How water shortages impact investing in Frontier Markets

How water shortages impact investing in Frontier Markets

There has been an intensity of focus in the media over the past month or so on water shortages across the world.   The problem is not new, nor is it unknown.  Water scarcity has been a challenge for much of the world for most of its history.  However, the impact of water shortages is has only recently begun to affect areas that were previously abundant in water.

The examples are copious, but below we highlight a few of the most well-known:

Aral Sea

The Aral Sea was once half the size of Lake Superior, and was an engine of growth for the former Soviet Union.  Straddling present-day Kazakhstan and Uzbekistan, the region is now almost entirely dry, and the sea has all but vanished.  The desertification of this area was caused by a foolhardy Soviet plan to boost cotton production through irrigation, hundreds of kilometres away. Read more here.

Northeast China

Northeast China is a more nuanced example.  The area was never abundant in water.  However, with an increasing population, the government has grown desperate to supply water to a potentially restless population and a burgeoning economy.  The Economist has an excellent article on the situation here.

India

India does not have enough water for its people.  This TIME article from 2010 highlights the issue which has only worsened in the past three years.  India is aware of the issue, but has done little in the way of improving the situation. 

There are several other examples in the developed world, such as Chile, the Southwestern United States, and Australia.  However, these countries have the means to invest in alternative solutions.  That being said, 30mm people in the Southwestern US rely on the Colorado River, and there are strong sights that this will not last for much longer.  For further information, see here.

There are a few reasons we chose to write about this topic.  Firstly, any investment that is made in regions with water issues is wrought with potential pitfalls, if a stable water supply is not secured.  As an example, Barrick Gold (the world’s largest gold producer), faces massive delays on its Pasqua-Lama project to water issues.   Water can no longer be considered an afterthought for corporates investing around the world, and in particular for investors looking for opportunities.

As the Economist article highlights, “China is also planning to build around 450 new coal-fired power stations, burning 1.2 billion tonnes of coal a year. The stations have to be cooled by water and the coal has to be washed. The grand total is 9 billion tonnes of water. China does not have that much available.”  Certain projects will be delayed, cancelled, or face significant cost overruns.

Below, you will find a list of countries by their freshwater supply per capita.  Eliminating those that are developed economies, and you will find a who’s who list of countries with political instability; Egypt, Yemen, Mauritania, Palestine, Niger, Pakistan, Syria, etc.  The only SIF30 countries to crack the top 50 are Gabon, Papua New Guinea, Peru, Bolivia, Paraguay, Mongolia and Cameroon.  Many of the remaining SIF30 countries as you can see, are at the bottom of the pack, globally.

As mentioned this isn’t a new phenomenon, but it has not been discussed in detail from the perspective of Frontier Markets.  If you are looking for a Global investment opportunity the S&P Global Water Index is a great place to start.  See its details here.  There is an iShares ETF based on this index as well as one offered by Guggenheim.  This index has returned +26% this year, and 13.3% annually for the past 5 years; not bad.

Within Frontier Markets, this list of companies involved in some capacity with water, is of course a lot smaller.  Here is the list of companies in SIF30 constituent countries.

Also, if you are interested in investing in individual companies within the S&P Global Water Index, see their information below.  This is as of October 30, 2013.

The key takeaways we would like you to take from this article are:

1. Water shortages are real and acute in Frontier Markets
2. When investing in a company that could be impacted by water shortages, look to see their plan for tackling water issues (recycling, secure water supply, solid government agreements, fixed price for water, etc.).  This issue can make energy, mining, and industrial projects disaster or completed successes.

3. Keep an eye out for companies that are innovating in the area of water conservation or desalination.  These companies will benefit from growth in Frontier Markets, as their water consumption approached usage in developed countries.

Further reading:

Solving the water crisis

Australia’s dynamic water companies

Innovative technologies within the US

5 Companies for a Thirsty World

Israel’s water technology