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11/19/2015

Water Megatrend Creates Compelling Backdrop for Investors


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Despite water covering 70.0% of the earth’s surface, only 3.0% is fresh, and just 0.5% accessible to humanity. Presently, 2.5 billion people, almost 40.0% of the world’s grain production, and approximately 25.0% of global GDP are at risk because of non‐sustainable water use1. The problems of water scarcity, contamination, and uneven distribution of the resource are becoming increasing prevalent around the world, as water use has grown at more than twice the rate of last century’s rise in population2. Consequently, pressure is mounting on the demand side as the global population increases while the availability of potable water dwindles and lessens supply. The supply and demand imbalance also increases pressure on food and energy security around the globe. As a result, according to Ladenburg Thalmann Senior Water Equity Research Analyst, Richard Verdi, water will be the resource to define the next several decades via a substantial increase in its value.

As recent drought conditions in California show, water scarcity is reaching crisis levels. The California drought is not merely alarming for other areas of the United States, but is directly affecting the country’s food and business industries. The widening supply-demand gap must be addressed urgently, to avoid the same kind of damage to ecosystems, health and livelihoods caused by drought conditions in other parts of the world3.

According to the 2030 Water Resources Group, in less than 20 years, worldwide demand for water will exceed supply by 40.0-50.0%. Past efforts to leverage technology to expand freshwater supplies will close only an immaterial portion of this gap. Thus, the development and implementation of new technologies that facilitate environmentally friendly efficient use of the world’s most meaningful resource will be vital in addressing these challenges. Significant resources have already been invested toward this end but so far, this spend has had only a subtle impact on an overall worsening condition. The Environmental Protection Agency estimates that a $400.0 billion investment in water infrastructure is needed in the U.S. alone, up $100.0 billion from the group’s earlier estimate dating back to 2002.

Due to the increasing water supply-demand gap, as well as the potential danger it bestows upon mankind and the substantial investment tailwinds the imbalance creates, Mr. Verdi sees water industry spending and investment continuing its upward trajectory for the next several decades. According to Mr. Verdi, increased spending will benefit five sub-industries: Water Utilities, Water Equipment & Technology, Water Treatment, Water Engineering & Consulting, and Water Rights. He believes these verticals should continue to gain as they strive to alleviate the world’s growing water supply-demand disparity. In light of the above, as global governmental bodies take action to remedy this issue, Mr. Verdi sees many potential investment opportunities.

-Richard Verdi is a Managing Director - Water & Sustainable Infrastructure Equity Research at Ladenburg Thalmann.

University of Michigan; The USGS Water Science School; World Business Council for Sustainable Development

The 2030 Water Resources Group

International Food Policy Research Institute; Growingblue.com

 

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