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!

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  4. Economics

    4 Countries Pleading for Higher Commodity Prices

    Discover what countries are struggling the most from the price collapse in commodities and what these countries require to return to economic growth.
  5. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  6. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  7. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  8. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  9. Stock Analysis

    Glencore Vs. Noble Group

    Read about the differences between Glencore and Noble Group, two companies in the commodities business. Learn about accounting accusations facing Noble Group.
  10. Mutual Funds & ETFs

    Pimco’s Top Funds for Retirement Income

    Once you're living off the money you've saved for retirement, is it invested in the right assets? Here are some from PIMCO that may be good options.
RELATED FAQS
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  3. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  4. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  5. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  6. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center