Water touches everyone on the planet. Many companies in the water ecosystem have weathered some of the global stock markets’ most recent and violent storms well. The reason for that lies within the nature of water investments. But, what has Covid-19 meant for water investments?

This crisis is different from anything else we have experienced in our lives. What has this meant for us as individuals and for our investments? Being «confined» at home has sharpened the focus for many on the content available in the media, the subscriptions they have to a range of online services such as music streaming, the software packages they need for work, communication and even education.

Besides food, today’s creature comforts are largely not physical items but more experiential. In terms of investments, this has led to substantial outperformance from the technology sector, and naturally, parts of the healthcare sector during the crisis.

The Material World Has Suffered

The contrast between a tech company’s ability to redeploy workers to their homes, developing and selling products that can be downloaded over the internet, and an industrial group forming «mission-critical» infrastructure or components from metal in a factory could not be starker.

It should not be a surprise to anyone that the latter category of business has seen a heavy impact in terms of furloughed staff, canceled or delayed orders, greater uncertainty and impacted share price performance. The «material world» has suffered, with even the traditionally defensive utilities also not considered crucial enough.

In Line With Global Equities

For us specifically, on a year to date basis, we can point to a strategy that is still performing in line with global equities, despite our focus on utility and mission-critical manufacturers.

  • Demand Efficiency companies – we remain focused on investing in industrial equipment companies that do not depend too much on new capital projects (where we expect delays, most particularly in the oil and gas sector), and prefer companies that make critical parts that are too important not to be maintained or replaced regularly.
  • Pollution Control companies – we have enjoyed some very strong performance from companies that provide laboratories or equipment to test water quality because these are often the same companies that are involved in virus testing, or in the development of vaccines.
  • Water Infrastructure companies - perhaps the most surprising and disappointing performance has been from some of the utility companies; while some regulated utilities are among the best performers year-to-date, much of the positive contribution came prior to the crisis, with the drawdown in these names taking many people by surprise. We would highlight some multiple compressions and some particularly harsh stock reactions in the ‘Concessions’ sub-segment.

What Does This All Mean Today?

There is a multi-decade long time horizon available to investors in the Water space. We are already seeing activity tentatively restarting. While we cannot discount a second wave of infection, we are very confident that long-term investors will see a recovery in economic activity driving upside in the broader investable universe for Water.

We can be absolutely certain that pent-up demand will drive a recovery in demand for the companies in which we invest. Given the sanitation crisis, we have all endured, and the role Water plays in handwashing and maintaining a hygienic living space, we reiterate how surprised we have been at how water has been taken for granted.

Panic-Buying of Toilet Paper

It was an eye-opener to us that the world saw panic-buying of toilet paper at the start of confinement periods, with little thought given to the underlying water delivery or sewerage service required to get through that extremely difficult period.

We accept that it is unlikely that people will rush to buy water stocks when this drama subsides – but we certainly contend that these stocks, their critical role in our lives, and their long-term value are being overlooked, and undervalued. What type of crisis will it take to reframe investor thinking on Water?


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