Emerging Markets Infrastructure Is Booming

In order to sustain economic growth, increases of infrastructure spending are critical for the emerging economies as their populations continue to expand and urbanize.

The developed world has a population of approximately 1 billion versus the developing world’s 5.5 billion people. As the emerging economies and the developing world keeps pushing to catch up, the continued economic growth in emerging markets [EM] have prompted a boom in infrastructure building.

In the past few years EM countries have benefited significantly from strong global growth and the impressive rise in commodity prices. Consequently, many countries that had been running large current account and balance of payments deficits in the 1990s, are now running surpluses and have become significant creditors to the rest of the world. This transformation to profitability has allowed for the funding of infrastructure spending to deal with future needs as well as in some cases decades of accumulated backlogs.

Despite some current signs of a slowdown in emerging markets, (China’s expansion for instance, continued to moderate, with GDP growth slowing to a 10.1% annual rate in the 2Q’08 from the 1Q’s 10.6%) growth prospects - particularly for the BRICs (the acronym, standing for Brazil, Russia, India & China), remain inevitable and solid. If anything, most if not all BRIC countries currently seem to be at risk of overheating, but nothing more than that.

That’s why the governments and particularly, private sector players with increased accessibility in these markets, are deploying unprecedented amounts of capital to upgrade the emerging world. According to a research conducted by Morgan Stanley (MS), a total of US$21.7 trillion in infrastructure spending is projected to be spent across emerging markets over the next decade, with Asia representing 67% of this total. China is expected to make up the majority of the spending, claiming 43%, followed by India’s 13%. Other key EM countries and their share of spending are Russia with 10% and Brazil with 5%.

Private funding supporting one or more general subject area projects as well as innovative dedicated infrastructure funds - are heavily engaged. A surge in market listings of owners, operators and contractors to build emerging markets infrastructure assets, is also underway. According to estimates, the number of listed EM infrastructure-related entities, notes MS - has risen from 230 to 354 (54% increase) over the last five years—with total market cap increasing from $146 billion to $1.1 trillion.

Merrill Lynch (MER) also came out with a report, recently - where it raised its annual infrastructure-spending estimate for emerging markets by 80%, “with an implied run rate of $6.6 trillion over the next three years”.

One interesting fact, based on statistics - by the end of fiscal 2010, the economic output of the developing world will at least, equal if not surpass that of the developed world.

Comments

[athenian]

So how do you suggest an investor should best take advantage of this?

[john in madison]

athenian:

Look at funds dedicated to investing in these markets such as Templeton Emerging Markets Fund (EMF) which invests accross the globe in emerging markets or Templeton Dragon Fund (TDF) which invests in China. Both are closed mutual funds which means they are traded as stocks and both are currently trading well below their book value and pay a nice dividend.

[Elliot Miller]

Athenian:
You can also consider ABB Ltd. (ABB) and the T. Rowe Price Africa and Middle East Fund (TRAMX)

[Elliot Miller]

Thinking further about athenian's question, another way to play the global infrastructure trend is to buy the dry bulk shipping companies that transport the components of the infrastructure and the container ships that transport the merchandise needed and desired by the newly emergent middle classes in the booming economies.

[John Egan]

You have to have a pretty good supply of Malox to invest long-term in emerging market funds. But I have been looking at infrastructure, particularly in Brazil and South America. There are a couple of interesting large So. American infrastructure plays (Cemex being one of them), but China has been more difficult to figure. Clearly for a country that is building (depending on who you listen to) one to two coal fired utilities a month, then, who are the big players here? The best I've come up with so far is Bectel, which is a private company and Siemens. Siemens is interesting as they recently installed a very high efficiency boiler (45%) in one of China's new coal-fired plants and is working on efficiency ratings inn excess of 50%. I also know that GE is trying for a foothold, but if they are at all successful, it sure isn't reflected in their stock price...

Thx jegan ;-)

[rhymes]

Check out hlsyf.ob as an infrastructure play. It is a play on high speed rail build out, subway buildout, nuclear buildout, wind power controls and industrial automation.

[trumanburbank]

There must be some subway firms that will benefit from the fact that China will build more subway miles in the next 15 years than exist in all of Europe presently, though I haven't researched that space.

One more pure play is Jinpan International (JST:AMEX), a small but profitable and rapidly growing Chinese high-tech producer of electrical trasformers that should benefit from expansion of the electric grid in China (90% of company sales are in China). Currently selling a TTM PE of about 14, and just opened new production plant last month.

There must be many other firms with similar pieces of the transportation, power, water/sewer systems that will benefit from increasing governmental infrastructure investments, but it's difficult to find pure plays.

Disclosure: long JST

[Arun N]

Investing directly in infrastructure emerging market plays are also difficult. They are usually highly leveraged and are subject to swings in prices. You could consider L&T (Larsen & Toubro), ABB, Aban Offshore, IDFC (Infra Dev Fin Corp), Concor (Container Corp) and other in the Indian market.

[mdmrjsds]

I haven't got a problem with most of your article, but this piece seems unlikely.

You say that by 2010 the emerging world will have more GDP than the developed world.

Rough numbers:

US 15 Trillion
EU 17 trillion
JA 7 trillion
AU, CA, NZ, etc 3 trillion

World economy 60 trillion

You are saying that in two years the developing world will produce 20 trillion dollars more of GDP. How?

China 3-4 trillion, hard to say because of communism
India 1-2 trillion

All others smaller.

Do you have a link or paper reference? What statistics are you referring to?