In 2006...Water will get more and more valuable

By Dan Denning Jan 13, 2006

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Is water the next oil? Well, natural gas might give water a run for its money given how fast its price has been rising, but I predict that, by the end of the year, water is not only going to be a major geopolitical theme, but a major investment theme too.

I started thinking about this a few months ago, but even since then two things have changed. First, the reality of freshwater scarcity is starting to hit the newspapers. Sure, most people know that 97% of the world’s water is unpotable salt water, but until a few months ago no one seemed to worry much about where freshwater is going to come from in the future, for mining, agriculture, drinking or hygiene, in the US, in China or in much of Europe, despite the fact that all three have suffered from drought conditions in one way or another over the last year.

Second, some authorities are taking action. In mid-December, the premiers of Quebec and Ontario, along with the governors of eight US states, signed a pact that will ban all large-scale water diversions from the Great Lakes basin. That will prevent 20% of the total fresh surface water of the earth being exported by pipeline to thirsty states like California, Arizona, or Nevada. The eight states that border the Great Lakes — Illinois, Indiana, Michigan, Minnesota, New York, Ohio, Pennsylvania, and Wisconsin – have seen the future. And the future is that fresh surface water is going to get more and more valuable as it gets more and more scarce, so they intend to hang on to as much of theirs as they can.

Up until recently, all of this information would have been interesting to you (I hope), but useless. After all, water utility stocks in the US and the UK have long been trading at high p/e  multiples. And the universe of such stocks is small. As an equity investor, you simply haven’t had a lot of choices.

Now, however, you have one more and it’s a good one. PowerShares has come out with a new (US-listed) ETF based on water that you can now buy just like a stock. It’s called the PowerShares Water Resources Portfolio (PHO). According to the prospectus, “the Index seeks to identify a group of companies that focus on the provision of potable water, the treatment of  water, and the technology and service that are directly related to water consumption.” Intrepid investors may prefer to review each of the 35 particular holdings in the ETF and construct a smaller portfolio of key water stocks to own for the next ten years. But if you want the simplest way to be “long water” in 2006, this is it.

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Published in Economics | More articles by Dan Denning

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