In the Financial Times

Philippe Rohner, Senior Investment Manager, answered questions from the Financial Times about water.

Thirst for "blue gold" set to grow

(This article was published in the 7 June 2010 edition.)

The UN, which proclaimed last 22 March as "World Water Day", also estimates that the world population will increase by 40% to 9 billion inhabitants by 2050. As their purchasing power increases, the populations of developing countries like China and India are consuming more and more goods that require water for their production. Take meat, for example. It can take up to 10 times more water to produce meat than to produce cereal crops. Various studies have shown that demand for water is increasing at twice the rate as the world's population.

Water is therefore seen as one of the strategic resources of the 21st century, much like energy resources. More investments will have to be made in water infrastructure and water treatment in order to meet the increasing demand.

Perhaps the best way to illustrate how the water market will evolve over the next few years is to look at the numbers. In China, for example, investment in water conservation projects reached a record 142.7 billion yuan ($20.9 billion) in 2009, more than twice the amount spent in 2008. And there is no reason to expect the trend to let up if Beijing wants to reach its ambitious economic goals and prevent social and political mayhem as a result of water shortages.

Due to stricter rules in developed countries, the European Union intends to invest a total of nearly €350 billion in new infrastructure between 2006 and 2025, and the United States is expected to invest some $900 billion in this same segment by 2019.

But even so, nation states will not be able to meet the increasing global demand for water on their own. At a time when many countries are looking for ways to reduce their debt, both industry and individuals will also have to count on the private sector as well. Referred to as the water outsourcing market – the share of this segment is already quite big, accounting as it does for an estimated $260 billion in annual turnover.

These various factors illustrate the daunting challenge facing the world in the years to come. So daunting in fact that one might wonder if they can even be met. In theory, at least, they should be. For one, water is a renewable resource, unlike fossil fuels. The water cycle, remember, works like a closed circuit: from the earth's surface, namely the oceans, water evaporates into the atmosphere only to return to the surface in the form of precipitation. The total available water therefore remains stable over time. The problem, however, is that only a tiny fraction of the world's water – some 0.25% – can be used by man since the rest is in the form of salt water, glaciers and wastewater.

Global demand for soft water will therefore exceed supply in the years to come, which means the price will inevitably rise. Today, the size of the world water market is $500 billion and growing steadily at an annual rate of 6%. There are many listed companies taking part in this boom which offer attractive opportunities to investors. One industry that looks particularly promising is the water desalination sector, which is enjoying higher rates of growth than other water-related sectors. With this technology, freshwater can be created from sea water at reasonable costs in regions where drinking water is scarce.

Experience has shown that a careful selection of companies within the water sector offering a competitive advantage over their peers, a solid outlook for growth and attractive multiples should continue to offer higher returns over the MSCI World index. By investing in water, investors can not only help improve the living conditions of people all over the world, but also earn attractive returns.