A Megatrend That Really Holds Water

03/30/2012 10:30 am EST

Focus: STOCKS

Patrick Vail of Money Morning explains that water—not gold, oil, or grains—will be the most critical commodity in years ahead, and investors who buy water stocks can capitalize on this global megatrend.

You’ve no doubt heard about the building scarcity of water. It’s the reason savvy shareholders have been busy investing in water stocks.

Here’s why.

Water may be everywhere, but only 3% of it is fresh, or suitable for drinking. Two-thirds of that is locked in glaciers and polar icecaps, which means less than 1% of the world’s fresh water is available for human use.

That’s the water found in lakes, rivers, reservoirs, and underground sources shallow enough to be accessed cheaply. Even still, much of that is polluted or otherwise unsuitable for consumption.

The water that’s left is then used in agriculture and industry, and here’s the kicker: It is divided between seven billion people and demand is increasing all the time.

According to the United Nations, in the last century, water use has increased at more than twice the rate of population growth.

Water has become so critical that Willem Buiter, chief economist at Citigroup, believes it will soon become “the single most important physical-commodity-based asset class, dwarfing oil, copper, agricultural commodities, and precious metals.”

That may be hard to imagine, considering we can simply turn on the tap and get fresh water for next to nothing. But it’s true. There are myriad of factors—from population growth to climate change—putting a strain on the world’s water supply and causing demand to spike.

We’ll look at those factors and how investors can benefit from this growing demand by investing in water stocks.

Investing in Water Stocks: Profit from Rising Demand

The biggest factor in the increasing scarcity of water is agriculture.

In 2012, American farmers will plant more crops than in any year since World War II. After two years of declining yields, this is good news for the agriculture industry, which is seeing commodity prices rise right along with global demand.

Around the world, the picture is much the same. China and India, too, are planting more this season.

The gigantic thirst for agricultural commodities this year means it will also be a huge year for water usage.

According to a study conducted by the University of Twente in the Netherlands, agricultural uses account for 92% of the global water footprint, a broad measurement that aims to quantify global water use and consumption.

What’s more, fresh water pollution from agriculture is a worldwide problem that causes billions of dollars in damage. In developing countries, where fewer environmental regulations exist to protect the water supply, nitrate and phosphate levels are expected to rise steadily over the next few decades.

That will put further strain on the water supply right in the places where demand for water is expected to increase the most, meaning emerging markets.

That’s because, on average, each person in the US uses 100 to 150 gallons of water every day, according to the Environmental Protection Agency. But in places like China and India, the average is closer to 20 gallons per day.

In fact, China and India already have the two largest water footprints of any country on the planet. And they’re about to get even bigger as their consumption of commodities skyrockets, water included.

The surging demand for water in these emerging markets is going to require better “water solutions,” or innovative ways of filtering and treating water to make it drinkable.

Better infrastructure to deliver fresh, clean drinking water to billions of new middle class citizens is also going to be needed, including filters, pumps, pipelines, and new processing plants.

That makes the growth in water stocks inevitable as billions of dollars is spent to meet demand.

Given the scarcity, the sums are tremendous.

According to the Organisation for Economic Cooperation and Development (OECD), global investment in water supply infrastructure needs to increase by nearly $500 billion by 2025.

While some of that money will go to fixing aged infrastructure in the West, much of it is going to be needed to manage increased demand in emerging markets like Asia, Latin America, and Africa.

A great way to gain exposure to water stocks is to buy companies that deliver it. Another way to invest in water is through companies that create solutions to the problems of tapping, pumping, filtering, and delivering water to millions.

You can find a list of water-related stocks here.

Either way, you don’t realize the wealth of the water until it’s gone. Investing in water stocks is going to be one of the market’s great long-term trends.

By Patrick Vail, contributing writer, Money Morning

Patrick recommends three water stocks in particular here. This article first appeared on MoneyShow.com’s content partner, CountingPips.com.

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