Strong Signals for the Water Sector

In June, finan­cial markets were caught between persi­stent infla­tion, geopo­li­tical risks, and surpri­singly robust corpo­rate earnings. Central banks in the U.S., Europe, and Japan signaled that the fight against rising prices is not yet over. Interest rates remain a key influen­cing factor. At the same time, falling energy prices and solid economic data helped ease the initial nervous­ness. Stock markets were highly volatile throug­hout the month but managed to end the month largely on a positive note thanks to a late rally.

Water Becomes a Location Factor

June provided a remar­kable indica­tion of where water has now entered the finan­cial markets: in the prospectus for the largest initial public offering in history. SpaceX, which now also includes the AI business xAI, streng­thened the risk disclo­sures in its IPO prospectus regar­ding water in early June. It now states that the availa­bi­lity of water has become a critical factor in the selec­tion of locations, construc­tion, and opera­tion of data centers—a sentence that was missing from the original version. Noteworthy is the dual role of this issue: the same documents present the company’s own water treat­ment and reuse as a compe­ti­tive advan­tage. Water is thus no longer a footnote but a location factor. Behind this lies a tangible reality: the water depen­dency of American data centers is likely to continue to increase.

Meanwhile, an important deadline is approa­ching in Washington. The water programs under the IIJA infras­truc­ture law—which has roughly quadru­pled annual federal funding for drinking water and waste­water projects since 2022—are set to expire at the end of September. The administration’s budget proposal also calls for cuts to the State Water Resources Fund (SRF)—a move that Congress, however, already rejected once last year. For investors, however, the outlook remains intact: The need for invest­ment is struc­tural and long-term, but finan­cing and regula­tory issues are incre­a­singly deter­mi­ning the pace at which projects are actually imple­mented.

Company News

Several portfolio compa­nies used the quiet weeks between earnings seasons to focus on strategic initia­tives. Advanced Drainage Systems, a specia­list in storm­water and waste­water manage­ment, presented an ambitious five-year plan at its Investor Day in mid-June: By fiscal year 2030, revenue is expected to rise to over USD 4 billion and adjusted EBITDA to more than USD 1.2 billion, with organic growth of over 8% per year. The EBITDA margin is expected to remain above 30%, a remar­kable level for a company that was once considered a simple pipe manufac­turer and has consist­ently evolved over the past decade into a provider of technical water manage­ment solutions.

Core & Main has added a promi­nent figure to its board of direc­tors: Susan Hardwick, former CEO of American Water, the largest publicly traded water utility in the U.S. For a distri­butor whose clientele consists prima­rily of municipal water utili­ties, this appoint­ment brings the customer’s perspec­tive directly to the highest level of the company. In addition, the company opened five new locations during the quarter; eight to ten are planned for the full year—more than ever before.

Results at a Glance

Three portfolio compa­nies reported their finan­cial results in June, and their figures reflected the familiar trends in the current water market. Core&Main, a U.S. distri­butor of water infras­truc­ture products, posted first-quarter revenue of USD 1.91 billion, virtually unchanged from the previous year. It was intere­sting to look beneath the surface: municipal demand remained stable and reliable, while the fire protec­tion segment grew by 17%, partly due to data centers. The full-year outlook was confirmed. Notably, manage­ment addressed concerns about a funding cliff, pointing out that the majority of U.S. water invest­ments are funded at the state and municipal levels and remain robust.

Halma posted the stron­gest results. The British safety and environ­mental techno­logy group closed its fiscal year with organic revenue growth of 16% and its 23rd conse­cu­tive increase in profits; the dividend was raised for the 47th time in a row. The Environ­mental & Analysis division, which encom­passes water analysis and quality monito­ring, grew organi­cally by 34%.

Fund Perfor­mance

The Tareno Global Water Solutions Fund posted a return of +4.63% in June (Tranche W‑EUR). The fund’s perfor­mance was driven by precisely those stocks that are benefiting from the data center trend: Watts Water, a provider of valve, drainage, and cooling water solutions, rose signi­fi­cantly follo­wing an analyst upgrade. Pump manufac­turer Gorman-Rupp was also among the top contri­bu­tors. Demand for pumps used in fire protec­tion and liquid cooling remains strong. On the other hand, Halma fell notice­ably despite record figures. The market had appar­ently already largely priced in the strong perfor­mance, and the outlook sugge­sted a more moderate pace of growth. The Canadian environ­mental services provi­ders WSP and Stantec also weighed on the month’s perfor­mance

Focus on Sustaina­bi­lity

Last month, this report noted that blue bonds—bonds whose proceeds are earmarked for water and marine projects—have so far been found prima­rily in emerging markets. June provided the counter­ex­ample: Water techno­logy company Xylem issued the first-ever Blue Bond by a U.S. company. The scarcity of sustaina­bi­lity-linked bonds in the U.S. market helped the debut secure favorable terms. Investors are already refer­ring to a “Blue-mium.” The transac­tion is more than just a curio­sity: It shows that dedicated water finan­cing instru­ments can attract enough insti­tu­tional demand even in developed markets to lower a water company’s cost of capital. If this pricing advan­tage proves to be lasting, other publicly traded water compa­nies with large invest­ment programs will have a clear incen­tive to follow suit.

Portfolio positio­ning

Develo­p­ments in June confirm our balanced portfolio approach. What is striking at present is the lack of passive inflows into water ETFs. We are incre­a­singly opera­ting in an environ­ment where targeted stock selection—particularly outside the U.S.-heavy ETF universe—can demon­strate its value. Struc­tural demand from data centers is evolving independently of the municipal invest­ment cycle and is supporting our industrial and techno­logy stocks. We will be closely monito­ring the follow-on finan­cing for expiring U.S. infras­truc­ture programs as well as European waste­water regula­tions. Both of these factors deter­mine the pace of the invest­ment cycle rather than its direc­tion. In the coming weeks, corpo­rate earnings reports will once again take center stage. Volati­lity is likely to be high, but this always creates oppor­tu­ni­ties as well.