Water is one of the essential building blocks of life and an absolutely vital resource. So, it might seem worrying to read headlines about freshwater shortages.
Only 3% of the world’s water is freshwater and of that only 0.5% is readily available. According to a 2022 UK government report, 4 billion people globally now live in areas with severe water scarcity, as climate change, an increasing global population, and other factors continue to reduce readily available sources.
The issue could be compounded further with 700 million people expected to be displaced from their homes by water scarcity by 2030.
Freshwater is also key to many vital industries including agriculture. The importance of maintaining a readily available, clean supply will likely only increase in the near future.
So, as supplies diminish, could water eventually become more valuable than oil? Here’s what your clients need to know before investing.
Your clients can invest in water in several ways
According to the Global Water Forum, worldwide water demand is projected to have increased by 55% in the 50 years leading up to 2050. Meanwhile, Science Daily reports that, if current climate change and population growth trends are maintained, by 2040 there will not be enough freshwater available for the world’s population, and that excludes industrial needs.
It is one of the reasons that Michael Burry, the American hedge fund manager who successfully predicted the 2008 financial crisis, has been moving his investments into water commodities over the past few years.
There are several options to invest in water, much like commodities such as gold, or any other regularly traded financial product.
Your clients might opt to invest in:
- Water-related funds
- Publicly traded water utilities
- Beverage companies
- Agricultural firms
- Water management companies.
Investing in water could help your clients diversify their portfolios with the addition of a generally stable, long-term asset. But before they make any investing decisions, it is vital that they seek professional advice and discuss how new investments might affect their long-term plans.
So, considering global trends, could water become a more valuable commodity than oil? Here are three reasons why it could be a more beneficial investment for your clients.
1. The scarcity principle indicates that water’s value is likely to rise
According to the scarcity principle, the price of a good, which is in scarce supply but high in demand, will rise to meet said demand. Conversely, if supplies are readily available, demand will likely drop, and prices will follow suit.
Crude oil prices have adhered to this principle over the past few years as shown by the table below:
Source: Macrotrends
At the onset of the pandemic and during periods of lockdown, there was a drastic reduction in global demand for oil as people stayed home and rarely travelled, and so prices dropped sharply.
While, in contrast, the war in Ukraine and the subsequent global energy crisis has seen supplies dwindle and prices skyrocket.
As global freshwater supplies become increasingly scarce year-on-year, the price related to water-related investments is likely to continue to rise, making it a potentially desirable and stable long-term investment for your clients.
However, past performance is not a guaranteed indicator of future trends, and so, before making any major changes to their portfolio, it is important that your clients consider the benefits of seeking professional advice.
2. Fossil fuels are being phased out, while there is no replacement for drinkable water
At a price comparison level, such as comparing an equivalent barrel of oil to water, it is highly unlikely that water will ever be more valuable than oil. Charging oil prices for every gallon of water would likely cause the global economy to collapse.
However, the quantities used and the quantities available for oil compared to water aren’t comparable and so, any assessment of water’s “true value” needs to be made on its own terms.
While oil, like water, obeys the scarcity principle, oil’s value is likely to decline over the long term, as even though fossil fuel supplies are running out — which would make oil harder to come by — the world is already making strides towards adapting to new energy resources.
As green energy such as wind, water, and solar continues to increase its overall share of the energy market, and advances are made towards safer nuclear energy, the dependence on fossil fuels like oil will likely slowly decline.
Meanwhile, there is currently no sufficient replacement for our need for clean, drinkable water. As water supplies become scarcer, its value will likely continue to rise in the long term.
3. Investing in water might align with your clients’ interest in ESG funds
Water at its core is a green resource. So, if your client is interested in orientating their portfolio towards environmental, social, and governance (ESG) funds, then investing in water might provide an opportunity.
ESG funds are comprised of businesses that have passed an assessment by an external agency and received a rating based on environmental, social, and governance factors.
This score is used to help guide investors towards companies that align with their personal beliefs and morals, as well as act as an additional means for holding businesses accountable for their actions.
The environmental section of ESG typically relates to issues such as a company’s:
- Carbon emissions
- Air and water pollution
- Contribution towards deforestation
- Green energy initiatives
- Waste management
- Water usage.
It is evident that there is a lot of overlap between ESG and water-related issues. So, researching and investing in ESG-rated businesses that deal with water commodities could be a valuable way for your clients to align their investments with their personal ethics and closely held beliefs.
Get in touch
If your clients are considering investing in water or other commodities, such as gold, and might benefit from a discussion relating to their greater portfolio and how it can affect their long-term plans, please get in touch.
Email us at mail@delaunaywealth.com or call us on 0345 505 3500.
Please note
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Production
