Is this the real liquid gold?

Why tapping into Earth’s most precious resource could be the next big thing.

Ask Eoin Fahy to name the world’s most precious resource and he doesn’t hesitate to answer.

“It’s blindingly obvious,” he said. “Water is the most essential item in the world.”

That response often surprises people, he said, especially with many investors fixated on the falling price of oil, now at $45 per barrel, down 57% from $107 in June 2014.

Plus, many people living in the developed world often take clean water for granted — just turn on the tap and it’s there. But it is a finite commodity, and it’s slowly disappearing.

Fahy, an investment strategist and chief economist with Kleinwort Benson Investors, a Dublin-based investment firm, has made a career out of studying — and investing in — water.

In some ways, water is an ideal sector for investment, as unlike oil, water can’t be reproduced and everyone needs it to survive, Fahy said. Solar and wind power, on the other hand, are growing alternate sources of energy.

“The supply of water is fixed and you can’t make more of it,” Fahy said. “You can also live without oil and fossil fuels, you can’t live without water and that’s part of the reason for the investment case  — the sheer importance of the thing.”

While the market is still growing, already some water-related stocks have garnered returns north of 100% and it’s likely the opportunities — and returns — will increase as the sector matures, Fahy said.

The water conflict

The problem isn’t that there’s too little water on the planet, it’s that there’s not enough clean fresh water to go around. Only 1% is consumable by humans, according to the US Environmental Protection Agency. Desalinisation plants, which convert salt water (97% of the world’s supply) to clean water, are still expensive to build.

Pollution, growing populations and increasing demand for water — for use in everything from agriculture and energy production to health care and manufacturing — has reduced the clean water supply further.

While California’s ongoing drought remains a pressing concern in America, China is in even greater trouble, according to Deane Dray, a managing director at RBC Capital Markets and an advisor to the United Nations on water issues.

“Without debate, it’s the worst there,” he said. China’s urban population is expanding quickly — the United Nations estimates that 292 million people will move into the country’s urban areas between 2014 and 2050 — putting pressure on existing water infrastructure in these area, Dray said.  

As well, China’s water supply comes mostly from rivers and lakes, about half of which are polluted, Dray said, with most of China’s usable water located in the south, while much of its population lives north. To fix its water infrastructure woes, China will need to spend trillions, according to a 2013 McKinsey & Company report.

Other locales, such as India, Australia, Israel, Jordan, the United Arab Emirates and parts of Africa are also dealing with water shortages. And, as the global population increases, even water-rich countries, like Canada, Russia and Brazil, will encounter problems, Dray said.

An investment opportunity

To avoid conflict, governments will eventually have to address the shortage.  That’s where the investment opportunities come in. The easiest way to make money off the crisis is to own the stocks of companies that are involved in improving water quality, Fahy said.

That could be construction companies that are building desalination plants, infrastructure operations that are working on dams and water treatment centres in developing countries and technology companies that are trying to find ways to make water cleaner. Those who want to learn more about businesses in the sector should read Global Water Intelligence, said Dray, a trade publication that covers the industry.

While still a long-term play — this issue is only ramping up —an investor can get decent returns today. The S&P Global Water Index, which tracks 50 companies from around the world that are involved in water-related business, has a five-year annualised return of 8.1% and a three-year annualised return of 7%. While that is lower than the S&P 500’s 12% annualised return, these are still attractive returns for those who want to make a long-term bet on water, he said.

Among the strongest individual stocks in Fahy’s portfolio, American Water Works, a wastewater utility holding company and Danaher Corporation, a global science and technology company, are both up more than 121% over the last five years. Both are well-run companies, he said, and that’s what’s primarily driving returns.

It’s important to remember that while some water-exposed stocks have experienced massive returns, others have had big losses. Just because Fahy’s two companies have done well, doesn’t mean they will outperform going forward.  

One notable problem with this area of investment, however: most of the companies primarily operate in other sectors. At Danaher, water accounts for only 12% of its business. General Electric, which is on Dray’s list of water stocks, has only a small part of its business in water. While this does show that large companies recognise opportunities in water, it is still difficult for people to make a pure-play investment.

Buying actual water

Another way to invest in water is by owning it outright. In Australia, investors can buy into funds that own water entitlements — access to parts of a lake or river.

The fund can then sell the entitlement to someone else or let another company — agriculture firms, for instance — use the water it owns for a fee. Euan Friday, the general manager of water at Kilter Rural, a Victoria, Australia-based investment firm, said this water market started in the early 1990s when Southeastern Australia’s Murray-Darling Basin was being overused.

Friday’s firm owns about 1% of the water in the basin and investors can buy into the fund for A$20,000 ($14,1555) to take advantage of the “rental” prices paid to use these entitlements.

His investors make a 4% to 7% annualised return, he said — and, the water entitlement itself has a compound annual growth rate of about 10% — which is similar to the stock market, but direct investments in water tend to be uncorrelated with equities, he explained. His funds’ returns are more determined by weather, and supply and demand. If it rains a lot, then his renters don’t need as much water so prices fall. If it’s a hot year, the price-per-megalitre climbs.

There aren’t many other places that one can do this kind of investing, Friday said, in part because developing countries such as China and South America have sovereign risk issues around water.

Still, as sector tackling water scarcity matures, so will the investment opportunities.

“It’s an interesting topic,” Fahy said. “It’s one of the biggest structural problems that we’re going to face over the next 10 to 20 years.”

This story was produced under the BBC's guidelines for financial journalism. A full version of those guidelines can be found at bbc.co.uk/guidelines.

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