An enduring but overlooked investment theme

The disruption to certain key commodities due to the ongoing conflict in Iran has been well documented. Beyond the immediate effects, the long-term impact of the crisis is a matter of conjecture, but it could serve to remind us of an established investment theme that may have been temporarily overlooked due to the clamour over AI.

The Middle East disruption is also likely to precipitate a reappraisal of global supply chains, for even if the conflict is eventually resolved, it could still result in a reconfiguration of seaborne and overland routes to market, as the emphasis switches further from cost efficiency towards resilience and a ‘just in case’ mindset.

The changes will have a major bearing on costs across a range of sectors. Corporations, and even whole nations, will become more inclined to bulk up physical inventory of key industrial inputs, and diversify their supply networks wherever possible. And although the pivot away from the established order represents a challenge for companies directly affected – for instance AP Moller-Maersk (DK:MAERSK.B) – others engaged in areas such as AI-driven predictive analytics will benefit from the changes under way.

With so much being written about the reduced volumes of crude oil, fertilisers and aluminium making their way on to global markets, it’s easy to forget that the civil unrest in Iran that began at the end of last year was linked to the country’s chronic water shortages. There are innumerable examples throughout history in which shortages of everyday necessities have triggered political unrest.

Iran is by no means an outlier in the region. All of the Gulf states, along with those of The Levant and Yemen, have placed a heavy strain on ancient, non-renewable fossil aquifers, which has led to seawater intrusion and contamination from untreated waste water. Any serious depletion on this basis also needs to be set against the annual rainfall across the region, which oscillates between one-tenth and one-twentieth that of western Europe.

As much as 90 per cent of the countries within the Middle East and north Africa (MENA) region are classified as arid or semi-arid, although many of the problems they face on the hydrological front can be linked to mismanagement and/or short-termism.

The good news for the Gulf states is that they are able to call on the expertise of three French multinationals – Veolia (FR:VIE), Suez and Saur – which have already accumulated a great deal of experience in the region. Only one of their number, Veolia Environnement, a long-term IC favourite, is publicly traded, but it provides broad exposure to the global water sector, in addition to its many other environmental strands. It has also established regional hubs and has expanded its presence in key Asian markets, as regional demand for water management continues to rise.

Whether any of the prospective water investments in the UK domestic market represent a thematic opportunity is now more difficult to assess given the changes in train. Given what’s been happening with South East Water, many householders – certainly ‘disgusted of Tunbridge Wells’ – would welcome an intensified focus on improved accountability at the heart of the Water (Special Measures) Act passed in 2025, but we’ll have to wait and see whether it’s compatible with the privatised utilities’ desire to boost free cash flows. 

The industry’s latest business plans amount to £104bn of private investment that the government says will “transform” the nation’s water infrastructure, which is just as well given its parallel commitment to the continued rollout of AI data centres – a thirsty prospect. The reality is, however, that even if the sector has new funds at its disposal to address our ailing water infrastructure, they’re likely to be dwarfed by the investment flows dedicated to energy and digital assets.

Perhaps we take this most basic yet essential resource for granted. The investment theme has been bandied around since the turn of the millennium, and there are now several funds available for those investors on the lookout for passive exposure. But perhaps events in Iran demonstrate exactly why investors should consider augmenting their exposure to the broader industry. 

Agriculture accounts for the lion’s share of global freshwater withdrawals, which for many people would take precedence over the demands of data centres. This doesn’t mean that the AI growth options have run their course, far from it, but worsening global water scarcity, rapid urbanisation and the need to remediate creaking infrastructure provides a compelling long-term investment case amid the AI euphoria. And if you’re looking to insulate your portfolio against market volatility, it’s worth remembering that companies operating in the broader water sector have below-average sensitivity to economic cycles.