Fundamentals:

According to the UN, by 2025 1.8 Billion people will be living in regions of absolute water scarcity and two thirds of the population could be living under stress conditions. Water usage has been growing at more than twice the rate of population growth in the last century. This is a trend that cannot continue for much longer.

70% of the total freshwater usage is consumed by agriculture, 19% by industry and 11% by domestic usage (FAO 2010). In developing countries where agriculture is the lifeblood of the economy, agriculture can account for up to 90% of fresh water withdrawals. The world’s population is forecasted to grow to 9.3 billion people by 2050. This requires a massive increase in agricultural production which will have the flow on effect of increased water usage. Whilst the developed world has implemented strategies to curb water waste and increase efficiency, the developing world to a great degree has not adopted any such measures.

Data obtained by FAO AQUASTAT shows that global fresh water withdrawals between 1987 and 2000 increased by 1% per year. This trend is expected to continue in developing nations. There has been a slight decrease in withdrawals within developed countries due to technological advances and increased efficiency.

Energy requirements:

Energy is required for the pumping and treatment of water. The amount of energy required for pumping varies due to elevation or depth of ground water, distance and other geological factors. In the wastewater treatment process, the amount of energy required varies due to the source of the water and different levels of treatment are required depending on the different uses needed for the water. Water required for drinking needs a higher level of treatment compared with water required for agricultural uses.

Water scarcity has four main influencing factors:

*The first as already mentioned is the massive growth in the world’s population.

*The second is the increasing urbanization of the global population. Water will need to be provided to an ever more centralized citizenry.

*The third is the increase in per capita consumption. The amount of water used by people will increase as the world becomes more developed.

*The fourth is the impact from climate change. Whilst it is still uncertain as to the intensity of the impact, semi-arid areas are continuing to see an increasing pattern of infrequent rainfall, leading to droughts.

How can you profit from the water scarcity?

Whilst it’s hard to invest in financial instruments such as water rights, there are a plethora of companies that are developing innovate and ground breaking technologies within the water sector. These companies have massive upside potential as the market demands new solutions to an ever increasing scarcity of water.

Your timeframe, skill in securities analysis, risk tolerance and yield target will determine what type of vehicle you invest in. There are individual companies, ETF’s and managed funds, all operating in the water investment sphere.

There are a multitude of ETF’s that operate in the water sector. I have listed a few as a starting point for new investors into the sector:

Powershares Global Water Portfolio (NASDAQ:PIO):

The PowerShares Global Water Portfolio (Fund) is based on the NASDAQ OMX Global Water Index. The Fund generally will invest at least 90% of its total assets in companies listed on a global exchange that create products designed to conserve and purify water for homes, businesses and industries. PIO owns 37 stocks in the NASDAQ OMX Global Water Index.

Powershares Water Resources Portfolio (NASDAQ:PHO):

The PowerShares Water Resources Portfolio (Fund) is based on the NASDAQ OMX US Water Index. The Fund generally will invest at least 90% of its total assets in common stocks and American depositary receipts (ADRs) of companies in the water industry that comprise the Underlying Index. The Underlying Index seeks to track the performance of US exchange-listed companies that create products designed to conserve and purify water for homes, businesses and industries. It is the largest ETF in this space, with more than $1 billion in assets under management. PHO invests in 29 individual water companies across a variety of industry sub-specialties.

Guggenheim S&P Global Water ETF (NYSE:CGW):

This ETF takes a similar approach to investing as PIO with nearly equal exposure to the industrials and utilities as well as exposure outside of the U.S. This is probably why the return this year has been 20 percent, nearly in line with PIO. The annual expense ratio is 0.70 percent. The Index is comprised of approximately 50 equity securities selected, based on investment and other criteria, from a universe of companies listed on global developed market exchanges.

First Trust ISE Water Index ETF (NYSE:FIW):

The ISE Water Index is a modified market capitalization-weighted index comprised of exchange-listed companies that derive a substantial part of their revenues from the potable and wastewater industry. The Index begins by establishing the total population of stocks in the potable and wastewater industry and eliminates stocks which do not meet the Index’s baseline eligibility requirements. To meet Index eligibility, a stock must satisfy market capitalization, liquidity and weighting concentration requirements. The Index selects the top 36 stocks in the industry by market capitalization. The basket of 36 stocks relies more on the industrials (65 percent) than the utilities (22 percent). The makeup is not too far from that of PHO with more industrial stocks at the top of the allocation.

If you conduct your own securities analysis, you may wish to examine these individual stocks further:

PICO Holdings (NASDAQ:PICO):

PICO Holdings has a portfolio of investments including Water, Real Estate, Agri-Business and Corporate. Their water investment vehicle is Vidler, a privately owned company in the water resource development sector. They develop new sources of water distribution, primarily in the southwestern United States for municipal and industrial use, either from existing supplies of water, such as water used for agricultural purposes, or from acquiring previously unused water. They also develop water storage infrastructure to facilitate the efficient allocation of available water supplies. Vidler has exposure to water rights that can be sold during times of shortage. They also sell and lease water storage infrastructure to municipal organizations when they require supply.

Consolidated Water Company (NASDAQ:CWCO):

They design, build, operate, and in some cases finance seawater reverse osmosis (SWRO) desalination plants and water distribution systems in several Caribbean countries, where the supply of drinking water is scarce and the use SWRO is economically feasible. The Company was established in 1973 as a private water utility in Grand Cayman, the largest island in the Cayman Islands group, and obtained its first public utility license in the Cayman Islands in 1979. The Company was listed on the Nasdaq stock market in 1995. Over the past 10 years, the Company has grown from a small Cayman Islands based utility business with revenues of less than $10 million dollars per year to a regional water provider with 2008 revenues in excess of $65 million dollars.

Mueller Water Products (NYSE:MWA):

They are a manufacturer and marketer of products and services used in the transmission, distribution and measurement of water. The Company’s products include engineered valves, fire hydrants, pipe fittings, water meters, leak detection and pipe condition assessment which are used by municipalities, as well as the residential and non-residential construction industries. The Company operates in two segments: Mueller Co. and Anvil. Mueller Co. The Company’s valve or fire hydrant products are specified for use in the 100 metropolitan areas in the United States. The Company offers residential and commercial metering products and systems and leak detection and pipe condition assessment products and services. Mueller Co. products are sold through waterworks distributors.

Summary:

Investing in water is a no brainer as the fundamentals driving the growing global trend of water scarcity are becoming stronger by the day. Whilst not a contrarian investment, the water sector has not yet been effectively priced by the market as government regulations keep the price of water, essentially free. This will change quickly when governments realize that current usage rates are increasing and cannot be sustained for much longer.