Investing in water: Ride a steady wave in a volatile world

Central banks have successfully managed to curb inflation and are anticipated to further reduce rates as price pressures diminish. However, some uncertainty remains, and the Federal Reserve may need to adapt to changes in US policies under President Trump.

For investors, promising opportunities may be found in sectors poised to benefit from prevailing themes in the coming years. Water is one such sector, with key themes and trends identified that support this belief.

With the global population projected to reach 10 billion by 2050¹, significant investment will be required to ensure an adequate water supply for everyone. Over the next 20 years, strong demand is forecasted in areas such as desalination, water reuse, filtration and metering. These investment opportunities have the potential to support future alpha generation, other than provide significant diversification benefits within a portfolio.

Five megatrends are expected to drive performance in the water sector. While not new, these trends are becoming increasingly relevant:

Unlike 2016, Trump’s election didn’t take markets by surprise. The concern is that his policies may lead to rises in inflation and interest rates if they excessively stimulate domestic growth. On the positive side, he is seen as being pro-business. His presidency is anticipated to benefit America but may have a negative impact on Europe, emerging markets, and China, which are likely to respond.

Although his government is likely to follow an “anti-green agenda”, that shouldn’t affect water investment strategies. Some water-related companies have reduced imports from China since 2018, making them better positioned to benefit if tariffs are increased or new ones introduced.

Water services are essential and companies in the sector tend to display financial resilience during market volatility, thanks to their stable business models, innovation and investment in infrastructure. 

High-quality water-related companies have grown over the last couple of years, and have the potential to demonstrate solid operating leverage and earnings growth.

Investing in companies that provide solutions to the global shortage of clean water using a precise and pure definition of the water theme is crucial. This approach ensures that the long-term trends identified will be the key drivers of returns.

Key segments in the water sector include:

As we move further into 2025, improvements in business momentum in several sectors should boost these three segments. At KBI, we also see signs of improvement in construction and real estate. More favourable policies and potentially lower interest rates would help these sectors to plug the housing supply gap. There may be an upturn in the industrial sector too. If market sentiment improves, delays in large projects will probably end.

When it comes to infrastructure, government and utility spending markets are strong, and engineering companies are reporting filled order books. In the US, the substantial budgets from the Infrastructure Investment and Jobs Act (IIJA)⁶ are beginning to be allocated to water projects, and water resources management plans in the UK⁷ are opening the door for new investments. In Latin America, Brazil announced the Universal Sanitation Act at the end of 2021, which commits to supply sanitation for all by 2033⁸. This will require investment of about $90bn-$130bn. The Act includes a framework, which encourages private market participation and funding.

There are many attractive themes to consider in the water sector. Two of these are smart water and infrastructure stimulus.

Smart water: harnessing technology for efficiency

This involves using technology and data analysis to improve the efficiency of water management for the benefit of communities. Water companies are overlaying and connecting their analytics on plumbing, hydrants, pumps, meters, boilers, water treatment technologies and irrigation equipment.

Remote monitoring and controls help with predictive maintenance and pre-emptive alerting, which can lower costs, decrease downtime and improve service reliability for the end user.

A good example can be seen in agriculture, which consumes up 70% of the fresh water available⁹. Demand is growing for technologies that optimize irrigation management. Intelligent watering devices not only reduce water consumption but also enable crop cultivation in challenging soil conditions.

Smart water technologies can automatically improve meter reading and reduce manual work while ensuring accurate billing and better customer service. Smart meter reading can help utilities deal with water losses faster, which reduces costs and helps make water more affordable. Technology advances, such as artificial intelligence and the integration of many solutions into common decision support systems, offer opportunities to deepen customer relationships and solve problems in the water sector.

Estimates⁶ of the global volume of “lost water” are equal to the annual freshwater withdrawals of Germany, France, Spain, Italy, and the UK combined. New regulatory requirements aimed at fixing this could take effect in the next decade. An EU directive will set leakage rate targets by 2028¹⁰, and the state of Wisconsin in the US requires water loss control plans from utilities companies¹¹.

Infrastructure stimulus in multiple markets

When it comes to the plans countries are making to adapt to climate change¹², water infrastructure takes up about 19% of the investment needed. That’s why it is worth paying attention to companies that can benefit from budget stimuli aimed at improving water distribution infrastructure. Governments can end up financing plans spanning several years or even decades. This provides greater clarity on the potential for profits of the companies involved.

The IIJA in the US allocated relevant resources to expand access to clean drinking water and promote climate change resilience efforts. $50 billion investment alone have been allocated to water infrastructure, the largest investment of this type in American history¹³. This funding has started to make its way into the order books of engineering and construction companies. It represents a significant step up from previous stimulus packages focused on water infrastructure-related spending.

At KBI, we see a favorable environment for the water sector, as we are witnessing new tailwinds.

Firstly, the utilities and contracts markets are characterized by historically low valuations and promising total returns.

Secondly, the residential and industrial water markets have shown resilience:

• High-quality companies have been performing well even in flat or declining markets, with potential for solid operating leverage and earnings growth.
• Government and utility spending markets are strong, with increasing backlogs for engineers.

Finally, valuations in the water sector are attractive compared to the broader market. Long-term earnings growth is expected to continue, and we foresee double-digit growth for the year.

¹ Source: World population projected to reach 9.8 billion in 2050, and 11.2 billion in 2100 | United Nations 

² Source: “Water: Our Thirsty World”, National Geographic, April 2010.

³ Source: “Ensure availability and sustainable management of water and sanitation for all” — SDG Indicators

⁴ Source: Reglobal, https://reglobal.org/green-capex-in-infrastructure/

⁵ Environmental remediation refers to the process of removing pollution or contaminants from environmental media such as soil, groundwater, sediment, or surface water.

⁶ The Infrastructure Investment and Jobs Act (IIJA), also known as the Bipartisan Infrastructure Law, is a United States federal law enacted in November 2021. It authorizes $1.2 trillion in funding for infrastructure projects over five years.

⁷ Source: Environment Agency. A summary of England’s revised draft regional and water resources management plans - GOV.UK

⁸ Source: DLA Paper, Brazil new basic sanitation legal framework | DLA Piper

⁹ Source: World Economic Forum, A look at global freshwater distribution and how we can save it | World Economic Forum

¹⁰ Source: Wareg, 4 - Navigating the Evolutions of the Drinking Water Directive

¹¹ Source: Public Service Commission of Wisconsin, PSC Water Loss Control

¹² Source: S&P Global, https://www.spglobal.com/_assets/documents/ratings/research/101585883.pdf

¹³ Source: United States Environmental Protection Agency, Biden-Harris Administration Announces $276 Million for Water Infrastructure in California Through Investing in America Agenda | US EPA