We have recently been plunged headlong into a global pandemic that has upended societal conventions, stopped global industry in its tracks, and confined around a third of the global population to their homes over various timeframes.
The nature of the crisis is different from anything else we have experienced before, 9/11 and the global financial crisis included, writes Simon Gottelier, senior portfolio manager of the water strategy at Thematics Asset Management.
Forced reassessment
Covid-19 can’t help but change the way we think about the delivery of essential services, and water and sanitation fall very clearly into that category.
Because water is everywhere, we don’t necessarily tend to notice it.
It’s a sort of reassuring presence as water investments can be in a broader portfolio of products.
We remain focused on investing in industrial equipment companies that do not depend too much on new capital projects ,where we expect delays, most particularly in the oil and gas sector, and prefer companies that make critical parts that are too important not to be maintained or replaced regularly.
Harsh reactions
Perhaps the most surprising and disappointing performance during the market downturn has been from some of the utility companies.
While some regulated utilities are among the best performers year-to-date, much of the positive contribution came prior to the crisis, with the drawdown in these names taking many people by surprise.
We would highlight some multiple compressions and some particularly harsh stock reactions in the ‘Concessions’ sub-segment.
Given the sanitation crisis we have all endured, and the role water plays in handwashing and maintaining a hygienic living space, we reiterate how surprised we have been at how water has been taken for granted.
It was an eye-opener to us that the world saw panic-buying of toilet paper at the start of confinement periods, with little thought given to the underlying water delivery or sewerage service required to get through an extremely difficult period.
Investment case
There are a few drivers that will continue to support the theme of water.
First, the long-term nature of the demand for water will not disappear as the need for investment in emerging markets and new investment in water and infrastructure in both developed and developing countries is set to last for at least 50 years and beyond.
For example, more than a trillion dollars of pent-up refurbishment spending is required in the US alone.
In addition, increased regulation and the use of analytics in terms of water quality will intensify the need to invest in infrastructure.
Rising urbanisation and industrialisation demands the development of substantial new water infrastructure as more of the world’s population moves to cities – again particularly in developing regions.
Furthermore, in many developing economies, living standards are improving and a more affluent middle class emerging, with a preference for a higher protein/meat diet, dramatically increasing agricultural water demand.
Long-term value overlooked
The threat posed by climate change, while an opportunity for us, it also remains the greatest existential threat of our time.
However, the opportunity presented by the increased use of big data in the management of water resources and systems in the mapping of consumption patterns and quantities as well as other climate-related offerings such as the water re-use market can bring huge opportunities for the sector that will also to alleviate some of the risks posed by climate change.
We accept that it is unlikely that people will rush to buy water stocks when this drama subsides – but we certainly contend that these stocks, their critical role in our lives, and their long-term value are being overlooked, and undervalued.
This article was written for Expert Investor by Simon Gottelier, senior portfolio manager of the water strategy at Thematics Asset Management.
