Tapping into the growth of emerging market water infrastructure

Expanding the world’s access to clean water could present investment opportunities

Tapping into the growth of emerging market water infrastructure

Boccellari_Thomas_sm_lowrezAuthor’s note: In 2015, I blogged about a growing shortage of fresh water in many parts of the world and how some companies are providing much-needed water infrastructure in these areas. Given continued strong interest in water-related investments, I believe this information bears repeating. – Tom Boccellari

While we in North America tend to take fresh water resources for granted, fresh water is an increasingly scarce commodity in other parts of the world. There is a fixed amount of water available worldwide, with 97.5% of it in the form of salt water unfit for human consumption.1 Of the remaining 2.5%, more than two-thirds of it is frozen in ice caps.1 The world’s population now stands at roughly 7.3 billion, and is expected to grow by a third to 9.7 billion by 2050.2 The United Nations estimates that only 1% of the world’s fresh water supply is accessible enough to meet the needs of a rapidly expanding world population.2

Water demand increasing with population growth

The problem is especially acute in emerging markets such as China, where population growth is reducing per capita potable water supply. China holds only seven percent of the world’s water supply, but makes up 20 percent of the world’s population — an imbalance likely to be exacerbated by the recent demise of China’s longstanding one-child policy.3

Source: PowerShares by Invesco using World Bank Group data, as of Dec. 31, 2015 (last available data)

Source: PowerShares by Invesco using World Bank Group data, as of Dec. 31, 2015 (last available data)

Many emerging markets are also less stringent in regulations preventing the contamination of water. That means that not only is the amount of fresh water per person declining, but an increasing amount of that water is contaminated and unpotable.

Water infrastructure spending up

As a result, emerging market governments are funneling large amounts of capital into areas like water conservation, purification and infrastructure. Over the past decade, water infrastructure spending has grown rapidly in both absolute terms and as a percentage of gross domestic product (GDP) in most emerging markets. Emerging markets now account for half of all infrastructure spending worldwide.2

Source: PowerShares by Invesco using World Bank Group data, as of March 20, 2017 (chart dates reflect last available data)

Source: PowerShares by Invesco using World Bank Group data, as of March 20, 2017 (chart dates reflect last available data)

Nowhere is this trend more pronounced than China, where spending on power, transportation and water has increased steadily as a percentage of GDP since the early 1960s. This is even more impressive when you consider China’s rapid GDP growth. Experts don’t expect infrastructure spending in China to decelerate anytime soon, either. A 2014 PwC/Oxford University research report forecasts that Asia — led by China — will account for more than 60% of global infrastructure investments by 2025, and that water will be a key component of these capital outlays.4

Source: World Bank, as of March 20, 2017 (chart dates reflect last available data). Past performance is no guarantee of future results.

Source: World Bank, as of March 20, 2017 (chart dates reflect last available data). Past performance is no guarantee of future results.

What does this mean for investors? In my view, well-managed global companies engaged in the build-out of water infrastructure and the purification of drinking water should be well-positioned for future revenue growth. Through targeted strategic investments, investors can potentially benefit as well.

The PowerShares Global Water Portfolio (PIO) holds a number of companies that generate a significant portion of their revenues in emerging markets. Based on the NASDAQ OMX Global Water Index, PIO invests in companies that create products designed to conserve and purify water for homes, businesses and industries. Both the fund and the index are rebalanced quarterly and reconstituted annually.

1 Source: The Water Project, Inc., 2017

2 Source: United Nations World Population Prospects: The 2015 Revision, Department of Economic and Social Affairs Population Division, July 29, 2015

3 Source: The Worldwatch Institute, State of the World 2013

4 Source: PwC, “Capital project and infrastructure spending: Outlook 2025,” 2015

Important information

Blog header image: Josfor/Shutterstock.com

The NASDAQ OMX Global Water Index is designed to track the performance of companies worldwide that are creating products that conserve and purify water for homes, businesses and industries. The index is weighted to enhance the underlying liquidity and increase the tradability of the index components.

There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The fund’s return may not match the return of the underlying index. The fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the fund.

Investments focused in a particular industry, such as water, are subject to greater risk, and are more greatly impacted by market volatility, than more diversified investments.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Tracking stock may decline in value even if the common stock of the larger company increases in value.

Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.

The fund is nondiversified and may experience greater volatility than a more diversified investment.

Thomas Boccellari

Multi Asset Product Strategist

Invesco PowerShares Capital Management LLC

Thomas Boccellari is a Multi Asset Product Strategist for Invesco PowerShares Capital Management LLC, a registered investment adviser that sponsors the PowerShares family of exchange-traded funds (ETFs). PowerShares is Leading the Intelligent ETF Revolution®, a new generation of ETFs.

In his role, Thomas works on researching, developing product-specific strategies and creating thought leadership to position and promote PowerShares’ product line. He joined PowerShares in 2015. Prior to joining PowerShares, Thomas served as a fixed income strategy analyst with Morningstar where he created thought leadership for the fixed income and ETF markets. Prior to that, he was an investment analyst with Valens Securities where he was responsible for analyzing global equity and fixed income investments. Thomas started his career in financial services with Credit Suisse as a research analyst.

Thomas has been quoted in numerous publications, including The Wall Street Journal, Kiplinger’s and Bloomberg. Thomas earned a B.S. in Mechanical Engineering from Northeastern University.

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