Emerging Market Infrastructure: 'The' Issue from Morgan Stanley's Head Researchers

“We view this theme, the build-out of the developing world as it closes the infrastructure gap with the developed world, as one of the – if not the – most important themes in global investments, for the coming decade.”

This is a quote from the featured story on Morgan Stanley’s (AMK) main website -a report entitled: “Emerging Markets Infrastructure: Just Getting Started” released approximately two weeks ago. It’s one of their keynote research pieces, with the listed authors as: the Managing Director, two Executive Directors, and the Vice President of Morgan Stanley Research.

The Report

The 38 page report is particularly well written, giving highly detailed information in a succinct, digestible presentation:

Here’s the link. 

Here is the summary:

Across emerging markets [EM], a boom in infrastructure building is underway. In power and water, property, ports and airports and beyond, emerging markets governments and private sector players are deploying unprecedented amounts of capital to upgrade the emerging world. We forecast a total of US$21.7 trillion in infrastructure spending in EM over the next decade, with Asia representing 67% of this total.

Urbanization, the move to the market economy, and the demand from the developed world for EM exports are straining existing infrastructure assets. Climate change will also require mitigating expenditure. At the same time, robust GDP growth and supportive balance of payments positions have provided the funding to build infrastructure in most EM countries, albeit that delivery capability still varies significantly.

Private funding in conventional project finance form as well as innovative dedicated infrastructure funds are heavily engaged. A surge in market listings of owners, operators and contractors to build EM infrastructure assets, is also underway. On our estimates, the number of listed EM infrastructure-related entities has risen from 230 to 354 (54% increase) over the last five years—with total market capitalization increasing from $146 billion to $1.1 trillion.

My Take

In other words, emerging markets infrastructure demand is rising heavily (fueled by increasing urbanization in developing countries), and is becoming more attractive as financing – both from governments and private investors with focused EM funds -  is becoming more widely available.

Makes perfect sense to me.

To expound upon a few of the enumerated points, part of their analysis focuses on strong growth in urbanization in the developing world. Of the 22 largest cities by population, they predict that by the year 2015, only two will be in the developed world: New York, and Los Angeles. They expect the top 5 to be: Tokyo, Mumbai, Mexico City, Sao Paulo, and New York, and the rest will come from countries like China (Shanghai, Beijing, Guangzhou), India (Kolkata, Delhi), Argentina (Buenos Aires), Brazil (Rio de Janeiro), Russia (Moscow), Indonesia (Jakarta), Turkey (Istanbul), Bangladesh (Dhaka), Nigeria (Lagos), and Egypt (Cairo).

The interesting point is that, largely due to increasing urbanization, Morgan Stanley predicts that many of the emerging market cities will have excessively large growth. For example, Guangzhou (China) grew from 2.7 million people in 1975 to 8.4 million in 2005, and Morgan predicts it will increase to 10.4 million by 2015. This contrasts heavily with “developed” cities which grew modestly (New York: 15.9M (1975), 18.7M (2005), to 19.9M (2015), and Los Angeles 8.9M (1975), 12.3M (2005), and 13.1M (2015).

A few other highlighted cities are:

There are plenty of other, equally as compelling, examples of tremendous urban growth in the report, but the substantial part for me was the sheer magnitude of the growth. I knew urban growth was a significant trend in developing countries, but I never would have guessed that there are multiple examples of 10x growth in 20 years in places like Nigeria and Bangladesh.

That leads to their next point: EM Infrastructure spending to support this urban growth. According to them, it comes to the tune of $21.7 trillion over the next 10 years.

That money goes to basic needs such as electricity, clean water systems, sanitation, and transportation. After reading a few of the statistics, I was surprised how much developed countries take that for granted. According to Morgan, 1.6 billion people (1/4 of the world’s population) has no/exceedingly poor access to electricity, 1.1 billion don’t have access to clean drinking water, and 2.6 billion lack basic sanitation (they reference the World Bank). To me, that combined with the large urban growth largely substantiated the seemingly exorbitant $21.7 trillion infusion of capital that they predict.

Not surprisingly, Morgan predicts the vast majority (67%) of the capital infusion will come from Asia. However, I was surprised to see that China’s predicted contribution to that total was as substantial as it was: 43% of total spend, or $8.941 trillion (Eastern Europe and Latin America trail with 15% and 11% respectively). Not surprisingly, India, Russia, and Brazil follow in spending totals at $2.733T, $2.004T, and $1.022T.

According to the report, this extremely large spending total is further substantiated by current spending trends:

In China and the Middle East, substantial spending is already taking place across the board. Morgan Stanley economist numbers on the infrastructure spend in China estimate that infrastructure spend (ex-property) has been around 9% of GDP for the past few years, with significant resources flowing to electricity and roads (see Exhibit 6).

The concluding section of the report addresses the sources of capital investment for these projects. It goes into detail about the public sector, but cites that there is substantial growth in private infrastructure equities. Between 2002 and 2007, it cites a 54% increase in the number of emerging market infrastructure stocks (compared to only 32% in developed countries). I, for one, found it to be an exceedingly insightful report and of course adds further credence to Emerginvest’s model.

Comments

[Jmar11:]

Nice article... I think you're right to point out the issues with the numbers. Have you thought about the emerging markets (..frontiers) coming after BRIC? What do you you think of Kazakhstan?
There's an article that lists Mexico, Korea, Bangladesh, Egypt, Indonesia, Iran, Nigeria, Pakistan, the Philippines, Turkey and Vietnam as the next big countries for investors: www.greenfaucet.com/th...
Wonder if the list is reliable?

2008 Aug 01 11:33 AM

[Emerginvest:]

User,

Thanks for the compliment! I fully agree with that statement. Clearly, the major movements in the developing world/emerging markets is BRIC, China, India, however there are other areas which are going to be going through very similar expansion - most of which are listed in that article. This is not to say that there won't be shocks (sometimes serious shocks) with this expansion, but I agree with Morgan Stanley that this will significantly shape the form of capital movement over the next decade.

2008 Aug 01 11:45 AM

[Schumia:]

Hi Jonathan,

Thanks for a good article and summary on the Morgan Stanley. However, as I have since done a bit of research that it's difficult to find any ETF that really tracks the "Infrastructure" as an investment emphasis. I did find a Macquarie Global Infrastructure 100 for which Richard Kang wrote here at SA titled "New Infrastructure ETF From SSGA: A Closer Look."

But this ETF looks like has very little exposure to the "emerging market" as Morgan Stanley's report suggets will be the next activity hub.

Does anyone have any suggestions as to which ETF may be a good choice in Infrastructure, and particularly, have a larger exposure to BRIC countries?

Jeff

2008 Aug 13 07:23 PM

[User 280717:]

It is finally here. I just wish in this market climate I was brave enough to invest... Powershares PXR
I will get my courage up eventaully...

2008 Oct 16 02:00 PM

[User 415702:]

"Of the 22 largest cities by population...only two will be in the developed world....They expect the top 5 to be: Tokyo, Mumbai, Mexico City, Sao Paulo, and New York"

Is Tokyo not in the "developed world"? Last time I was there (admittedly it was 28 years ago) it look quite developed to me!

May 18 08:32 AM