Liquid assets

Water may be the oil of the 21st century, but its infrastructure is a mess. Ergo, there’s billions up for grabs to keep the taps on

Globe Investor Magazine, Feb. 21, 2008
Photograph by Jesse Boles

The United Nations estimates that within 20 years, water shortages will afflict two-thirds of the world’s population. Below the surface of this looming crisis lies a global investment opportunity: water infrastructure.

Investors can take one of two tracks: Go after new water treatment technologies—essentially, gamble that the method they pick will be the winner in the marketplace. Or bet on water-supply infrastructure, which has a more predictable future.

A common misperception is that infrastructure mainly involves new drinking-water plants for fast-growing markets like China and India, but developed nations, as well, are facing huge costs to repair existing facilities.

Investors who want to tap the global water market—revenues were more than $450 billion in 2007—should look for companies with lengthy contracts to build and maintain services, or to supply piping, pumps, purification systems and other proven equipment and technology.

Packaged products aside, water doesn’t trade widely as a commodity. Water infrastructure, however, is less sacred. The two biggest players in the rapidly consolidating water sector hail from Paris—Veolia Environnement (VE/NYSE) and Suez SA (SZEZY/Nasdaq) deliver everything from desalination plants to outsourced management.

As a group, water stocks have outperformed the broader market in recent years. Since 2003, the Palisades Water Index of publicly traded companies has seen a 23.42% annual return. Benjamin Tal, an economist with CIBC World Markets, pegs water infrastructure as a relatively stable long-term investment—especially if the companies have access to China and India. One caveat: Rising valuations mean it’s tougher to make money now.

The easiest way to take a diversified plunge into water is through ETFs or water funds, which offer exposure to a host of firms, including blue chips like Suez and Veolia. Two that are available to Canadian investors are the Claymore S&P Global Water ETF and the Criterion Water Infrastructure Fund.

If you’d rather go with individual stocks, one promising play is British water and waste-water giant United Utilities. The $12.4-billion company, which specializes in long-term contracts—everywhere from the U.K. to the Philippines—is flush with cash. In fiscal 2007, United more than doubled its net profit. - Nick Rockel