Why did Michael Burry, the investor who made the greatest bet against the US Economy during the 2007-08 crisis, believe that the water is going to become the most precious asset in the world?
Abstract :
Water is present in abundance around the world but only a small percentage of it is fit for human use. This leads to one unavoidable question, “What would happen if this water is not available in enough quantity for us?” Along with an alarming concern, this question brings with it a huge influx of opportunities. The water industry is untapped all around the world and is starting to gain the interest of investors due to increasing demand and the increased scarcity of supply. Water is one of the planet’s most coveted and widely used resources. Like other commodities, such as oil and gold, water assets can add significant diversification to any portfolio. Water possesses immense potential and the power to replace even the most coveted commodities, including gold! Water is essential and indispensable to all aspects of life. Water sustains families and communities. It supports economic productivity. From semiconductor manufacturing, to agriculture, to hotels and restaurants, virtually all sectors of the economy relies on water. We know water is the source of life. But it can also be a source for portfolio diversification. The writeup follows recent developments and projects a future lookout, becoming clearer every passing day.
INTRODUCTION
“Water was liquid silver, water was gold. It was clarity—a sacred thing. Drinking was no longer something to take for granted. I’d never needed to consider water before.” – Aspen Matis
With water turning into a scarce resource around the world, it is not uncommon for people to consider wars over it to be a distant reality. In their quests worldwide, researchers have found that rising temperatures and population growth will increase the chance of cross-border conflicts by between 75 to 95 percent within the next century. “What’s happening bit by bit is that water scarcity is becoming increasingly common all around the world, no matter where you look as country after country hits the limit of what it can use, “Whether that’s in Australia, California, China, India, Pakistan, or right throughout Africa.” says Professor Mike Young, a researcher in Water and Environmental Policy.
The availability and rising demand of this resource has untapped extremely potential investment opportunities and turned water into a commodity that could be invested in and traded extensively with each passing day.
Water trading and investing is the practice of investing in Companies, Stocks and ETFs that focus primarily on water — companies manufacturing bottled water or those involved in water-related infrastructure. There are also a number of indexes tracking water-related stocks.
The process of water trading in India can be traced back to the early 1920s, with its documentation beginning in late 1960s. On the global frontier, international markets have been keen on water investments and trading from an earlier stage. They have developed advanced investment vehicles for water trading, including water indexes and funds on similar lines.
“Burry is focusing all his trading on one commodity; Water” – Killik
Investment in water was brought into the limelight in recent times by Dr. Michael J Burry through his insights in several articles and interviews. Burry is a renowned investor and analyst, who was the inspiration behind the Hollywood movie “The Big Short”. He thoroughly emphasized on the fact that water is the equivalent of liquid gold in the future and we are neglecting the potential as well as the dire need to secure clean water. Further, he is investing in water-rich foods and farmlands such as almonds, among other investment vehicles for water.
In his words, “What became clear to me is that food is the way to invest in water. That is, grow food in water-rich areas and transport it for sale in water-poor areas. This is the method for redistributing water that is least contentious, and ultimately it can be profitable, which will ensure that this redistribution is sustainable. Fresh & clean water can not be taken for granted. And it is not – water is political and litigious.” – Michael J Burry
INDIAN SCENARIO
In the recent decades, India has witnessed a rapid growth in demand for water, particularly in domestic and industrial sectors, due to population growth, urbanization, industrialization, and rising incomes. This growth in demand has not been matched with an increase in its supply. The problem is compounded by pollution of water, which has reduced its suitability for various purposes. Under these circumstances, it is vital to use water efficiently and judiciously. It is also necessary to anticipate and address inter-sectoral conflicts over the allocation and use of water. The standard approach so far has been to advocate reforms in water pricing across sectors in order to reflect the scarcity value of water and the cost of service provision. Nevertheless, major areas using water, particularly in irrigation, have resisted these reforms so far, resulting in inefficiency in its use, persistently low quality, and in some cases, loss of sustainability. In this context, economic theory tells us that markets increase economic efficiency by allocating resources to their most valuable uses.
WATER MARKETS AND INDIA
In recent decades, India has witnessed a rapid growth in the demand for water, particularly in domestic and industrial sectors, due to population growth, urbanization, industrialization and rising incomes. This growth in demand has not been matched by an increase in supply. The problem is compounded by pollution of water, which has reduced its suitability for various purposes.
Economic theory states that markets increase economic efficiency by allocating resources to their most valuable uses. In other words, if certain conditions are met, markets provide the correct incentives and lead to efficient use of the concerned resources. Therefore, one way to change the incentives and support the reallocation of water in order to achieve a more efficient allocation of water is through water markets. The markets allow water users to buy and sell water, thus changing the whole incentive structure and breaking the logjam of water pricing reforms. When water users observe gain from the strategy of reallocation, they would be willing to sell water or pay a higher price for new supplies.
For water markets to work, the property rights associated with water must be private, exclusive and transferable. Another important rationale for water markets is the relationship between markets and liberty. In this context, the creation of formerly non-existent entitlements in these markets could prove to be a tool for empowerment. Irrespective of their socio-economic status, holders of water rights would be sought after by those looking into buying these rights.
Water markets prevalent in India are informal and are generally limited to water trading between adjacent farmers — a practice quite common for groundwater. Indian water markets are localized, fragmented and uneven across regions, as they grow in magnitude and earn their significance. The expanse of the area irrigated through water markets, which is often considered to be a surrogate for the magnitude of water trading, varies across regions as well as over time. It depends on a number of factors such as rainfall, groundwater supply, cropping patterns, and the cost and availability of electricity. With regard to challenges, the issue of water scarcity is likely to get aggravated in future with a possibility of the changing nature of water demand. These challenges have emphasized on the need for initiatives towards water allocation and efficiency improvement.
It is, therefore, imperative that India explores a solution to informal water markets that assign property rights to individual users, expand the scope of trading and make large-scale inter-sectoral water transfers possible. Since formal water markets have legal basis, they can be subject to adequate regulation, leading to legal and institutional issues that need to be resolved.
CORRELATION BETWEEN WATER AND THE ECONOMY –
In the developing nations of the world, those with access to cleaner and improved water and sanitation facilities have shown a greater spurt in development by up to 3.7%.
Investments made in the water industry and water-related industries suggest impressive returns, especially in clean water. Water sanitation industries have given returns ranging from USD 3 to USD 34 on every 1 USD invested.
Several countries have funded industries and processes to spend on water, since it is used in turbines, producing electricity, cooling generators and machinery. Subsequently, water holds major importance in agriculture and related activities.
There are several countries like the UAE investing heavily into the process of desalination, or the procedure converting seawater into freshwater. The method has generated an immensely positive impact on their progress in tackling the issue as compared to the rest of the world, along with securing them with an edge over relevant developments.
Most of these observations also pertain to India, considering the importance of water in most of its industries and agriculture being its occupational “backbone”. Although the path paved by improved water, its usage and sanitation is unprecedented and often undermined, its positive effect, from the healthcare industry to the manufacturing industries, show that it is beneficial to all.
DEMAND –
Besides agriculture taking up a majority on the end of demand in the equation, there are several public and private companies, which are vigorously taking up shares in the water industry — whether it be for requirements in processes, production or other commercial purposes. Increasing water scarcity, rising population and lack of resources has elevated the demand of the resource beyond comparison, resulting in the following projections of water related industries:
In the prevalent scenario, India has had the following consumption table:
Table 1 – Approximate usage distribution, 2019 :
Agriculture (78%)553.8 Domestic Use (6%)42.6Industrial Use (5%)35.5Power Development (3%)21.3Others (8%)56.8TOTAL710
Table 2 – Expected usage distribution by 2025 :
Agriculture (68%)802.4Domestic Use (9.5%)112.1Industrial Use (7%)82.6Power Development (6%)70.8Others (9.5%)112.1TOTAL1180
The domestic usage has increased many folds over the years and it is expected to reach 167 liters a day per capita by 2050 from the current levels of 99 liters a day per capita.
The demand is also expressed through the following products:
Water Pumps and machinery or equipment used for water or related activities
The revenue in the industry has grown to over Rupees 5000 crores, and it is expected to cross twice the amount of this figure by 2025.
Bottled water and packaged water: It is an industry rising in the ranks. It was valued at $29 Billion in 2019, and it is further expected to cross $60 Billion by 2024 with a CAGR of over 10%.
Water purification industry: As an industry directly linked to the supply of consumable water, it plays a pivotal role in the bigger picture. It is rising at an unprecedented rate with a CAGR of 24%, and is expected to reach $818 million by 2024 from its current valuation of $391 million.
Other factors in demand include the following:
An inevitable growth in the population
The need to change water infrastructure in developing countries
The addition of the privatisation of such tasks
When comparing its demand equation to the supply equation, India has had poor infrastructure, planning and procedure to store and utilize water effectively. Most states in India experience poor supply of water for agricultural and industrial purposes. The pipelines and transportation systems, although revamped to be highly efficient, are still failing to cope with the regular demand.
This scenario leaves a majority of the sector to pursue private companies establishing themselves in this sector. The Indian government has announced plans to invest 50 Billion dollars into the water industry. The plan also aims to incorporate the private sector to promote growth and investment opportunities.
SWOT ANALYSIS
A SWOT Analysis of the matter brings the following forward:
Strengths
The scarcity of water leading to an exponential rise in demand.
The introduction of various investment vehicles and opportunities for water worldwide.
The efforts by countries across the globe to improve water infrastructure and allow growth of the industry as well as the investments made in it.
Weaknesses
It traces a slow-paced growth.
People undermine the alarming increase in the scarcity of water.
The willingness among people to make a substantial change.
Opportunities
An increase in the involvement of the private sector.
A growing demand of the resource worldwide.
An increase in the amount spent towards water infrastructure.
Threats
An exponential increase in sustainability.
The alternatives to water sources are being discovered along with ways to harness and use the source, such as the case of glaciers.
Scientific advancements in turning ocean water into freshwater.
Why you should invest in water
The primary factors that decide the investment opportunity in a particular asset is the demand-supply equation. This equation, coupled with other complex factors, helps one decide how good an investment can be. Water, as a subject of investment, is no stranger to this approach.
The demand for water is such that it is impossible to be replaced or overshadowed, due to its ever-increasing nature. The growing demand for clean water or water as a commodity is directly proportional to the growing population and its needs. Since the growth of the population and their demands have not shown a decrease, it is evident that the demand for water will not be decreasing over time.
Water fits the bill of an investment that can be regarded as a safe haven in times of crisis — much similar to the worth of gold. Increased volatility, especially in circumstances similar to the current pandemic, is increasing the demand for stocks which are immune to such changes. Water and the stocks related to it, including water equipment, machinery and utility companies to name a few, are some of the rising prospects in investment, as confirmed by experts such as Dr. Michael J Burry.
On the contrary, the supply equation, especially in India, is not adequate to support the demand. The infrastructure, facilities, research and development investments are some of the causes behind the drastically weakening supply of the resource. The end of supply encourages investment, with the Indian government planning to invest close to Rs. 3 Lakh Crore in the industry for safe water facilities to every household in the country. The initiative creates a significant investment opportunity in companies dealing in water and the assets attached to it.
The following graphs show the resistance of water indices to the pandemic and the growth they saw in the same period:
The S&P 1500 Water Utilities Index is a sub-sector of the Standard & Poor’s 1500 Utilities Index; this index is composed of just two companies, American States Water (NYSE:AWR) and Aqua America (NYSE: WTR).
The S&P 1500 Water Index Chart
The Dow Jones U.S. Water Index is composed of approximately 29 stocks; it is a barometer consisting of a large number of international and domestic companies that are affiliated with the water business and have a minimum market capitalization of $150 million.
Dow Jones Water Index Chart
A PROMISING FUTURE
According to a report by Business Standard, “India’s government will invest Rs. 3.6 trillion to provide piped water to all households.”
It then states, “India to see an investment of Rs. 3.6 Trillion in the “Jal Jeevan” mission, an attempt to provide piped water to all households by 2024. The budget allocation to this sector increased too by upto 15% to Rs. 115 billion with the balance of the allocated budget to be released in the subsequent years.
This gave a very promising boom to companies directly involved in the aim of the project, Jain Irrigation Systems Ltd. experienced a rise of 4.9% even during the pandemic and Shakti Pumps India Ltd. saw an increase of a staggering 20%.
There are several companies offering promising returns in a time like the 2020 pandemic. These stocks show the capability of water to be immune to such problematic conditions and the possibility of water being a future competitor to gold.”
On a global outlook –
These are a few indexes tracking the American and Global water markets:
S&P Global Water Index
S&P 1500 Water Index
Both these indexes have shown resistance to current conditions and a stark increase in economically challenging times.
There are a number of water ETFs giving investors a variety of options to invest in the water markets. These include the following:
Invesco Water Resources ETF –
1-Year Trailing Total Returns: 11.2%
Expense Ratio: 0.60%
Annual Dividend Yield: 0.44%
3-Month Average Daily Volume: 49,753
Assets Under Management: $1.1 billion
Inception Date: December 6, 2005
Issuing Company: Invesco
Invesco Global Water ETF –
1-Year Trailing Total Returns: 9.3%
Expense Ratio: 0.75%
Annual Dividend Yield: 0.91%
3-Month Average Daily Volume: 11,017
Assets Under Management: $209.1 million
Inception Date: June 13, 2007
Issuing Company: Invesco
First Trust Water Index Fund –
1-Year Trailing Total Returns: 9.0%
Expense Ratio: 0.55%
Annual Dividend Yield: 0.54%
3-Month Average Daily Volume: 21,395
Assets Under Management: $552.3 million
Inception Date: May 11, 2007
Issuing Company: First Trust
The following firms are investing in the water sector:
1. LGTVP: As a part of The Liechtenstein Global Trust (LGT), group of the princely House of Liechtenstein, the LGT Venture Philanthropy supports organizations with outstanding social or environmental impact, providing financial, intellectual and social capital to supported organizations. In the strife to increase the sustainable quality of life of less advantaged people, LGTVP has also made an investment in Driptech.
2. Matrix Partners: Operating in the United States, India and China across multiple sectors, they have partnered with hundreds of innovators. With Matrix India’s advisory offices in Mumbai, the organization invests funds across significant growth sectors in India, including internet, mobile, education, financial services, healthcare, consumer and emerging areas. Within the water sector, they have made an investment in Waterlife, which develops solutions to provide safe water, and Chetas, a company focused on providing turnkey solutions in water management.
3. The Sandi Group: This Washington-based company is investing $ 7 million to fund research for developing water-purification solutions in India, through Aquakraft. This fund will help improve water-treatment technologies in the Asian country.
Indian Water Companies
Following are some insights regarding Indian Water Companies:
ION, Ion Exchange (India) Limited:
VA Tech:
Thermax:
Triveni Engineering:
KSB:
Varun Beverages:
These companies have shown strong rebounds to the crisis that had hit us all in the form of the pandemic. While most companies suffered and are still in the recovery phase, these companies in the water industry have shown stark increase in their stocks and resistance to continued downfall that other companies in similar industries have shown.
Some of the factors that affect prices in the water market and stocks related to water:
We can look at a few factors that have been of significant weightage in recent times and over the years in general
Growing population: Relative and proportional to the growth in the population belonging to a particular geographical area and the concentration of users, added to the usage patterns and requirements are major deciding factors for demand in the area. Growing demand is directly proportional to the supply required, and hence, elicits opportunities for the growth of companies in various fields of the water industry, including sanitation, beverage and domestic usage, such as pipes and motors.
Scarcity: As mentioned earlier, the scarcity of clean and safe water for various purposes is on an exponential rise. Lowered supply coupled with exponential increase in demand is another major contributing factor to consider.
Innovation: Developments, whether in the technological or mechanical sectors, are fueling advancements in the water industries as well. Newer and more efficient water transportation, storage, refining systems, improved waste management systems, pipelines and motor systems are providing the incentive to replace older systems to avoid unnecessary costs and are, therefore, considering them as investments. A f countries have introduced opportunities for the private sectors based in them to participate in the renewal of the state or municipal water systems to new, more efficient systems.
Resistance to Shocks and Volatility: This is a relatively new aspect that has come to light due to the COVID-19 pandemic. Water indexes and stocks alike have shown resistance to what has been a bloodbath in the markets and the detrimental effect that the pandemic has had on most, if not all, sectors. Water has shown resistance to decline and steep growth on the charts in times when investments vehicles considered to be the safest, such as those focusing on gold, could sustain the financial load and crash.
Conclusion
The graphs and statistics presented in the research paper show the predicted growth rate of the water sector, returns, rewards and the investment opportunities. The opportunities, water and its related industries present, are unmatched in potential. These have shown a resistance to many factors that can lead to a decline in most industries. And even more so, a potential to revert back to original return levels faster than most comparative industries. They also offer a lucrative long term investment potential and a “safe haven” in the times of volatilities. Opportunities to invest in this scarce resource are flowing freely, and the first mover advantage on investments will provide returns which most dream about.
References:
https://www.investopedia.com/articles/etfs/top-water-etfs/
https://www.investopedia.com/articles/06/water.asp
https://www.business-standard.com/article/pti-stories/nal-se-jal-plan-water-sanitation-may-attract-rs-6-3l-cr-investment-in-next-5-yrs-says-report-119071400251_1.html
https://yourstory.com/2013/10/7-firms-investing-in-indias-water-sector
http://thevalueofwater.org/sites/default/files/Economic%20Impact%20of%20Investing%20in%20Water%20Infrastructure_VOW_FINAL_pages.pdf
http://econdse.org/wp-content/uploads/2016/07/Water-Trading-Chap-9-first-proof-aug-2012.pdf
