Aqua guard

Water, a key renewable resource, has just started a multi-year boom which should leave even oil behind.

Throwing out the baby with the bath water is an idiom that has its origins on the monthly bathing ritual in Europe before the 16th century. The bath tubs were few and seniors of the house were the first to take bath, the children of the house came last.

The very reason: the baby was thrown with the muddy and dirty bath water on occasions. It's tough to validate this socionomic anecdote. But the question is that were some of our ancestors really low on hygiene or was it about water scarcity and economising of a resource?

Well, the fact is that water has moved from abundance to scarcity through history and our ancestors did face a water scarcity in the past which might have forced them to change their habits. This also involved economising on bathing water and hence throwing the baby out.

The question of water is more relevant than the energy question which faces the world today. It's just that water economics has not been understood by the speculator yet as he is busy with other assets. And, water has traditionally been a state domain and inefficient.

The very reason it's discussed less. Just to put things in perspective water outperformed oil from 2004 till 2006 and 2007 is not over yet. Water averaged 21 per cent returns a year over the last three years.

The returns might look meagre if you compare it with the 40 per cent average returns for the Sensex. But equity vs water looks comparable if you take the average return on the Sensex from 1990. The benchmark gave an annual return of 22 per cent over the last 17 years. And the way things appear, water may not just outperform oil but the Sensex as well.

Water, a part of the alternative energy sector, is just one of the many thriving assets today. Alternative energy is not new anymore. Solar Index, Bio Energy Index, Renewable Energy and Water Index are some of the benchmarks listed and traded today.

And renewables already take care of 13 per cent of the world energy needs, 34 per cent is oil, 21 per cent is gas, 25 per cent is coal and 7 per cent nuclear. This places renewables ahead of nuclear fuel today. Wilderhill Clean Energy Index is the first ETF for renewable sector with $800 million under management with 42 stocks.

The renewable sector components consist of harvesting, energy storage, cleaner fuels, energy conservation, greener utilities, etc. We have a wind energy global major in India (Suzlon), which has sprung up to global scale in about two decades despite all negative issues against wind and the safety aspect and questions like "what if a wind mill comes crashing down?"

According to statistics, for every 10,000 birds killed by human activity, less then one death is caused by a wind turbine. Today 1.6 million homes are served by wind energy and this number is expected to rise to 25 million by 2020. Wind turned out to be a better performer than even water as it doubled returns as compared to oil over the last seven years.

Then we have the solar energy, where we have a Chinese global major (Yingli). Even Vatican opted for solar power in June this year. Solar energy has outperformed oil by a multiple of 10 since 2000. So what we might be really fighting for is not that oil stock but real scarcity of water and few stocks in a high potential alternative energy sector.

Al Gore's Nobel Prize winning work also makes a strong case for understanding the alternative energy and water sector. The opportunity in a crisis, he mentions in his work, is for real. Water is linked with crisis and opportunity. And it's also linked with our food and the consequences of global warming.

Food as we talked last time is so critical for prosperity and water is essential for the agro sector. The book An Inconvenient Truth: The Planetary Emergency of Global Warming and What We Can Do About It clearly mentions submerging of parts of Bangladesh, Kolkata and some American and European cities.

These are facts know to climate watchers from many years, but we have we just started noticing it now. And with more than a billion people worldwide without access to adequate supplies of safe water, the scarcity is for real.

So what are we doing about it? United States, the great champion of free-market capitalism delivers water by the public sector. In France, private companies have been distributing water for 150 years and Suez is a global sector leader. Water is capital intensive and not an easy sector to understand and invest in.

The industry in developed countries used more than 40 percent of total water withdrawals versus 10 percent in developing countries. If pollution is not controlled in these countries, and water consumption not regulated, clean water becomes even scarcer.

The developing world will need about $600 billion or more to augment water reserves and meet water quality needs. And the rate of return constraint, where utilities are limited to a 5 per cent return over costs, fails miserably. Markets remain the best mechanism for allocating resources.

So where does India stand? India scores low on the water poverty index, which is a holistic water management tool developed by Centre of Hydrology and Ecology. Lower the ranking, bigger the problems. And unlike Europe we have few water utility companies. It's the local Jal Board or the municipality that is in charge.

This leaves us under-prepared, a kind of crisis, but an opportunity if we are in the alternative energy business. There are many instruments available today globally which allow you to take exposure to the respective sector. And it should be a matter of time when a water index starts trading even locally. Till then, conserve.

The writer is CEO, Orpheus Capitals, a global alternative research company