Industry Provides Support, Interest Rates Weigh on the Market

The conflict with Iran and high oil prices kept infla­tion concerns in the spotlight in September. Yields on long-term bonds rose amid robust economic data and ongoing concerns about public finances. Buoyed by techno­logy stocks, U.S. stock markets proved more resilient than European markets, where higher energy and finan­cing costs weighed on senti­ment. The upcoming earnings season could poten­ti­ally trigger a short-term rebound in October, while the U.S. midterm elections repre­sent an additional source of uncer­tainty.

Develo­p­ments in the Water Sector

Industrial demand remained the most important short-term growth driver for the water sector, supported by invest­ments in data centers and related infras­truc­ture. Provi­ders with a corre­spon­ding project focus benefited most from this. Concerns about the security of artifi­cial intel­li­gence and poten­tial regula­tion increased uncer­tainty regar­ding the pace of invest­ment. However, we do not expect these factors to slow the under­lying momentum. In the construc­tion sector, the outlook remains mixed: Higher long-term interest rates and mortgage costs made it more diffi­cult to finance home purchases, and indica­tors for commer­cial construc­tion also remained subdued. This weighed on demand for water techno­logy for new construc­tion.

Agricul­ture and irriga­tion presented a mixed picture. Rising agricul­tural prices improved the outlook for a recovery in invest­ment. At the same time, signi­fi­cantly higher diesel costs eroded margins for agricul­tural businesses, just as fuel consump­tion increased during the fall harvest. In municipal water and waste­water services, surveys of invest­ment budgets pointed to several years of moderate declines as public subsidy programs come to an end. However, the surveys suggest a gradual slowdown rather than an abrupt slump in invest­ment. Rising water rates provided some support for finan­cing options, but higher interest rates remained an obstacle. The outlook thus varies consider­ably across end markets: growth oppor­tu­ni­ties in industry contrast with more cautious invest­ment activity in construc­tion, agricul­ture, and municipal infras­truc­ture.

Company News

After Arcadis had rejected the takeover propo­sals from WSP Global, the company presented its plans for an indepen­dent future at its Capital Markets Day in September. Manage­ment reaffirmed its commit­ment to the indepen­dent strategy and its convic­tion regar­ding the value of the company as an indepen­dent entity. The strategy for 2027–2029 envisages the sale of the majority of the archi­tec­ture business and opera­tions in China, a simpler organi­sa­tional struc­ture, and increased invest­ment in selected growth markets. Manage­ment is targe­ting organic net revenue growth in the mid-single-digit percen­tage range and an opera­ting EBITDA margin in the mid- to high-teens. We continue to hold both Arcadis and WSP in our portfolio.

Halma has streng­thened its water quality activi­ties through the acqui­si­tion of Pyxis, a specia­list in monito­ring and analysis techno­logy. In its announce­ment on 24 September, the group confirmed the comple­tion of the acqui­si­tion of all three Pyxis compa­nies. The maximum conside­ra­tion, on a cash- and debt-free basis, amounts to USD 200 million. The transac­tion comple­ments Halma’s capabi­li­ties in real-time water quality monito­ring and analysis.

Earnings Season at a Glance

Core & Main reported solid results for the second quarter. Earnings per share grew faster than revenue, partly driven by share buybacks. Municipal demand and major infras­truc­ture projects remained key drivers. However, given a mixed demand environ­ment, manage­ment maintained its full-year outlook. Halma raised its full-year margin forecast, supported by opera­tional impro­ve­ments and a favorable business mix. Revenue growth expec­ta­tions remained unchanged, while order intake continued to exceed both revenue and the prior-year level. United Utili­ties confirmed its finan­cial forecast and the on-schedule progress of its exten­sive infras­truc­ture invest­ment program. The announce­ment unders­cored the predic­ta­bi­lity of the invest­ments within the existing regula­tory frame­work.

Fund Perfor­mance

The Tareno Global Water Solutions Fund posted a return of −2.6% for the W‑EUR share class in September. As of September 30, its year-to-date perfor­mance stands at +2.9%.

Sabesp (Companhia de Sanea­mento Básico do Estado de São Paulo) and Georg Fischer made the largest positive contri­bu­tions. Sabesp rebounded from the decline in its share price follo­wing the release of its earnings in August. Improved water availa­bi­lity may have further bolstered market senti­ment. Georg Fischer’s funda­mental outlook continued to be supported by strong order intake in the semicon­ductor appli­ca­tions and water infras­truc­ture segments, as previously reported in the half-year results.

The largest negative contri­bu­tions came from the utili­ties American States Water and California Water Service, the environ­mental services provider Veolia, and the equip­ment suppliers Pentair and Advanced Drainage Systems. In our view, rising long-term interest rates weighed on capital-inten­sive utility compa­nies, while higher finan­cing costs dampened construc­tion-related demand. Despite the long-term need for invest­ment in the water sector, these headwinds affected various parts of the portfolio.

Portfolio activity

In September, we made selec­tive adjust­ments to our portfolio. We estab­lished a position in Inter­pump. We were impressed by the company’s pump and fluid techno­logy, as well as its solid profi­ta­bi­lity and cash flow genera­tion. We increased our position in Essen­tial Utili­ties. The regulated business and ongoing infras­truc­ture invest­ments enhance the predic­ta­bi­lity of earnings and streng­then the portfo­lio’s defen­sive orien­ta­tion. We also increased our position in Franklin Electric, as we have a positive outlook on its growth prospects and opera­tional perfor­mance.

We reduced our position in Core & Main. Despite solid quarterly results, the unchanged revenue outlook and uncer­tainty regar­ding short-term demand led us to adopt a more cautious stance.