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The world is in desperate need of water. Drought and increasing temperatures have threatened to impact nearly every major sector of the economy, from energy to agriculture to shipping.
Markets are taking note. The S&P Global Water Index, which tracks 50 companies from around the world that are involved in water utilities, infrastructure, equipment and materials, has outperformed the S&P Global Broad Market Index by more than 3 percentage points per year since its beginning in late 2001. So far this year, the Global Water Index return has been nearly 5 percentage points higher than the S&P Global BMI.
The big picture: Europe is suffering the worst drought it has seen in at least 500 years after sweltering temperatures led to thousands of deaths across Germany, the United Kingdom, Spain and Portugal. European rivers hit record low water levels, interfering with crop and power production as well as shipping. The Rhine fell so low that shipping had to be severely reduced, causing supply issues in Switzerland and Germany. Yields of major crops are expected to fall by at least 10% to 20% due to water restrictions.
It’s not the only region of the world struggling with water shortages. A drought that has been enveloping the southwestern United States since 2000 marks the driest 22-year period of the past 1,200 years, a UCLA-led study found. The American Farm Bureau Federation suggests that yields could be down by as much as a third this year compared with last year because of drought and extreme heat.
Climate change could make these extreme droughts a common occurrence. A report by the United Nations Intergovernmental Panel on Climate Change last year found droughts in drying regions that previously occurred only once every 10 years are now happening about 1.7 times per decade, on average. If the Earth warms by another 2 degrees Celsius, the once rare occurrences will happen about 2.5 times per decade.
What it means for markets: Stress on public budgets will make it difficult for governments around the world to solve water-access and drought issues on their own. Publicly-traded companies are increasingly likely to be part of the solution, and analysts predict opportunity for upside.
“As these demands for clean water increase, companies involved in water-related business activities stand to grow in the coming years,” wrote Tianyin Cheng, a senior director at S&P Dow Jones Indices.
Recent reports from the World Economic Forum estimate the global water industry at $483 billion, as of mid-2022. Investors want in: There were 23 water funds launched over the last five years, with a collective $8 billion in assets, according to Morningstar data.
Common holdings in these funds include utilities like American Water Works Company (AWK), Georg Fischer AG, a Swiss firm that works on the safe transportation of water, and water technology companies like Xylem (XYL), which forecasts revenue growth around 5% annually through 2025.
Consolidated Water (CWCO), which recycles waste water into potable water, is also being watched by analysts. Its shares are up 52% this year while the broader S&P 500 is down nearly 19% over the same period.
A rising tide: On the other side of the equation lie companies that sap water resources and don’t address drought as a critical problem to their business operations. A recent analysis from environmental disclosure platform CDP and Planet Tracker, a non-profit think tank, showed listed companies could face losses of at least $225 billion from risks related to water.
Also in August, sustainability investor group Ceres announced the creation of the Valuing Water Finance Initiative, with 64 US and international investors representing a total of $9.8 trillion in assets under management. Investors include pension funds and asset managers such as Franklin Resources. Ceres says the fund will pressure companies to pay more attention to their impact on water quality and availability. Participants, they say, will consider additional steps of “escalation” like voting against directors at companies who won’t make necessary changes.
Wall Street’s big month
After a mercifully quiet summer, the stock market is going to have a lot to react to this month. Between consequential central bank decisions around the globe (and at least eight US Fed officials speaking this week alone), Big Bank CEOs testifying before Congress and some changes coming to the crypto market, investors will have a lot to digest and contend with. That’s not to mention the host of economic data that will let us know more about whether inflation is still biting, the labor market is still booming and consumers are still shopping.
Historically speaking, this isn’t a great month for markets. But September is a month of clarity. The crisp air snaps away the last of August’s haze and allows us to see what’s ahead. Here’s what we’ll be watching over the next few weeks.
Big week for central banks
The US Federal Reserve is arguably one of the most influential forces on markets right now as officials consider further interest rate hikes later this month to fight inflation. Investors will be watching closely for any clues to what it might do. Central bank decisions on hikes are expected across the globe, which are expected to have impacts on both European and US markets.
– Sept. 7: It’s a central bank bonanza as Cleveland Federal Reserve President Loretta Mester, Fed Vice Chair Lael Brainard and Vice Chair for Supervision Michael Barr all give their economic outlooks. On top of that, the Fed will release its Beige Book, which describes the state of consumer spending, sentiment and housing demands in the 12 Federal Reserve districts.
Beyond the US, the Bank of Canada also publishes its decision on where to set the benchmark interest rate.
– Sept. 8: The Fed fete continues as Federal Reserve Chair Jerome Powell speaks from the Cato Institute at 9:10 am, ET. The last time Powell spoke, from Jackson Hole, he said the economy should expect some pain on the horizon, which sent markets reeling.
The European Central Bank will also release its decision on where to set the benchmark interest rate, which will be closely watched by investors globally.
–Sept. 9: This week of Fed festivities wraps with speeches from Chicago Fed President Charles Evans and Governor Christopher Waller.
An onslaught of data
Key economic data mapping the trajectory of US inflation comes out the following week. This is the last drop of data before the Fed meets to decide where interest rates go, and investors will be looking closely for signs that inflation could be easing.
–Sept. 13: The Consumer Price Index (CPI) for August is released. This measures the change in the prices of goods and services, and the Fed pays very close attention to this figure.
–Sept. 14: Producer Price Index (PPI) for August is released. This is the Fed’s preferred measure of inflation. It measures a change in input prices of raw, semi-finished or finished goods and services.
–Sept. 15: The Bank of England publishes its decision on where to set the benchmark interest rate. In the US, retail sales for August will also be released. These are an important indicator of consumer spending, which accounts for the majority of economic activity.
All eyes on DC
The penultimate week of September is perhaps the most newsworthy. Investors have been waiting since July to see the Fed’s next move, and this week they finally meet and announce the extent to which they’ll raise rates. Wall Street CEOs will also flock to the Hill to talk banking policy, and could give an update on where they predict the economy is headed in.
–Sept. 20- 21: Federal Open Market Committee (FOMC) members will meet and vote on where to set the target interest rate. Traders will watch the decision closely as well as the press conference following the decision with Fed Chair Jerome Powell. Any surprises could send US markets tumbling.
– Sept. 21-22: Bank of America’s Brian Moynihan, Wells Fargo’s Charlie Scharf, JPMorgan Chase’s Jamie Dimon, Citi’s Jane Fraser, PNC’s Bill Demchak, US Bank’s Andrew Cecere and Truist’s Bill Roger all testify for their annual report to Senate and Congress. Investors will listen for any predictions on where the economy is going and for any mentions of that dreaded ‘R’ word: Recession.
Pass the chips
Here’s another development in the longstanding US-China rivalry.
The Biden administration released plans for its $50 billion investment in the US semiconductor industry on Tuesday. Aimed at shaping an important industry and countering China, the Department of Commerce announced how it would allocate its CHIPS for America Fund, part of an act signed into law in July.
According to the White House, about $28 billion of the fund will go toward grants and loans to help build facilities for advanced and cutting edge chip-making. Another $10 billion will go to expanding manufacturing for older generations of technology used in cars and communications tech like smart phones. The last $11 billion will go to research and development initiatives related to chipmaking.
The Department of Commerce will start accepting applications for the funding from companies by February and could begin distributing money by next spring.
The United States was once a leader in semiconductor chip manufacturing but has lost ground to other countries like China. Now, many American manufacturers import the chips that are essential to the production of cars, smartphones and medical equipment.
As my colleague Rishi Iyengar has reported, Taiwan complicates matters further. The self-governed island off China’s coast has become a diplomatic and military flashpoint between Washington and Beijing. Taiwan is critical to the global semiconductor industry, with several of the world’s top manufacturers headquartered there.
The new funding is intended to help companies bring chip manufacturing back to the US and, as a result, help lower costs and prevent supply chain disruptions, reports my colleague Katie Lobosco. The current global chip shortage has limited production of new vehicles, for example, leaving Americans facing high car prices.
Earnings from GameStop.
Apple unveils new products at 1 p.m. ET and the Federal Reserve releases its US Beige Book.
Coming Thursday: Fed chair Jerome Powell speaks at Cato Institute; US weekly jobless claims; ECB rate decision; Japan GDP.