As one of the key themes in the Asian Five Elements investment concept, "water" is probably the least exciting.

It is, however, also the least cyclical sector and is essential for the sustainable growth of a modern economy, thus serving an important defensive function, especially in the commodity world and today's volatile markets.

Significant demand for water and strong needs for water-related infrastructure investments are resulting in growing interest in water stocks in Asia.

Although accounting for around 60 percent of the global population, Asia has just 36 percent of the world's available water.

At present, less than 20 percent of Asia's population is connected to waste water treatment facilities, and this number needs to at least triple in the next 10 years in order to sustain the development of Asia's economy.

In China, for example, the availability of water per capita is only one-third of the world average. Two-thirds of China's 600 largest cities does not have enough water; half of these cities have polluted ground water. Less than 15 percent of China's population has safe drinking water from a tap. China's investment needs for water-related projects are estimated at 1 trillion yuan.

In vast agricultural countries such as Australia and India, the irrigation industry is another key focus for the "water" investment theme. Australia is a large and dry continent with a climate that varies significantly depending on the geographic location.

Agricultural production there is limited by rainfall, with additional water supply from irrigation significantly increasing productivity.

Whereas in India, irrigation is the only way to encounter the unreliability of the monsoons to the agriculture sector, which makes up about 17 percent of the economy.

Water supply, purification, treatment, conservation and irrigation companies in Asia are expected to be the main beneficiaries of these huge infrastructure needs across the region over the next few decades.

Regionally, water utilities offer defensive characteristics in a falling market, given their strong cashflows and higher yield. The CLSA Asian Water Index, for example, has outperformed Morgan Stanley Capital International All Country Asia by 8 percent since the market sell off began in November.

The Five Elements investment concept, which encompasses the more exciting metals, oil and timber sectors, as well as the defensive water stocks, is a complete solution focusing on the dynamic themes of urbanization and industrialization in Asia rather than just a commodity play.

The author is the head of investor communications at JF Asset Management.

(China Daily HK Edition March 31, 2008)