With oil prices revisiting the $100-a-barrel mark and gold reaching new lofty heights, commodities are once again riding high in investor's minds. Emerging market growth and increasing demand, along with the rush to physical assets in the wake of sovereign debt worries, continue to bode well for the asset class going forward. However, despite the growing demand for corn, coal and copper, analysts at Citigroup (NYSE:C) predict that something more liquid could be the next big story in the commodities markets.
TUTORIAL: Investing 101
A Globally Integrated Market
According to a recent Citigroup report, water will be the commodity 'du jour' and those companies involved with it will see a massive expansion of investment capital. The banks 37-page report recommends that investors play the trend of urbanization by buying into water related companies. Analysts expect there to be a globally integrated market for fresh water within 25 to 30 years, including futures and spot pricing, along with fleets of water tankers and storage facilities that will dwarf those we currently have for oil and natural gas. (Opportunities to invest in this scarce resource are flowing freely. For more, see Water: The Ultimate Commodity.)
The analysts at Citi may be on to something. A variety of macroeconomic forces are helping reinforce their position for water equities. As incomes and populations in a variety of emerging nations continue to rise, the demand for water is also increasing. These incomes are moving water beyond the basic requirements needed for drinking, cooking and hygiene. At current growth rates, the demand for water is expected to grow by nearly 6% annually. Over the next 20 years, India is expected to see its water demand more than double and China's will rise by 30%.
On the supply side, water continues to face constraints. Despite covering 70% of the earth's surface, only 1% of the water available is safe for humans to drink and use. Research also suggests that soil moisture levels on Earth are declining rapidly. This data could point to the fact that fresh water tables around the world are nearing depletion. China's growth in water demand alone will result in an estimated 200 billion cubic feet supply shortfall within the next two decades. (For more on the supply side, see Understanding Supply-Side Economics.)
With such supply and demand imbalances, it's no wonder why lead analyst for Citi, Willem Buiter highlights "Water as an asset class will become eventually the single most important physical commodity-based asset class, dwarfing oil, copper, agricultural commodities and precious metals."
Adding Some Liquid Assets
For investors, the potential for water investments remains strong. For example, the EPA estimates that up to $1 trillion will be needed over the next few years in order to upgrade the U.S.'s aging water infrastructure. Despite this potential, water remains absent from many investor's portfolios. Now could be a great time to add some liquid assets to a portfolio. Both the PowerShares Water Resources (NYSE:PHO) and Guggenheim S&P Global Water Index (NYSE: CGW) allow investors to add a wide swath of water companies to portfolio. However, there are plenty of individual picks as well.
Pentair (NYSE:PNR) offers a variety of filtration, pumps and reverse osmosis products to both municipal and industrial clients. The company also has its hands in agriculture, providing water efficiency products and it should benefit from the need for more food as well. Similarly, Mueller Water Products (NYSE:MWA) and Watts Water Technologies (NYSE:WTS) manufacture a selection of water infrastructure products.
Foreign water utilities are also a way for investors to tap into the growing demand for water. Brazilian water utility Sabesp (NYSE:SBS) offers investors a way to tap into Latin America's growing need for water, while receiving a 4% dividend. France's Veolia (NYSE:VE) has water utility operations across the globe and yields nearly 6%. (For more on dividends, see Dividend Facts You May Not Know.)
The Bottom Line
With its supply and demand imbalance in place, water could be one of the best long-term plays for a portfolio. Citigroup's recent report on water helps underscore that need. Funds like the First Trust ISE Water (NYSE:FIW) or companies such as Roper Industries (NYSE:ROP) are ideal additions to play the trend.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!