Water funds on the rise: Strong performance in May 2025

Getting back on your feet after a fall – How water stocks offer stability and opportunities in a risk-prone market environment

The stock markets staged an impressive recovery in May, driven by strong momentum from the US, Europe, and Japan. Growth stocks and small and mid-cap companies benefited from good corporate results and a noticeably improved mood. In the US, the S&P 500 rose by more than 6%, with the technology, industrial, and consumer goods sectors posting significant gains. European equities also posted solid returns, supported by hopes that the tariff dispute would not escalate and stable earnings expectations. The Japanese markets were also well supported by identical factors. In this risk-friendly environment, defensive sectors lagged behind. Investors clearly regained confidence in equities, particularly in small and medium-sized companies with solid fundamentals.

The Tareno Global Water Solutions Fund achieved a solid performance of +4.53% (W Euro Tranche) in May.

Away from the noise: water stocks deliver in volatile times

The most recent earnings season ended in May with results that significantly exceeded our expectations. The water sector proved to be a resilient haven in a highly volatile geopolitical environment:

• Kurita Water (Japan): The specialist in ultrapure water systems raised its full-year forecast and secured two major projects in the US and Europe – clear signs of a rebound in capital spending in the semiconductor industry.
• Watts Water (US): With earnings well above expectations and stable forecasts, Watts is showing how to navigate successfully in a US construction market characterized by high interest rates. A weaker US dollar is providing additional tailwind for the company, which has a strong presence in Europe.

Down but not out: a comeback in the making

Spending cuts by US federal agencies hit many environmental consulting firms hard in the first quarter of 2025, with Stantec, WSP, Arcadis, and Tetra Tech in particular coming under pressure to reduce costs. But the tide is turning:

• Tetra Tech (USA) lost 13% of its order backlog following drastic cuts to USAID projects, but won new, high-margin contracts.
• Stantec, WSP, and Arcadis are reporting a similar recovery, with rising order volumes and share price gains.

The fact that government orders are picking up again, especially in the US, is a strong sign. The sector made the strongest contribution to performance in the reporting period – a comeback that should not be overlooked.

Our month in the water sector

We met with several companies in our universe and would like to share three highlights:

1. ACEA (Italy): The leading Italian water utility remains a top pick despite its already strong performance. Higher investments in the network to reduce water losses and a possible reduction in the Suez stake promise further price gains.
2. Webuild (Italy): Synonymous with global infrastructure activities, from roads and tunnels to high-speed trains, and a world market leader in water infrastructure. With Fisia Italimpianti, Webuild covers the entire cycle from desalination to wastewater treatment.
3. Georg Fischer (Switzerland): The planned takeover of the VAG Group from financial investor Aurelius strengthens Georg Fischer in the metal fittings business for water networks. The imminent completion of the sale of the Machining Solutions division is likely to be another driver for the share price.

Holding all the cards – targeted selection and liquidity reserves in volatile markets

What’s next? The strong recovery despite ongoing uncertainty shows that markets love good news. We remain underweight in US equities, where valuations remain challenging. Europe, on the other hand, is seeing growing inflows, not least thanks to Mario Draghi’s competitive initiatives, which should boost infrastructure investment. We remain cautiously optimistic and are maintaining a liquidity buffer of around 6% in case the rollercoaster ride continues. And who knows: sometimes a little cash is the best safety net when the next crash comes.

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