Opportunities in global infrastructure

Peter Santoro, Senior Portfolio Manager | February 3, 2014

  • Infrastructure investments may offer stable cash flows and diversification from more cyclical investments
  • Infrastructure investments span the emerging and developed markets across many industries
  • Today’s current market environment offers unprecedented opportunities for well-resourced investors

Infrastructure represents the foundation for our day-to-day lives—the societal staples we rely on. And the stable fundamental demand drivers of infrastructure should be largely uncorrelated from the ups and downs of the broader economy. For these reasons and others, infrastructure investments may offer fairly reliable cash flows as well as potential diversification from more cyclical investments.

Investment opportunities in global infrastructure are vast, spanning the emerging and developed markets across a wide variety of industries. Infrastructure demand applies to more than simply building and repairing roads and bridges. Global population growth combined with urbanization and industrialization will spur increased demand for reliable clean water, clean air, power generation, transportation/logistics, wireless service and other societal staples.

Santoro

In the emerging markets, rising living standards drive demand for investments, which facilitate the delivery of a broader basket of food items, clean water and reliable power. Increased urbanization in these markets requires better roads, rail systems and telecommunication systems. In the developed markets, not only is there a need to repair and rebuild aging roads and bridges but innovation has also created demand for a significant infrastructure evolution in areas such as the platform of pipelines and liquefied natural gas (LNG) facilities necessary to effectively harness the output of U.S. shale gas production. In this sense, investing in infrastructure is not simply a process of examining what was spent in the past and projecting that forward. Cell towers will replace telephone poles; natural gas pipelines will displace coal trains fueling utilities.

To illustrate the size and focus of the global demand for infrastructure, let’s examine some examples of spending trends in Brazil, China, India and the United States.

Brazil

• In August 2012, the government said it would spend $69 billion by the end of 2014 to improve its transportation systems.

• The infrastructure spending for the 2014 World Cup and for the 2016 Olympics in Rio is projected to be around $50 billion.

China

• Out of 662 cities in China, more than 400 are suffering from water shortage with 110 of those cases considered to be severe.

• China’s latest five-year plan has a goal of 85% wastewater treatment coverage nationwide and 90% in urban areas, a huge step up from current levels.

India

• An expected $1 trillion (USD) is expected to be spent on infrastructure with approximately 50% funded by the private sector via the use of PPPs (Public Private Partnerships).

• India’s largest investments in infrastructure by sector are in electricity at 33.5%, roadways at 16.6% and railways at 13.7%.

United States

• In 2009, the federal government famously appropriated $62 billion for transportation and water infrastructure under the American Recovery and Reinvestment Act.

• Recently, the Urban Land Institute estimated that the U.S. needs to spend roughly $2 trillion to rebuild roads, bridges, water lines, sewage and dams that were reaching the end of their planned life cycles.

The opportunities for investment in global infrastructure are now plentiful and diverse. In addition, we have seen an evolution from purely government mandates and financing to more private funding to meet the challenges of modern infrastructure maintenance and development. The end result is the broadest range of both economic and social infrastructure investment opportunities the world has ever seen.

Furthermore, in a market environment that is seeking growth, yield, and diversifying sources of each, infrastructure assets can be very attractive. Returns from infrastructure related securities have exhibited a low correlation to generic fixed-income and equity investments. Those seeking stable free cash flow and a hedge on inflation are also often attracted to infrastructure investments. Because many infrastructure companies are highly regulated they often have rate increases tied to inflation and these long-term contracts promote steady income generation that can be distributed back to investors.

Simply put, as life conditions around the world progress, the complex framework of total infrastructure must not only be maintained, but must evolve and expand to meet changing global needs. We believe that the intersection of stable fundamental economic drivers, growth in overall demand, and diverse, idiosyncratic local and regional changes represents an unusually interesting investment universe for globally well-resourced investors to find opportunities.

 

 

Peter Santoro

Senior Portfolio Manager
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