How to invest in water through the ASX

With parts of Australia in the grips of the longest drought on record, demand for water could increase significantly in coming years.

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The justification for an investment in water seems pretty straightforward. Many people predict that demand for water will increase significantly over the coming decades. If this occurs, while supply remains constant, then the price of water will increase. This, in turn, will make the rights to water more valuable and as a result, investors will profit through capital growth.

Water rights may also become more valuable through a fall in supply. This could occur from reduced rainfall or by depleting natural reserves before they have time to renew. However, in times of drought, there might also be limited water to on-sell.

ASX companies with exposure to water

On the ASX there are a few companies which offer investors exposure to water.  The most obvious is Duxton Water Ltd (ASX: D2O), which is a company that owns a portfolio of Australian water assets, mostly in the Southern Murray Darling Basin. Duxton shares were first listed on the ASX in 2016 and currently, trade at a price of $1.39 per share. Interestingly, the company currently values its water assets at $1.62 per share.  This means the current share price could represent a discount to the true value.

A less direct approach to investing in water could involve buying shares in Webster Ltd (ASX: WBA). Webster is an Australian agricultural company and while it does own the rights to a large amount of water, it also requires a large amount of water to operate. If the water investment theory holds, these water rights should increase in value over the long term, which will increase the value of the Webster share price.

Foolish Takeaway

There appears to be a sound strategy behind investing in water but there are also risks. For starters, heavy amounts of rain over a consistent period of time could easily shift down the perceived value of water rights in a specific area. Alternatively, high water prices may force change in relation to water use, which will reduce demand. There is also risk from government intervention.

If I was to invest in water via the ASX, I would choose to buy Duxton shares as the company gives the greatest level of exposure. However, given the risks, I won't be investing until an even more attractive price is on offer. 

Other companies with access to large amounts of water include Rural Funds Group (ASX: RFF) and Select Harvests Limited (ASX: SHV). These could also be worth adding to the watch list if you're keen on water.

Motley Fool contributor Mitchell Perry has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED. The Motley Fool Australia has recommended DUXTON FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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