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.