Finan­cial Market 2025: Water sector and global economy off to a dynamic start

The good, the bad and the volatile

The year 2025 saw global equities begin on a positive note, though leader­ship shifted, with Europe outper­forming the US. Volati­lity was a recur­ring theme, driven by infla­tion concerns, disrup­tive develo­p­ments in AI, and renewed trade tensions.

Early in the month, stronger-than-expected economic data and persi­stent infla­tion raised doubts about the pace of Federal Reserve rate cuts. Markets had antici­pated multiple reduc­tions, but the Fed signaled a more measured approach. In the middle of the month, China’s DeepSeek intro­duced a compe­ti­tive AI model, leading to a tempo­rary sell-off in tech names. Towards the end of January, the Trump administration’s announce­ment of new tariffs on imports from Canada, Mexico, and China had a negative effect on senti­ment.

In Japan, equities were initi­ally weak follo­wing a 25-basis-point rate hike by the Bank of Japan but recovered later, with the TOPIX ending slightly positive. European markets outper­formed, supported by a rotation out of US tech and strong perfor­mance in finan­cials and health­care.

The Federal Reserve maintained its policy rate at 4.25–4.5%, while the European Central Bank delivered a widely expected 25-basis-point cut to 2.75%.

The Tareno Global Water Solutions Fund recorded a perfor­mance of 1.47% for the month (W‑EUR Tranche).

Five key themes to watch in 2025

Infla­tion vs. Defla­tion: A Confu­sing Battle for Investors

Investors are caught between concerns about rising infla­tion and fears of defla­tion in certain sectors. While overall infla­tion remains stubbornly high, some manufac­tu­rers and distri­bu­tors of commo­dity-based products have seen their stock prices drop due to defla­tio­nary pressures. Compa­nies like Core&Main and Advanced Drainage Systems have strug­gled as they face decli­ning prices in their markets. However, given the current monetary and fiscal policies, infla­tion is likely to stay above 2%, and pricing power should streng­then in 2025, benefiting compa­nies currently seen as vulnerable to defla­tion.

Federal Spending: How Long Will the Govern­ment Keep Supporting Markets?

Since 2021, federal spending on water infras­truc­ture has more than doubled, driving strong revenue growth for compa­nies like Badger Meter and Xylem. While this spending has fuelled industry expan­sion, the key question for 2025 is whether leader­ship changes in Washington will shift toward a more balanced funding model.

Environ­mental Regula­tion: Will Policy Changes Impact Water Regula­tions?

There is ongoing debate about the future of environ­mental regula­tions, parti­cu­larly with the shift in U.S. leader­ship. While some expect signi­fi­cant rollbacks, environ­mental protec­tions like the Clean Water Act have bipar­tisan support. Recent incidents of water pollu­tion, such as a chemical spill in New Jersey, unders­core the neces­sity for effec­tive regula­tion at both the federal and state levels.

Agricul­ture & Irriga­tion: Searching for Stabi­lity

The agricul­ture sector has been experi­en­cing a protra­cted downturn since its peak in 2012, and forecasts for 2025 indicate ongoing challenges. Major equip­ment manufac­tu­rers such as Deere and AGCO antici­pate signi­fi­cant declines in unit sales. However, compa­nies like Lindsay have shown resili­ence, and if 2025 brings any positive surprises, investor senti­ment may improve.

 Valua­tion Dispa­ri­ties: A Chall­enge for Investors

The water industry has always had a range of stock valua­tions, but the gap has widened drama­ti­cally. Some stocks trade at excep­tio­nally high multi­ples due to their perceived scarcity value, despite lacking strong finan­cial perfor­mance. Price-to-earnings ratios have widened consider­ably from 14 to 45 times (compared to 16 to 26 times 10 years ago), highlighting a growing diver­gence between funda­men­tals and relative valua­tion.

Our month in water

Earnings season kicked off in January with reports from A.O. Smith, Badger Meter and Tetra Tech. While the reports did not bear major surprises, the visibi­lity into 2025 seems limited.

The A.O. Smith business in China is still facing challenges, and there are signs of increased compe­ti­tion in the US market. The stock has already discounted many of these issues, and there may be an inflec­tion point soon, especi­ally if the Chinese govern­ment intro­duces stimulus measures.

Badger Meter released a report showing a solid opera­ting perfor­mance, and we took the oppor­tu­nity to reduce our position in response to the positive market reaction.  Metering Infras­truc­ture has been a benefi­ciary of federal spending in recent years, which might change under the new admini­stra­tion. With the earnings release, Badger announced the acqui­si­tion of Smart­Cover. The company provides assess­ment solutions for under­ground infras­truc­ture such as storm­water networks. This is a timely move to diver­sify the portfolio away from metering.

Rolling with the punches

There is one situa­tion that has recently stood out. Tetra Tech faces signi­fi­cant uncer­tainty under the new admini­stra­tion. Trump 2.0 appears more aggres­sive and unpre­dic­table with threats to agencies like FEMA (Federal Emergency Manage­ment Admini­stra­tion), the EPA (Environ­mental Protec­tion Agency) and USAID (U.S. Agency for Inter­na­tional Develo­p­ment). While this poses a risk to Tetra Tech’s federal business which accounts for about a third of revenues, the stock has fallen about 35% from its pre-election highs, a sell-off, that seems overdone. At the end of the day, Tetra Tech remains a compel­ling growth story, led by a seasoned team of execu­tives with a stellar reputa­tion and a talented enginee­ring team that will be in high demand.

Outlook and Positio­ning

Earnings reports will be a focus over the next few weeks, and it will be intere­sting to see how European compa­nies perform in this challen­ging environ­ment, and whether there will be a rotation out of large cap tech into small and midcap names. January pointed in this direc­tion, but we have been there before. There is cause for optimism that Europe’s outper­for­mance can continue. Just have a look at Ursula von der Leyen’s compe­ti­ti­ve­ness compass.

Minimal adjust­ments were made to the portfolio, with only a slight reduc­tion in US exposure and an increase in cash to capita­lise on oppor­tu­ni­ties in the event of unjusti­fied volati­lity follo­wing news flow.