The water sector offers huge, long-term opportunities for investors with the recent US Election result just another boost to an already positive story.
This is the view of Justin Winter, portfolio manager at Impax Investment, who believes water infrastructure in particular will be a rewarding place to invest in 2021.
Speaking on a recent BNP Paribas podcast, Winter pointed to several key drivers. He said that emerging countries like India and China continued to see a migration from rural areas to cities – and this meant increased investment in essential water supply and waste-water systems.
But he stressed that opportunities in the water sector were abundant in developed as well as emerging countries.
With the developed world – particularly the US – there have been years of under-investment in water infrastructure and in the deep south of the US ongoing problems with poor quality water and contamination.
Political shift
Winter’s view is that Democrat control of both Houses means the US is likely to see significantly more active investment in water infrastructure projects – which is good for investors in this space.
But is his outlook a fair representation or is it overly bullish?
Martin Conroy, portfolio manager on the KBI Global Investors Water Strategy, broadly agrees with Winter’s summary.
“I think there are good investment opportunities in both developed and emerging markets. In the emerging markets China, India and Brazil stand out as areas of interest.”
To provide some perspective on the level of investment, Conroy points out that the market in China is the same size as that of the US and Europe combined in terms of total spend on water infrastructure.
The incentive in China is to improve both access to and quality of water supplied to its population.
He namechecks US water technology company Xylem as one of several multi-nationals well-placed to benefit from infrastructure spending in Asia.
“Xylem have pointed to the huge growth opportunities in India and China – with 20% growth in both these markets. This is important as Xylem is seen as a bellwether in the industry.”
Clean water for every household
The story in India is not too dissimilar that of China – increasing urban populations with associated water supply and quality issues.
The re-election of prime minister Modi in 2019 was a big positive for those companies in the water sector, according to Conroy.
“Modi has put plans in place to build infrastructure so that every home in rural India will have access to safe piped water by 2024. This is ambitious and will require tens of billions of US dollars to achieve. In Brazil, the country is introducing its universal sanitation bill – this too will have an impact on levels of water infrastructure work.”
With regards to the US, Conroy takes a similar line to Winter. He believes there are positives to be drawn from the Biden administration, its pledge to improve water infrastructure and the fact that the Democrats will not be subject to high levels of obstruction (given they have a majority in the Senate and the House of Representatives).
In a developed market like the US, it is more about rehabilitation of existing infrastructure than building from scratch but there are big opportunities there, Conroy says.
“It is undoubtedly a positive that the Democrats hold both houses but in the water sector in the US it is not just about Federal spending, a lot of the decisions come at local level and local revenues have taken a big hit because of the pandemic.”
Conroy’s view is that companies will benefit from an increased infrastructure spend in the US but that spending may not be as immediate due to covid than otherwise might have been the case.
The upside may not be felt for some companies until 2023 or later.
Regulation
Winter believes regulation will have an impact in levels of water infrastructure work undertaken globally and particularly in the US.
“Over the last four yours in the US, the administration has not been keen on enforcing existing legislation let alone tightening what is there.”
He points in particular to chemicals known as PFASs (or ‘forever chemicals’) that are now widely present in US drinking water and that can potentially cause serious health problems.
So far there has been no over-arching policy to address this problem, but Winter is hopeful that under a Biden administration this might change.
“Companies that can provide solutions to [the PFAS] problem – those who produce testing equipment; companies that run laboratories which run these tests and companies that specialise in removing contaminants – all these companies are attractive to us and offer good profits for investors.”
Closer to home in Europe, Conroy believes Ofwat in the UK has set stringent targets for water companies in terms of water quality, waste-water standards and effective leak detection – a similar picture exists in mainland Europe too.
The bottom line is that in 2021 spending in the water industry is more a necessity than a choice – which is good news for manufacturers, consultants and service providers aligned to the sector.
