Investing in the water value chain – including infrastructure, technology, and services – can help investors achieve sustainable returns over the long term. Now is a good time: valuations of high-quality companies demonstrating strong earnings growth, such as those our strategy targets, look compelling after a correction compared to the broader equity market.1
The global need for sustainable water management is growing due to long-term trends including population growth, urbanisation, and climate change. This means the market for pipes, water treatment, filtration technology, metering services, etc., is expanding, offering opportunities for growth and sustainability-driven investing.
Three core elements underpin the case for water-related investing:
- Water is a critical, non-cyclical resource with stable demand. More than two billion people live in water-stressed regions – a number expected to rise. This includes highly economically productive areas such as California and Taiwan. Governments and corporations are investing in water infrastructure, purification, and wastewater management, creating growth opportunities. Regulatory frameworks and incentives such as the European Green Deal and UN Sustainable Development Goals (SDGs) are likely to drive capital into water solutions.
- Sustainability-driven growth is key. Water-related investing can contribute to UN SDG 6 (clean water and sanitation), as well as support climate action and sustainable cities. Investors, therefore, have an opportunity to target financial returns alongside a measurable impact on water access, security, and quality.
- We see compelling return potential. The global water market is projected to grow from $990 billion in 2023 to $1.6 trillion by 2030. Water-related businesses, as providers of an essential public service, can offer attractive risk-adjusted returns with lower volatility than the broader market given their low sensitivity to the economic cycle. A diversified exposure across geographies and the water value chain helps reduce concentration risk and enhance resilience and returns.
Tapping into growth currents
Across the water value chain, we have identified three main areas:
- Water infrastructure: We invest in companies building, maintaining, and upgrading infrastructure such as pipelines, reservoirs, and treatment plants. They stand to benefit from a push to modernise ageing infrastructure in developed markets and greenfield projects in emerging markets.
- Water technology: This segment includes innovators in technologies including smart metering and leak detection systems. As water utilities adopt digital solutions to improve efficiency, technology providers are well-positioned for long-term growth.
- Water utilities and services: Providers of water distribution and treatment services offer stable, predictable cash flows due to their regulated and essential service nature. Utilities act as a defensive allocation, balancing higher-growth segments.
Our water strategy – Diversified across regions and sub-sectors
Our strategy seeks to capitalise on the urgent global need for sustainable water management solutions by investing in companies that generate at least 20% of revenues from water-related activities.
We aim to capture growth opportunities in developed and emerging markets. Significant exposure to North America and Europe is driven by infrastructure modernisation and regulatory support, with catalysts such as the US Water Infrastructure Act and EU Water Framework Directive.
Urbanisation and industrialisation in Asia, Latin America, and Africa fuel demand for clean water and efficient wastewater systems, offering higher growth potential despite elevated risks.
The non-cyclical nature of the water sector provides stability across economic cycles: water utilities benefit from regulated, recurring revenue streams; exposure to higher-growth companies in water technology and infrastructure acts a counterbalance.
Risks include changes in macroeconomic conditions and regulations. Valuation risk is managed by focusing on companies with strong balance sheets that can generate consistent cash flows and long-term growth.
A focus on quality, market growth and demand for products aligned with sustainability-related goals should support the strategy’s performance outlook over time.
Valuations, opportunities and earnings
After a de-rating in the markets, we believe relative valuations look attractive. The valuation dislocation over the past 18 months presents, in our view, an attractive entry point for investors. The price-earnings (PE) premium is now well below the long-term average with the next 12 months PE at 20 times, compared to the MSCI ACWI index’s 18 times. Valuations should improve as market conditions stabilise, and investor focus shifts to long-term growth and sustainability themes.
We believe US President Donald Trump’s re-election presents short-term opportunities. The expected focus on deregulation and infrastructure development could benefit companies involved in water infrastructure and management. His policies may lead to increased government spending on infrastructure projects, including water systems, to stimulate economic growth.
Moreover, the potential for tax cuts and reduced regulatory burdens could improve company profitability, boosting their growth prospects in the medium term. However, we remain cautious of potential market volatility and geopolitical risks of Trump’s trade policies.
Positive momentum from several sectors and stocks
- Technology: Economic growth, especially from a pro-growth US administration, will likely require more water-intensive technologies such as for manufacturing semiconductors.
- Healthcare: Firms are addressing PFAS (a large, complex group of synthetic chemicals) contamination in the US water supply, including consultants, laboratory equipment providers, and treatment operators.
- Industrials: Firms could benefit from a recovery in construction markets, particularly in Europe, and demand from fast-growing tech sectors for, for example, cooling solutions for data centres.
- Materials: Companies offering water filtration and treatment solutions have delivered robust returns due to strong demand and operational efficiency.
- Utilities: The sector’s underlying earnings have strong economic defensiveness. We expect a material increase in utility spending during the upcoming regulatory periods in the UK and Brazil.
Conclusion
We believe water is a prime investment theme in listed equities. This perspective is buoyed by factors such as climate change, ageing infrastructure, pollution, and rising demand.
Current market conditions present attractive entry points for long-term investors as opportunities across the sector are supported by economic improvements, tighter regulations, structural growth and technological advancements.
[1] This is an edited version of an investment case update provided by Impax Asset Management.
