As investors look for assets that can hedge against rising inflation, water technology could provide a suitable solution that also makes a positive environmental and social impact.
Equity market investors have experienced a volatile start to 2022, with inflation advancing at the fastest pace in decades in the U.S. and other developed nations, as economies face supply-chain issues while they rebound from the worst of the COVID-19 pandemic. These conditions have been exacerbated by growing geopolitical concerns after Russia’s invasion of Ukraine, which, among other things, has highlighted the urgent need for greater infrastructure security, both physical and cyber.
In this context, companies with business models based on preserving supply, enhancing water efficiency and ensuring water quality and water security might give investors a chance to mitigate the impact of higher prices and rising geopolitical risk on their portfolios. These companies can serve as an inflation hedge while water utilities keep margins steady by passing on higher input costs to end users.
Since water is perhaps the one thing that cannot be substituted and remains critical for most things, it should be seen as a key spending priority in any market environment. Aging infrastructure, rising water demand and growing filtration needs provide a predictable demand for more water infrastructure-related spending in this decade, causing the price utilities charge for water services to rise in recent years at roughly twice the pace of inflation.
While water is technically a commodity, its market behavior is different from traditional commodities such as oil and gold; it’s not traded and is difficult to transport economically. Unlike other global soft commodities such as soybeans or grain, its value is not captured on trade exchanges and its price remains debatable. Instead, water perhaps has more in common with investing in health care or education, which are typically provided as services rather than as goods. Water itself is typically free, while the infrastructure around it is not.
Therefore, investing in water is typically done by buying equity in firms focused on improving water access with network operations or in improving water-use efficiency, repairing or replacing water infrastructure, or improving water quality by way of filtration systems or wastewater treatment.