According to the World Health Organization, an estimated 55 million people globally are affected by droughts every year. (UBS)

More than 98% of the Southwest is in drought this week, according to the monitor, which noted that reservoir storage levels were below-normal in all Western states except for Washington.

In California, which is entirely in drought conditions, two of the state's largest reservoirs — Shasta Lake and Lake Oroville — are at "critically low levels," according to the monitor.

And in Texas, 67% of the population is living under drought conditions, with 35% living under severe to exceptional drought conditions, with forecasters at the National Weather Service are predicting the drought will persist.

And it’s not just impacting the US…

According to the World Health Organization, an estimated 55 million people globally are affected by droughts every year. They state that water scarcity impacts 40% of the world’s population, and as many as 700 million people are at-risk of being displaced as a result of drought by 2030.

The importance of water is undisputed. As the world's population grows, the planet's limited natural resources are subject to increasing strain, which in turn can detract from social and economic prosperity.

Emerging market countries that depend heavily on water for GDP growth (e.g. those with a significant agricultural sector) and encounter severe shortages of it suffer the effects of scarcity acutely, according to the Chief Investment Office’s report on Water Scarcity.

Population growth, industrialization and the convergence of living standards with those of the Western world have already caused water demand to soar. The effects of climate change on water and the economy suggest this situation “may become even more severe,” according to CIO.

Cities will be severely impacted by climate change due to their high population density. By 2050, more than 570 cities with a total population of 685 million will face a decline in freshwater availability of at least 10%. By 2050, Cape Town and Melbourne may see declines of available freshwater of 30% to 49%; even worse affected may be Santiago, which could face a decline of more than 50%. This could have a major negative impact on the GDP of many regions of the world.

This trend toward city living will create major challenges as well as investment opportunities when it comes to water exploration, treatment and distribution. Most industrialized countries built their water mains and supply infrastructure in the early part of the 20th century and have not invested extensively in upgrading them since. The average lifespan of water pipes is 50-100 years, depending on what they're made of and how much pressure they handle. Such aged infrastructure means that on average utilities lose 10% to 30% of water from leakage in developed markets and up to 40% in emerging markets.

Water is a relevant factor for many industries as direct or indirect input factor for the production process. If water scarcity negatively impacts companies, this will reduce economic growth. Given all these negative effects of water scarcity, it is also an important risk factor to watch for the portfolios of investors. CIO believes investing in infrastructure and smart warning systems could yield high returns, both socially and economically.

The market for water is not dominated by a single sector, but rather comprises several sub-sectors and industries. CIO’s water scarcity theme combines 17 end-markets.

CIO says the attractive business prospects and high revenue visibility of water utilities (local monopolies) and the well-diversified business set-up of the water-exposed industrial companies are the main reasons they think that investors should include them in their portfolios.

See the UBS Long-term investment series, which contains thematic investment ideas based on long term structural developments.

Main contributor – Joe Melvin