Water's stellar performance in 2005

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It has been another fantastic year for publicly quoted water companies, but can it be sustained?

Water investors enjoyed a second year of astounding returns in 2005. An index of the 57 global water companies covered by GWI rose 24.2%, against a 9.5% increase in MCSI’s benchmark world stock market index.

The growth was led by Europe, with the three largest companies in the sector, Veolia, Suez and RWE, enjoying an exceptional year. Veolia – the largest water company – saw its share price rise by 45.3%. Suez and RWE were up 38.7% and 42.9% respectively, although their success was driven more by their energy interests than their exposure to the water sector. The UK private water companies continued their bull run, set in motion by a favourable AMP4 review in 2004.

The investor-owned utilities in the US enjoyed a strong year, benefiting from a favourable regulatory climate in California among other factors. Total gains were well ahead on the main benchmark indices. Equipment supply was a different story, advancing only modestly in the wake of spectacular gains in 2004.

Asia was another hot spot for water investors. During 2005, mention of “China” seemed to have a similar effect on share prices as mention of the word “internet” in 1999. With the water sector increasingly opening up to private investors, there were plenty of opportunities for Singapore, Hong Kong and Shanghai quoted companies.

Last year’s outstanding performance follows a 21% gain in world water stocks during 2004. It creates a conundrum for investors. They are attracted to water because it is a seemingly dependable investment, but this dependability has produced some valuations which are seemingly unsustainable.