Another successful year for our water fund

December 2024

Follo­wing the US Presi­den­tial election in November, which was a source of global market excite­ment, the markets ended the year on a more subdued note. The major shock for the month was the Fed’s shift in guidance on monetary policy. Before the Fed’s final policy meeting of the year, investors were relatively convinced that they would continue to cut rates consist­ently through 2025. However, the Fed materi­ally changed its tone on the outlook. The central bank now expresses greater caution regar­ding the infla­tion outlook and has guided the market to antici­pate only two rate cuts in 2025 instead of the previously antici­pated four cuts. Conse­quently, global equities concluded the year in a weak state, with losses in most markets.

The Tareno Global Water Solutions Fund recorded a perfor­mance of ‑3.24% for the month (W‑EUR Tranche). Despite this, the year was concluded with a perfor­mance of +17%.

Review 2024: solid growth for the water sector

The water sector demon­strated respec­table growth in 2024, though it lagged the broader equity markets, where techno­logy compa­nies once again led the charge in a narrowly focused market. Perfor­mance across the sector varied during the year. Municipal water and waste­water infras­truc­ture spending remained strong, provi­ding a solid founda­tion. Infras­truc­ture invest­ment saw robust momentum in regions such as the U.S., Europe, and the U.K., supported by signi­fi­cant public and private sector funding. In contrast, industrial activity in developed econo­mies was less dynamic, resul­ting in slower-than-expected capital and opera­tional invest­ment within the water sector. Higher interest rates imposed constraints on residen­tial and commer­cial construc­tion, curbing water-related expen­dit­ures across global markets. Finally, low agricul­tural commo­dity prices reduced the profi­ta­bi­lity of farmers in key regions like the U.S. and Brazil, dampe­ning spending on irriga­tion systems and techno­lo­gies.

Adhering to funda­mental princi­ples has been instru­mental in the success of our invest­ment strategy this year.

New priori­ties: how politics and business are putting water at the centre

Fuelled by El Niño, 2024 has been marked by unpre­ce­dented global heat, with tempe­ra­ture records being broken for 15 conse­cu­tive months. Warmer climates have inten­si­fied storms, hurri­canes, droughts and flooding. While some of these events are attri­bu­table to a warming climate, this is not the case for all of them. Many of the world’s water problems are self-inflicted wounds. Poor manage­ment, misguided enginee­ring solutions, ill-advised decis­ions regar­ding infras­truc­ture develo­p­ment, and ineffec­tive leader­ship have compounded the challenges posed by a desta­bi­li­sing ecosy­stem. While the situa­tion is pressing, there are encou­ra­ging develo­p­ments. Water has become a priority for various stake­hol­ders. The EPA has unveiled a long-awaited regula­tion and timeline for the removal of PFAS, and the EU Council has incor­po­rated water resili­ence into its five-year agenda, recog­nising the bloc’s need to address water pollu­tion and scarcity.

While we are hesitant to use buzzwords, signi­fi­cant changes are underway. This year has seen compa­nies priori­ti­sing water. For instance, Kemira divested its Oil&Gas business to priori­tise water, while Georg Fischer sold all assets except their water business to focus solely on flow techno­logy.

Infras­truc­ture and innova­tion: positive outlook for the water sector

We maintain a positive outlook for the water sector in 2025. In the municipal sector, signi­fi­cant invest­ments in developed markets are likely to drive robust earnings growth for utili­ties and enginee­ring firms involved in municipal initia­tives. Key drivers of this growth are expected to include infras­truc­ture moder­ni­sa­tion, efforts to enhance resili­ence, compli­ance with PFAS-related standards, and the repla­ce­ment of lead pipes. Legis­la­tive measures such as the U.S. Infras­truc­ture Invest­ment and Jobs Act (IIJA) and the U.K.‘s AMP 8 are expected to provide substan­tial policy support. With a signi­fi­cant portion of the IIJA funding for water infras­truc­ture projects yet to be disbursed, an increase in spending is antici­pated in the coming years, creating a favourable environ­ment for compa­nies such as Tetra Tech, Clean Harbors and Veolia.

Industrial markets are expected to recover in 2025 as uncer­tain­ties related to interest rates and political events diminish. We antici­pate an escala­tion in the invol­vement of the private sector in finan­cing water-related infras­truc­ture, driven by robust demand from AI-driven invest­ments in data centres, semicon­ductor manufac­tu­ring, and power genera­tion facili­ties, which require substan­tial water techno­logy. We identify compa­nies such as Georg Fischer, Kurita Water, and Pentair as poten­tial benefi­ci­a­ries.

Residen­tial and non-residen­tial markets persist­ently face challenges from elevated interest rates, parti­cu­larly in the US. However, we antici­pate a moderate impro­ve­ment in new construc­tion and home sales, as well as a rebound in repair and renova­tion activi­ties later in the year. In Europe, residen­tial and non-residen­tial construc­tion activity is expected to gain momentum as the year progresses and interest rates are further cut by the ECB. We favour compa­nies such as Wiener­berger, Geberit, A.O. Smith and Advanced Drainage Systems.

The agricul­tural equip­ment sector, especi­ally for original equip­ment manufac­tu­rers (OEMs), is likely to face headwinds in 2025, with the long-term outlook for irriga­tion equip­ment remai­ning promi­sing but near-term catalysts lacking.

We acknow­ledge the poten­tial uncer­tain­ties around environ­mental policies, trade tariffs, and govern­ment expen­diture, but we strongly believe that bipar­tisan support for water invest­ments remains robust.

We extend our warmest wishes for a prospe­rous and fulfil­ling New Year, both perso­nally and profes­sio­nally.

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