Issue 30: 2015

Global Insights

The Global Water Crisis

As California (and the world) grows thirstier, investors are looking at water in a new way.

Photograph by Andy Ryan

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The United Nations predicts that about half the world’s population will be living in areas of high water stress by 2030, with some of the poorest and fastest-growing regions the most affected.

A major driver of future water stress will be the rapid growth of demand in the emerging world. Emerging nations in Asia, Africa and the Middle East face a combination of rapid economic growth, underdeveloped water sanitation and treatment infrastructure, and some of the lowest per capita supplies of freshwater in the world. A total of 70% of the global increase in demand through 2030 is expected to come from just Asia and Africa, with around half of that occurring in China and India alone.1

Emerging nations, when added together, are likely to experience some of the world’s most severe water shortages in the years to come. It’s not a stretch to say that the future of the emerging markets — and therefore the global economy — revolves around an adequate supply of water.

California’s crisis

With tremors in emerging markets, fears of Fed tightening and a structural slowdown in China, investors have plenty of worries keeping them awake at night. But it’s the catastrophic drought in California, and its emergence as a harbinger of the global water crisis, that may carry the most risk to the global economy over the medium term.

In its fourth year, the drought has punished the Golden State, greatly reducing groundwater and snowpack levels and causing billions of dollars of lost economic output. In 2015, it’s estimated that the drought has cost the state nearly $3 billion in direct and indirect costs, according to a report from the University of California, Davis.

Here is a look at the state’s increasing drought level, documented each year in the first week of January. The graphic below documents the drought level from 2011 to September 2015, according to the U.S. Drought Monitor, 2015.

 

Taking Action

The response in California has so far focused mostly on curbing demand, including the use of statewide rationing, imposed in July. But more important for the long term are plans to increase the supply of freshwater, through water treatment, desalination or retention.

On a larger scale, some 17 desalination plants are in the planning stage, including a $1 billion plant in Carlsbad, Calif., that’s scheduled to open in late 2015. Nationwide, billions of dollars could be spent on the U.S. water infrastructure over the next decade.

A range of global investments, both public and private, will be required in water services and infrastructure over the course of several years, in both emerging and developed economies.

This should benefit companies involved in related industries — primarily water monitoring, wastewater treatment and liquid purification services — as well as those that provide industrial equipment for fluid handling, such as pumps, valves, filters, seals and water analysis instruments.  

With California pointing the way to a world of water scarcity, water-related investment opportunities seem likely to proliferate.

Sources: The New York Times, 2015; Fortune, 2011. (Latest available data.)

Why Invest in Water?

  • Corporate investment: Global multinationals have invested over $84 billion in watermanagement over the last three years, including Ford Motor Co., Google, Intel, Nike, Nestlé and many other firms;13 it seems that they will continue to do so.
  • Spending: Billions — if not trillions — of dollars are likely to be spent on water in the coming decades.
  • Investors are watching: Water scarcity remains a key interest with firms such as U.S. Trust.
  • Falling supply: The U.N. says there could be a 40% global shortfall in available freshwater by 2030, based on current levels of water productivity and scheduled investments in water infrastructure.
  • Rising demand: Demand for water services and infrastructure is growing as quickly as 14% per year in the oil and gas sector and 7% in the food and beverages sector.

1 Charting Our Water Future, 2030 Water Resources Group, 2009. (Latest available data.)

2,3 University of California, San Diego, and the U.S. Geological Survey, 2014.

4,6 Time, 2015.

University of California,Davis, 2015.

7,10,12  World Health Organization, 2012. (Latest available data.)

8 The United Nations, 2014.

9,11 World Health Organization/UNICEF Joint Monitoring Programme for Water Supply and Sanitation, 2014.

13 Financial Times, 2014.

IMPORTANT INFORMATION

Investing involves risk. There is always the potential of losing money when you invest in securities.

Projections made may not come to pass due to market conditions and fluctuations.

Past performance is no guarantee of future results. Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

Equities Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

International International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.

The United Nations predicts that about half the world’s population will be living in areas of high water stress by 2030, with some of the poorest and fastest-growing regions the most affected.

A major driver of future water stress will be the rapid growth of demand in the emerging world. Emerging nations in Asia, Africa and the Middle East face a combination of rapid economic growth, underdeveloped water sanitation and treatment infrastructure, and some of the lowest per capita supplies of freshwater in the world. A total of 70% of the global increase in demand through 2030 is expected to come from just Asia and Africa, with around half of that occurring in China and India alone.1

Emerging nations, when added together, are likely to experience some of the world’s most severe water shortages in the years to come. It’s not a stretch to say that the future of the emerging markets — and therefore the global economy — revolves around an adequate supply of water.

California’s crisis

With tremors in emerging markets, fears of Fed tightening and a structural slowdown in China, investors have plenty of worries keeping them awake at night. But it’s the catastrophic drought in California, and its emergence as a harbinger of the global water crisis, that may carry the most risk to the global economy over the medium term.

In its fourth year, the drought has punished the Golden State, greatly reducing groundwater and snowpack levels and causing billions of dollars of lost economic output. In 2015, it’s estimated that the drought has cost the state nearly $3 billion in direct and indirect costs, according to a report from the University of California, Davis.

Here is a look at the state’s increasing drought level, documented each year in the first week of January. The graphic below documents the drought level from 2011 to September 2015, according to the U.S. Drought Monitor, 2015.

 

Taking Action

The response in California has so far focused mostly on curbing demand, including the use of statewide rationing, imposed in July. But more important for the long term are plans to increase the supply of freshwater, through water treatment, desalination or retention.

On a larger scale, some 17 desalination plants are in the planning stage, including a $1 billion plant in Carlsbad, Calif., that’s scheduled to open in late 2015. Nationwide, billions of dollars could be spent on the U.S. water infrastructure over the next decade.

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A range of global investments, both public and private, will be required in water services and infrastructure over the course of several years, in both emerging and developed economies.

This should benefit companies involved in related industries — primarily water monitoring, wastewater treatment and liquid purification services — as well as those that provide industrial equipment for fluid handling, such as pumps, valves, filters, seals and water analysis instruments.  

With California pointing the way to a world of water scarcity, water-related investment opportunities seem likely to proliferate.

Sources: The New York Times, 2015; Fortune, 2011. (Latest available data.)

Why Invest in Water?

  • Corporate investment: Global multinationals have invested over $84 billion in watermanagement over the last three years, including Ford Motor Co., Google, Intel, Nike, Nestlé and many other firms;13 it seems that they will continue to do so.
  • Spending: Billions — if not trillions — of dollars are likely to be spent on water in the coming decades.
  • Investors are watching: Water scarcity remains a key interest with firms such as U.S. Trust.
  • Falling supply: The U.N. says there could be a 40% global shortfall in available freshwater by 2030, based on current levels of water productivity and scheduled investments in water infrastructure.
  • Rising demand: Demand for water services and infrastructure is growing as quickly as 14% per year in the oil and gas sector and 7% in the food and beverages sector.

1 Charting Our Water Future, 2030 Water Resources Group, 2009. (Latest available data.)

2,3 University of California, San Diego, and the U.S. Geological Survey, 2014.

4,6 Time, 2015.

University of California,Davis, 2015.

7,10,12  World Health Organization, 2012. (Latest available data.)

8 The United Nations, 2014.

9,11 World Health Organization/UNICEF Joint Monitoring Programme for Water Supply and Sanitation, 2014.

13 Financial Times, 2014.

IMPORTANT INFORMATION

Investing involves risk. There is always the potential of losing money when you invest in securities.

Projections made may not come to pass due to market conditions and fluctuations.

Past performance is no guarantee of future results. Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.

OTHER IMPORTANT INFORMATION

Equities Equity securities are subject to stock market fluctuations that occur in response to economic and business developments.

International International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.