Israel's Water Infrastructure Faces Challenges, Investment Opportunities Emerge

Five out of Israel's six desalination plants experienced disruptions or partial shutdowns earlier this month due to algae and turbidity in the water, which clogged the facilities' membranes. This event led the Water Authority to drastically reduce water supply to agriculture to safeguard drinking water for citizens. The incident highlights the critical importance of water infrastructure, including desalination plants, pipelines, and water meters.

Globally, water demand is driven by two persistent factors: population growth and climate change. Rising populations require more water for basic needs, while global warming diminishes water supplies. These economic principles of supply and demand underscore the need for significant investment in water infrastructure to preserve existing resources.

While individual stocks can be analyzed, the water infrastructure sector also offers investment opportunities through exchange-traded funds (ETFs). A prominent ETF is PHO, managed by Invesco, which includes companies categorized as water suppliers (distributing water to consumers) and water equipment and infrastructure firms. The latter category is particularly interesting for investors focusing on individual stocks, encompassing manufacturers of water meters, membrane producers like those affected in Israel, and other infrastructure-related companies.

Historically, the PHO ETF has shown strong performance, delivering 180% returns over the past decade, although its returns have been weaker in the last five years, yielding only 19%. The author, who manages the hedge fund "Bereishit," suggests that the recent weakness, following a significant run-up, could present an opportune moment to invest in this defensive and growing sector. The author and/or their clients may hold positions in the mentioned securities, and this information does not constitute investment advice.