Water

Based on Research by Joanne Baynham of MBMG International’s award-winning Portfolio Managers, MitonOptimal.
Commodities are a hot investment topic right now - oil, gas, gold, a variety of other precious and non-precious metals, wheat and other ‘softs’ and even coal have all captured the attention of investors and consumers alike as their values and prices seem to have inexorably risen over the last few years.
As the equity market now approaches a peak, investing in defensive, high dividend stocks, such as utilities, has also become an area of increasing focus for the markets. Despite this, we haven’t seen a great deal of intelligent research, until now, on one of the areas of cross over between these two - i.e. water.
There’s a huge debate raging about when the world will run out of fossil fuels and the consequences of this - but very little on how long the global water supply can last. Scientists don’t claim we are running out of water per se - just clean water. The United Nations Population Fund Projects that in 2025, if present rates of water consumption are maintained, 5 billion of the world’s 7.9 billion people will live in areas where safe water is scarce. Eighty percent of all diseases and one third of all deaths in developing nations are caused by contaminated water.
Between 1970 and 2003, the world’s population growth rate declined from 2% to 1.2% per annum, yet in contrast, the increase in water withdrawals has steadily outpaced population growth. Water withdrawals are growing at 2.5% per annum, and there is no sign of a reversal in this trend. Put another way, since 1950 world population growth has doubled, but water use has tripled.
Hence one can see that the increase in water usage is not merely a function of having more mouths to feed, but is in fact a result of growing global urbanization. As developing countries mature and move away from an agrarian society, the net result is that one sees the migration of the rural poor to the cities. Government’s encouragement of industry growth, for which water returns are higher, is helping to drive this phenomenon.
Rural poor in developing countries are now migrating to urban slums at such a rate that by 2007, for the first time in history, half of the world’s population will live in towns and cities. In China, for example, where this migration from rural to urban living has been pronounced for the last 15 years, 400 of the largest 670 cities are operating in serious water deficit and over-taxing sewage treatment facilities, if available at all.
“More than half the watersheds of China’s seven main rivers are contaminated by industrial, farm and household waste, officials warned.” This was said in a bleak annual report on the nation’s environment. In addition, millions of people in northern China face water shortages this summer as the Yellow River falls to its lowest level in 50 years, the officials said… “Only one quarter of the 21 billion tons of China’s annual output of household sewage is treated.” Treatment plants are being built, but will still handle only half of all city sewage, leaving rural waste water untreated. The government has forecast an annual water shortfall of 53 trillion gallons by 2030 - more than China now consumes in a year.
A clear indicator of the growing trend of urbanization is the ever increasing number of mega-cities with a population of more than 8 million. In 1950 there were only two - New York and London, but now where are already 22. Of the top ten of these mega-cities, seven are in developing countries, and all are outpacing their industrial counterparts in terms of the rate of expansion. With the possible exception of Sao Paulo, every one is experiencing a high level water stress. This figure will have risen to around 36 by 2015, and many of these cities will have a population way in excess of 8 million. Of these 36 mega-cities, 23 will be in Asia.
In one extreme example, Dhaka’s (Bangladesh) population has grown from 250,000 just over thirty years ago to more than 13 million today. This means there is now an environment where more than 9 million people have no sewerage at all, resulting in human waste collecting and overflowing into rivers and lagoons - sources of fresh water for the poor.
The lessons of a letter written by the US President nearly forty years ago are even more pertinent today than they were then, “A nation that fails to plan intelligently for the development and protection of its precious waters will be condemned to wither because of its short-sightedness. The hard lessons of history are clear, written on the deserted sands and ruins of once proud civilizations.” Lyndon B. Johnson (1908-1973), 36th President of the United States. Letter to the President of the Senate and to the Speaker of the House Transmitting an Assessment of the Nation’s Water Resources, 18 Nov. 1968.
In terms of supply there are between 9000 and 14000 km3 of renewable, useable water available annually. Total global water consumption (water withdrawals plus rain-fed agriculture) is currently running at around 6000 km3. In terms of water supply and demand, therefore there is no scarcity of water right now. But in the next few years the gap between supply and demand will shrink on a global basis. One interesting fact to note is that the supply of fresh water on the planet is no larger today that when humans first walked the earth.
Given the rising demand and fixed supply of water it should come as no surprise to see that water rates are already rising faster than inflation. If one looks at the US as an example, the average annual price increase of water has been 6.3% since 1989, which is about the same price increase as crude oil, but with a much lower volatility (4.2% for water compared with 42.9% for oil). This is partly explained by the fact that oil is continuously priced in an open market whereas the price of water is mainly administrated or politically priced. Private participation is less than 10% in the water industry vs. more than 70% in the oil industry.
What with the positive supply and demand fundamental driving water usage, it should not come as much surprise to see that many analysts have predicted exploding growth for the water industry in the near-term future. However, the real situation to date has been more one of lower but very consistent growth, as historically the total water industry (in the US) has experienced mid single-digit rate growth - in the 5% to 6% range. Growth might not be explosive going forward, but at the same time it is hard to imagine any kind of reasonable future scenario in which this industry will be characterized by anything other than very steady and sustained growth, and very attractive long-term business opportunities. At the same time investors in this business need to understand that most sectors are not growing at 15% to 20% a year.
A very illustrative fact is that in any randomly selected five-year period over the last 25 years, water utilities dominate the list of the best performing industry groups in the U.S stock market on a total return basis. Why? The simple answer is that water utilities have always done very well in good times and bad.
Shown in the next table below is a list comparing the ten remaining investor-owned water utilities in the U.S. compared to a list of standard market indices and popular investment icons. With records like these, it is not hard to understand why U.S. water utilities now carry such remarkably high market valuations.
When compared to almost any other industry, the water industry has a very compelling business model - with the most persistent demand, and probably the most predictable future.
Consider the following facts:
Ï% There is no substitute for water and users typically cannot postpone purchase - in other words, the demand for water tends to be very price- inelastic
Ï% The utilities that get water to the end user are natural monopolies with huge barriers to entry
Ï% Demand is generally unaffected by inflation, recession, interest rates, or changing preferences - all of those factors that significantly affect demand for other commodities
Ï% Water has a history of strong and consistent growth under all market or economic conditions - demand doesn’t change much with changing economic conditions.
Ï% The price of water does not reflect real economic value - water is worth far more to us than we actually have to pay for it, and hence there is room and the necessity for huge price increases in the future.
Investing in water stocks is very compelling story, but the downside is that many of the stocks appear to reflect this good news - i.e. valuations are hardly cheap. It is, however, a very diverse industry, with many very profitable companies, which are not dependant on the business cycle for their earnings, hence one should buy water funds when equity markets come under strain.
The final word on the subject: “You think we have bad fights over oil. Just wait until we start fighting over water. It’s predicted in the Koran, Anonymous Jordanian quoted in The Washington Post, 28 Mar 91.”
“The wars of the twenty-first century will be fought over water” - Ismial Serageldin, World Band Vice President for Environmental Affairs, quoted in Marq de Villiers’ Water, 2000.
Might just be time to take a look at how wet your portfolio is!

1995-2005
Symbol	Name	Total Return	Annualized
WTR	Aqua America Inc.	818.50%	24.80%
SWWC	Southwest Water Co.	765.72%	24.09%
SJW	SJW Corp.	412.42%	17.75%
ARTNA	Artesian Resources	411.60%	17.73%
AXP	Amer Express	370.02%	16.72%
YORW	York Water Co.	354.07%	16.34%
WMT	Walmart Stores	351.14%	16.24%
PNNW	Pennichuck Corp.	332.82%	15.78%
HD	Home Depot	302.88%	14.93%
IBM	Intl Bus Mach.	286.71%	14.47%
CWT	California Water Serv	259.59%	13.65%
XOM	Exxon Mobil Corp.	257.81%	13.58%
GE	Gen Electric	255.09%	13.49%
AWR	American States Water	248.79%	13.31%
PG	Procter & Gamble	235.15%	12.84%
JNJ	Johnson & Johnson	227.29%	12.57%
CTWS	Connecticut Water Serv	202.07%	11.69%
MSEX	Middlesex Water Co.	198.09%	11.47%
INDU	Dow Jones Indus Avg	154.69%	9.79%
SPX	S & P 500 Index	138.29%	9.06%
CCMP	Nasdaq Composite	118.29%	8.11%
MCD	McDonalds Corp	65.80%	5.18%
K	Kellogg Co	47.73%	3.97%
DIS	Disney Co	32.88%	2.88%
MRK	Merck & Co	31.70%	2.79%
KO	Coca Cola Co	28.35%	2.36%
Source: Bloomberg Analytics - All returns are with dividends re-invested.

Sources of Research:
Ï% The Environmental Benchmarker & Strategist Annual Water Issue, Winter 2006
Ï% A Brief Over of Water Investment Opportunities, John Dickerson
Ï% Investment Opportunities in the Water sector, Sustainable Asset Management, Sept 2004
Ï% Various fund fact sheets from Pictet Asset Management
Ï% Water is the oil of the 21st Century - MaxWater Investment Management
Ï% Water funds less exposed to business cycles - The bullandbear.com

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]@mbmg-international.com

Snap Shots: by Harry Flashman

Spectacular wall art time-lapse

There is something sad about showing friends the results of your photography on a small screen on the back of your digital camera. Photographs are meant to be displayed properly, and here’s how to produce some spectacular wall art to put on show. It takes no special equipment, special cameras, film or digital does not matter. All it takes is just a little forethought.
We are all aware of the fact that the camera and film can catch a particular moment in time and freeze it forever. The famous French photographer Lartigue was particularly good at this. So was Henri Cartier-Bresson, famous for the phrase “the decisive moment.”
However, what I am discussing today is “time lapse” photography. This is where you stack a series of related ‘decisive moments’ together. This kind of photography will show such things as the development of a flower, or a butterfly emerging from the chrysalis. You know the sort of thing - all very National Geographic. Any of you who have seen the film “A Zed and Two Noughts” will also remember those scenes of bodies decomposing, all done by time lapse photography. Very avant-garde.
Now while all this style of time lapse photography sounds expensive and even time consuming, it does not need to be so. There was one famous photographer who on her birthday takes a photo of herself in the nude. This she has done for the past 30 something years and has produced a time lapse record of human aging. This series of shots has been studied by the medical profession, as it is the only such record that has been undertaken in the world. So, if it doesn’t depress you too much, there’s an idea for you. Just don’t lose last years photo’s, will you!
No, for me, I want more instant gratification than that. I believe you should pick on something that can allow you to produce a finished product in the sort of time frame that you could sit with comfortably. So let us look at some items that you could do easily, with just a point and shooter, film or digital.
Here is one suggestion - buy a rose (they sell them in all bars every night) and place it in a vase by the window and shoot it at lunchtime. Leave it exactly where it is, and take one lunchtime shot every day for the next week. In that time, it will have spread its petals, begin to die, the petals will shrink, the stem will bend over, the water will go cloudy and other attributes that will only become obvious when you study the shots. However, to capitalise on this you must mount the seven shots, side by side, in order from the left. You have just produced a work of art in a week!
So you haven’t got the stamina for a week. What else can you do? Well, there is always the record of one object in daylight. Take six shots, one every two hours, of your house, for example, starting at 6 a.m. You will see how the different time of day produces different light, the sun’s movement produces different shadows and again, by mounting them side by side, in order from the left, you will have produced a work of art in one day!
So you don’t want to spend a day getting your definitive time lapse shots, so look at taking one hour. In that time you can document the progress of a snail along a wall, or serial shots of people walking down the street, someone cleaning their car or the way your beer glass empties. Just light it from behind with natural lighting to get the best effect. Probably you should repeat this a few times over a Sunday.
Note that I have said that the shots must be mounted from the left. There is a sound reason for this. We read from left to right and we naturally then place the “start” of anything on the left, with the “finish” on the right. (If you are from a country which reads from right to left, then probably mount yours the other way round!)

Modern Medicine: by Dr. Iain Corness, Consultant

Prik kee noo and prostate cancer

I received an email the other day, which I have published (in part) below:
“Dear Dr. Iain,
Rodents not only have to endure rat races, but if the males don’t die of other that, they also get prostate cancer, it seems. Or maybe it was induced in them by a rat of a researcher who reported on BBC that capsaicin reverses it, i.e., makes the prostate cancer go away.
Capsaicin, for those who don’t know, is what makes the fruit of the plant Capsicum from the deadly nightshade family, Solanaceae, hot. As Capsicum plants are more generally called chili peppers, the interviewer asked the researcher if that meant eating chili peppers could reverse prostate cancer in men. The researcher said he thought not, for a human dose equivalent to what he fed his rats would be too hot to eat.
Chilies have ever since been essential to the Thai diet, almost always present at meals or handy on a nearby bush. Reputedly the hottest form, which rates a 100,000 on the Scoville pungency scale, has tiny peppers which point downward and go directly from green to red. The article refers to it as the Thai Hot, Bird’s Eye, Siling Labuyo, but Thai call it Prik Kee Noo.
(These are) entirely too hot to be eaten by regular humans; but, as they are about the same size and shape as a medicinal capsule, they can be swallowed whole the same way. Being 67 and of an age to be concerned about my prostate, I decided to do just that with 3-4 Prik Kee Noo a day. Since I don’t bite them, they don’t bite me back. Instead, they pass through my digestive track from one end to the other without setting any of it on fire but my prostate gland was burning by Day Two.
Alarmed, I hurried to the urologist at (my local Thai) General Hospital. He had a good laugh and said Thai medical professionals have long known of the health benefits of chilies.
He then told me what was going on ‘down there’ was that the capsaicin was quite literally burning cancerous tissue away. He said the fire would go out (it did) when the cancerous tissue was gone, but to continue downing Prik Kee Nu every day (I have),
Happy Lee,
Farang Kee Nok in Siam.”
So has Happy Lee discovered the Thai male elixir of life? Unfortunately, I doubt it, and here’s why. The first is the problem that his core sample is not big enough, and since it concerns only himself, comes under the heading of being ‘anecdotal’. It would have been interesting to know Lee’s PSA levels before and after his prik kee noo ingestion, to try and give us some scientific data to work on. But unfortunately no.
The second problem (for me) is that if prik kee noo is the answer, then the incidence of prostate cancer in Thailand will be less than in the west. This has been looked at by a group in Bangkok, made up of Drs Tantiwong A, Soontrapa S, Sujijantrarat P, Vanprapar N, Sawangsak L all of the Department of Surgery, Faculty of Medicine, Siriraj Hospital, Mahidol University. They studied a group of 928 elderly men from communities around Siriraj Hospital who were evaluated for prostate cancer by Digital Rectal Examination (DRE) and/or Prostate Specific Antigen (PSA). Transrectal ultrasound guided biopsy (TRUS-Bx) which is the gold standard for definitive diagnosis was performed in cases with an abnormal DRE and/or PSA. If biopsy could not be performed, intermittent follow-ups with DRE and/or PSA were recommended.
They found that the prevalence of prostate cancer in Thai elderly men in the urban community was more than 0.75 percent and the prevalence of abnormal DRE and PSA was 8.7 and 17.3 percent respectively. The conclusion they drew from these figures was that the prevalence of prostate cancer in Thai elderly men was comparable to the prevalence in Western countries.
To make sweeping statements based on scanty evidence is always dangerous, and I am not saying Happy Lee is wrong. However, what I am saying is that much more scientific work needs to be done to validate the proposal.