL).
RBC Capital Market’s Dray says there are few listed “pure” water companies, and while there are over 50,000 water utilities in the US, fewer than 10 are listed. This limits the choices of investors in the water sector.
Nonetheless, Dray believes that Xylem, Evoqua Water Technologies Corp. (AQUA) and Danaher Corp. (DHR) are “much better positioned to be winners” in the higher-tech water sub-sectors, such as smart water systems, automation, water testing and desalination. .
-Myra P. Saefong
(ENDS) Dow Jones Newswires
09-10-22 1500ET
Copyright (c) 2022 Dow Jones & Company, Inc.