Water utilities represent good investment opportunities
Published 17/11/2008 | 15:07
Warren Buffet recently stated that when the markets are fearful investors should be looking to invest.
I paraphrase — but you get the drift.
But if you intend investing for the five to 10 year term, what exactly should you be looking for?
Well, despite the fact that there is a stock market crash going on, the principles of investing have not suddenly changed. So you will be looking for stock with plenty of growth potential.
Clearly you will need to do some homework here in order to see which sectors and countries are most likely to provide these growth stocks.
At the risk of stating the obvious, you need to invest in companies that will provide a rate of growth that is going to outperform the other asset classes.
So, buying stock that belongs to a mature sector may bring some dividends, but may also limit the growth you get.
If you look back to what was doing well some two or three years ago, you will see that a huge swathe of money was going into the smaller companies sector.
This was on the basis that the scope for growth was greater than the FTSE 100 stock.
Now, as I have mentioned many times before, just because a company is quoted on our stock exchange does not mean that it does all its business in the UK.
Far from it. In fact the truth is that companies are so globally focused now, that for some the export markets make up most of their growth potential.
But let’s get back to looking for sectors, or areas, that might provide some investment excitement in the future.
One of the ways of doing this is to have a look at what the world ‘needs’ and the economic drivers that surround this.
One new sector that is emerging rapidly is the Cleantech sector. By this I mean companies that are investing in biofuels, windpower, wave or tidal power, carbon capture or, in fact, any business that is providing clean technology — hence the Cleantech soubriquet.
This sector is very much larger than might be apparent at first and one of the major sub-sectors within it is water.
While investing in water utilities might be considered very ‘old hat,’ it is also only the very tip of the iceberg that represents water investment opportunities.
There are by my reckoning at least four main investment areas here:
- water distribution and management
- advanced water treatment
- demand side efficiency
- water in food production
And it could be argued that there is one other important area, which is water scarcity
As you would expect there are some indexes. There is the ISE Water Index, which is linked to the First Trust Water Index Fund.
The Deutsche Borse Group has launched the DAX Global Water Index, which covers 28 of the largest and most liquid global water sector companies.
I also found about 12 quoted UK companies — in addition to the main utility companies — where you could immediately invest in the water sector.
To illustrate my earlier comments, take a look at Amiad Filtration Systems (please note that I have only said ‘take a look’).
This company is based in Israel and produces water filtration systems for global markets. In 2007 their turnover rose by 29%.
Their profit also rose from $3.7m to $5.9m. On top of this they paid a dividend of 7.8% in 2007, against 6.8% in 2006.
There are also many other unquoted opportunities, but you will have to do some considerable research to unearth them.
One example might be Ultragreen Technologies, which is developing a variety of clean technology opportunities.
In any event, and bearing in mind the global drive for a cleaner planet, the Cleantech sector is one that will undoubtedly grow and provide some very interesting investment opportunities as it does so.
Nicholas Watts is an independent financial adviser with Positive Solutions Financial Services which is regulated by the Financial Services Authority. To contact him, use the website www.realwealthmanagers.co.uk