In Transit: Opportunities In Global Transportation And Infrastructure

by: Peter Mantas

[Originally published on Jul 3, 2014.]

One of the most incredible statistics that I've come across over the past year was in a PwC report involving trends in global urbanization. The report, researched by Oxford Economics, studied trends in 49 countries on six continents and found that currently the world's population is growing by 1.5 million people per week. In India, for example, the urban population is likely to rise by some 500m over the next four decades. Alternatively, the city of Karachi in Pakistan grew by 80 per cent to 13 million in the decade to 2010.

What should this mean to the global investor?

As cities continue to grow, there is no question that new capital projects will have to exist in order to meet growing demand. These are very long term based projects but nevertheless play an important part for any investor seeking stability. There are very few industries as a whole where the sum future cash flows for a very long period of time are certainly worth more than what is being generated today, but transportation and infrastructure is one of those industries where all major players in the sector will benefit in some way from these underlying fundamentals.

For example, in India, transportation and utilities investments are expected to triple over the coming decade as income and travel demand rise and India's population increasingly congregates in urban centers. Overall, global spending on infrastructure and capital projects is set to reach US$9tn by 2025, up from US$4tn in 2012. Emerging Asia - including China, India, Indonesia, Malaysia, the Philippines, Thailand and Vietnam - will be by far the fastest growing region, accounting for 47.7 per cent of the global spend by 2025, up from 30.4 per cent in 2012.

However, the key (and difficulty) is to find suitable investments, preferably outside North America, for a very capital intensive industry over a very long period of time.

One way of doing this is to look at ETFs intrinsically linked to this investment thesis that directly have presence in emerging market infrastructure. Some common names are EMIF, ZGI (in Canada) or IGF. These funds can be an appropriate way for an investor to get into this space while limiting exposure to failures or setbacks attributable to a specific company in the sector. The other approach, and our preferred method for the enterprising investor, is to find global companies in this space that will best benefit from these trends. Names like ACN, UTX, GE and WAB are poised to do well in this space. North American utility and infrastructure names may also be an option (i.e. BIP, ENB, EQM) although many companies currently are trading at very high valuations.

Furthermore, these fundamental trends have significant implications on global trade. A study conducted by Airbus estimates that air freight transportation will double over the next 15 years, and most of that growth will be coming from the developing nations mentioned above. Over the next decade, Africa and the Asia-Pacific region are expected to lead growth in both air passenger and commercial freight. The growth of new freight deliveries reflect the rapid masturbation occurring in cities in Asia, Africa and Latin America. Look at companies directly related in trade with global reach in sourcing and supply chain logistics (CHRW, LSTR) or indirectly through aircraft manufacturing (NYSE:BA).

Disclosure: long WAB and ACN.