NEW YORK (TheStreet) -- Oil may have dominated the headlines in recent decades but investors seeking the commodity of the future should look to water, said Matthias Kuhlmey, head of global investment solutions at HighTower.
"You have a misaligned supply/demand issue which is currently unfolding in the world," said Kuhlmey. "In the next few years more than half of the global population will live in areas with high water stress and then you have a significant infrastructure challenge."
Regarding that infrastructure challenge, nearly $22 trillion, or 1.3 times U.S. GDP at current figures, will need to be invested in water-related infrastructure projects over the next 20 years simply to maintain the status quo, according to Kuhlmey.
When it comes to investing in water, Kuhlmey said the choices are limited being that there are only about 100 publicly listed water related companies globally, most of which fall firmly within the small-cap category. In Kuhlmey's view, small-cap stocks will produce better results for investors who have a stomach for volatility and a long time-horizon.
After analyzing drought conditions in the U.S. over the past 10 years, Kuhlmey said that during so-called drought periods the S&P Global Water Index, which is composed of 97% small-cap stocks, has outperformed the MSCI World Small Cap Index by 85%. On the other hand, during non-drought periods, the S&P Global Water Index has underperformed by 38%. Kuhlmey said the current spike in U.S. drought conditions started in March 2015 and, based on past periods, could last up to nine months.
When it comes to valuation, not only is the S&P Global Water Index about 20% cheaper on a price to earnings basis versus global small-caps but, according to Kuhlmey, over the past 10 years, water stocks have materially outperformed their non-water peers in absolute terms as well as on a risk-adjusted basis.
"I think the best angle to play water is to be a stockpicker," said Kuhlmey. "Water is not necessarily a pure play. You will find companies in the infrastructure business and they will cater to other industries, not only water."