industry, alongside long-standing trends towards greater outsourcing. As such, Danaher and Thermo Fisher are two of the top names that help healthcare companies to research, develop and commercialise products across a wide range of end-markets. Both are geared to traditional spending as well as promising future markets (including cell and gene therapies, for example). We believe that both companies can grow annual revenues in the mid-to-high single digit range over the medium to long term, underpinned by excellent commercial execution and the aforementioned secular growth in healthcare R&D.
Splashing out Within our “Sustainable Infrastructure” theme, the case for investment in water is quite simple: it is the finite, essential resource needed to sustain life. Further, the world needs to secure greater access to it in a useable, clean state in the face of some persistent, growing challenges. Water demand is being driven by a rising global population, coupled with climate change and the associated variability in weather patterns. In developed markets, ageing infrastructure presents a significant barrier to overcoming these issues. Across the US, for example, it is estimated that the national average age of pipes has risen from 25 to 45 years between 1970 and 2020, largely as a result of underinvestment. Creaking infrastructure not only leads to greater leakage and pollution, it is also less efficient and more costly to run than its upgraded equivalent. In emerging markets, meanwhile, water infrastructure is still non-existent in some countries and regions. The UN estimates that over four billion people lack access to basic sanitation, whilst over two billion are deprived of safely managed drinking water. Gaps in regulation around pollution, combined with a lack of adherence to existing ones, further complicate the picture.
EQUITY RESEARCH
Against such a backdrop, spending on water technology must continue to grow steadily over the coming decade, to improve existing infrastructure and meet these growing challenges. This combination of solutions is what our favoured water technology companies are all about.
Biden time However, there is also the potential for a significant separate boost in spending across developed markets from the $110bn earmarked for water infrastructure as part of President Biden’s $1.9tn proposed government spending plans. Our approach to this is nonetheless conservative – whilst we have confidence in the eventual increase in spending needed, there can be no certainty about its timing and extent beyond the headlines. Despite a growing awareness of environmental and regulatory issues, several decades of underinvestment have already passed, increasing our reluctance to assume that this time will be any different. So, rather than baking a significant step-up in spending into our forecasts, we prefer to remain circumspect. Should a significant new infrastructure replacement programme materialise in the medium term, this will likely boost our investment case. If not, the challenges facing this crucial industry will remain. Our thematic work suggests the sector will generate attractive opportunities for investors regardless. For now, our favoured way to invest is via Xylem, the world’s largest pureplay water company. With a product range spanning pumps, meters and treatment, plus data and analytics, it is geared to the replacement and upgrade cycle in hardware (mainly pumps), as well as the newest and smartest connected solutions aimed at reducing waste and improving asset efficiency. For more information on any of the companies mentioned in this note, please contact your Investment Manager. ●
Killik & Co Security Risk Ratings All research recommendations are issued with a security-specific risk rating, represented by a number between 1 and 9. Assessing the relative risk of any security (specific risk) is highly subjective and may change over time. The Killik & Co Risk Rating system uses categories which are intended as guidelines to the specific risks involved, as follows: 1. Restricted Lower Risk Securities in this category are what we believe to be lower risk investments such as cash, cash equivalents and short dated gilts, and the collective investment vehicles that invest in those instruments. 2-3. Restricted Medium Risk Securities in this category are what we believe to be medium and lower risk investments including medium and long-dated gilts, investment grade bonds and certain collective investment vehicles investing predominantly in these securities. 4-9. Unrestricted Securities in this category are what we believe to be higher risk and are drawn from across the United Kingdom and international markets. These are normally direct equity investment and collective investment vehicles which predominantly hold securities other than investment grade bonds and money market instruments. The vast majority of the Killik & Co Research recommendations are likely to fall in the unrestricted/ higher risk category (4-9) above.
For further details on the Killik & Co Risk Rating system please see the Killik & Co terms and conditions. Summer 2021 — 9
