Benefiting from the Emerging Markets Infrastructure Boom
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Infrastructure building in emerging markets may easily be one of the most attractive investment themes of our time. According to Global Finance Magazine:
Demand for infrastructure in emerging markets will reach $1 trillion annually through 2030, triple the level of the previous two decades, with Asia accounting for the lion’s share, according to a study of 40 major EM economies by The Royal Bank of Scotland in collaboration with the Judge Business School at Cambridge University.
Many emerging countries have been behind the curve when it comes to infrastructure investing for many decades, and now they need to step up their infrastructure building as quickly as possible. Multinational companies are building their production plants in countries like China and India more each day, and they don't want to have problems in sensitive areas like transportation or communications.
People in many regions of India don't have access to basic services like running water. As BRIC countries become the center of the international scene, pressure is mounting about the need to achieve better living standards for the local populations. Better houses, roads, bridges, schools and hospitals are a necessity of big masses of population all over the planet, and especially in emerging markets.
These countries don't just have the need to build better infrastructure, they also have the resources to do so. Export-oriented economies have generated big amounts of international reserves in the hands of many emerging market governments. Also, most emerging markets countries have a solid fiscal budget position, which means they have the possibility to implement ambitious expansionary plans when they believe the timing is right.
China, for example, embarked on a very aggressive infrastructure plan when the global economy collapsed during the great recession of 2008/2009, and many analysts are forecasting more expansionary measures in case the Asian giant finds itself in a serious economic slowdown again. Brazil will host the 2014 soccer world cup, and the Olympic Games in 2016, so the country is investing heavily in order to have its roads and stadiums in the best conditions achievable.
There are two ETFs focused on infrastructure building in emerging markets: iShares S&P Emerging Markets Infrastructure Index (NASDAQ: EMIF) and PowerShares Emerging Markets Infrastructure (NYSEMKT: PXR). Those instruments have similar expense ratios at 0.7% for EMIF and 0.75% for PXR, but EMIF is more focused in small local companies standing to benefit from infrastructure spending in emerging markets, while PXR takes a more global approach to stock selecting. Higher volatility and also more upside potential could be expected from EMIF due to its local, small capitalization bias.
Those preferring individual stocks could find opportunities in attractively valued multinationals like Caterpillar (NYSE: CAT). Caterpillar is an undisputed leader in the global machinery business, and the company has been expanding aggressively into emerging markets. These shares were trading above $115 in March, but are now below $87 due to investors' concerns about the march of the global economy. At a forward P/E of less than 8 and with a dividend yield of 2.2%, there is plenty of upside room in Caterpillar from a valuation point of view.
ABB (NYSE: ABB) is another cheap stock that should benefit from higher infrastructure spending in emerging countries in the coming years. Few companies have such a deep understanding about efficiencies in power generation and consumption like ABB does, and efficiency is becoming an increasingly important issue when resources are scarce. With a forward P/E around 9 and a dividend yield of 4.3%, shares of ABB are trading at an attractive valuation.
Investors have been very concerned about the possibility of deep problems in the Chinese construction sector, and that has brought shares of Brazilian iron ore producer Vale (NYSE: VALE) to valuations levels that look like a buying opportunity. Vale is trading at a forward P/E barely above 5, and yields more than 3.1% in dividends. Although iron ore prices are usually volatile and unstable, Vale has access to some of the best reserves in the world, and the company should do quite well in the long term due to its competitive costs and efficient operations.
Infrastructure spending is a necessity in emerging markets, and they have the financial resources and the political will to implement ambitious infrastructure plans over the following years. Couple that with the exciting valuations that many global infrastructure companies are showing, and it looks like there is a big chance for long-term outperformance in many of these names.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of ABB. Motley Fool newsletter services recommend ABB. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.