title: An Investigation of Water Investment Performance: Analysis of the Global Water Industry
Creators: name: Reza, S M Rajibur
Publisher: name: Griffith University
Year: 2017
Subjects: subject: Water
subject: Investment performance
subject: Ownership and capital structure
subject: Time-series analysis
subject: Water indices
subject: Water markets
subject: Water funds

description: Water is a precious commodity and it is essential for all aspects of our lives. The lack of attention being directed to the use and control of water systems in many places has led to acute shortages in the availability of potable water throughout the world. This is mainly due to significant imbalances between water demand and supply, and as a result, water is an important asset today. For these reasons, investment in water is an issue of growing concern for the entire world. The demand for this finite resource is growing at an increasingly accelerated rate. In the major markets of the world, the water index is one vehicle that has helped to improve investments in the water market in countries which record water-related indices and funds. Issues such as stock returns, the complexity of stock prices, and the impact of investor adoption relationships contribute to future investments in the water companies which make up the water indices. Overall, this thesis seeks to examine the performance of water investments in great depth, and the nature of the water markets more generally. The main aim of the thesis is to understand, examine, model, and forecast water indices, water markets and water funds using univariate and multivariate analyzes. Taking into account the overall dynamics of the market, this study examines whether the water market is a desirable market for investors. That is, whether investors can gain appropriate benefits from investing in the global water industry by using, for example, “investment” hypothesis. The study is conducted in four phases in terms of the time periods before, during and after the global financial crisis (GFC). This allows the author to more critically consider the nature of the water industry. The initial results of the four major studies show that water assets have generally outperformed the stock market, before, during and after the GFC of 2008-2010. The four studies are designed to answer the four major aims and their related research objectives, questions and hypotheses. The thesis utilizes the four water indices (the WOWAX, the S-Net, the S&amp;P and the MSCI ACWI), and their 72 components, four water markets (Asia, Europe Latin America and the US), and two water funds (Pictet and KBC Eco). The water companies’ stocks are represented by the WOWAX, the S-Net Global water industry, the S&amp;P and the MSCI ACWI. The study period covers January 1, 2004 to October 31, 2014 in different periods (full, pre-GFC, GFC and post-GFC). The first study critically investigates the impact of ownership and capital structure on water companies’ performance, in order to examine the nature of impacts during different periods (full, pre-GFC, GFC and post-GFC). This is done using multivariate and unbalanced panel regression analysis. The study compares and contrasts the relationships between performance, ownership (foreign ownership and institutional ownership) and capital structure (leverage and short-term debt to assets). This study also uses five control variables representing tangibility, asset growth, risk, age and free cash flow. The study shows that foreign ownership improves the financial performance of the global water companies’ in different periods of strain and stress (full, pre-GFC, GFC and post-GFC). In particular, institutional ownership influences the financial performance of the global water companies during the GFC period. The results further suggest that either “leverage” or “short-term debt to assets” could be chosen in order to conform to water companies’ regulatory requirements. Moreover, the results show that ownership and capital structure jointly influence water companies’ performance. The second study analyzes the stock returns and volatility of the four water indices, four water markets and two water funds in different periods (full, pre-GFC, GFC and post-GFC) with the purpose of investigating the profitability of water-related investments using ARMA(1,1)-GARCH(1,1) and EGARCH(1,1) models. The coefficient estimation of the ARMA(1,1)-GARCH(1,1) model confirms that the conditional volatility process GARCH(1,1) model has a positive effect on the serial autocorrelation of squared residuals for water indices, water markets and water funds during full, GFC and post-GFC periods. Again, the EGARCH (1, 1) model shows the persistence of volatility in four water indices, four water markets and two water funds in different periods (full, pre-GFC, GFC and post-GFC); with asymmetric volatility (leverage) for Asia and the US, the S-Net and Pictet in full, pre-GFC and GFC periods, and the WOWAX in GFC and post-GFC periods. The third study investigates the extent and manner of equity price interdependence among four water indices (the WOWAX, the S-Net, the S&amp;P and the MSCI ACWI) using the vector auto-regression (VAR) framework. This study employs methods of Granger causalities, variance decomposition and impulse responses. There is a significant Granger causality between the S-Net and the MSCI ACWI; and the S-Net and the S&amp;P indices at the 1% level of significance. This shows that these indices are significantly linked. The S-Net was the most influential index amongst the indices, in that the forecast variance can be accounted for by the S-Net being at a level of 55.75%. The third study also indicates that the four water indices are interdependent and related; so the water indices are influenced by movements in other water indices. The fourth study further examines the data set for short-term and long-term behavior among water indices and water markets. In addition to inter-relationship analysis, the fourth study examines the linkages between the four water indices (S-Net, WOWAX, S&amp;P and MSCI ACWI) and four water market indices (Asia, Europe, Latin America and the US). Using the Johansen test for co-integration in different periods (full, pre-GFC, GFC and post-GFC), the fourth study finds the existence of integrating vectors in the different periods. This suggests that when the water market indices are combined, a linear relationship forces these indices into a long-run equilibrium relationship. The Granger causality approach within a co-integration framework also allows us to assess the dynamic linkages between the stock price indices of the four water indices and the four water markets. To further confirm the empirical results in the co-integration frame, the fourth study uses the autoregressive distributed lag (ARDL) based bounds approach for a robustness check. These results confirm significance at the 5% level for the parameter over different periods (full, pre-GFC, GFC and post-GFC). Overall, the results of this thesis explain water investment performance in terms of the water indices, water markets and water funds’ returns and volatility persistence and asymmetric effects, which imply potential spillovers from these water assets. Further, this thesis highlights the importance of foreign and institutional investors’ roles in global water companies’ performance in different periods, providing reference for water investors and for researchers. As research into water assets is somewhat lacking in the finance literature, this thesis contributes to an understanding of the importance of water investment markets by studying an important aspect of the generated trading stock markets analysis. This thesis also contributes to a determination of which water assets global capital will flow into or out of, and how these assets influence water investors throughout the world.