Emerging-market infrastructure shines
Growing middle class in developing countries drives demand for transport, telecoms
Emerging-market growth has been a bright spot in a stalling global economy this year, leaving investors salivating about potential investment opportunities in the developing world. And perhaps no sector has received more attention than infrastructure development.
Powered by a large proportion of the world's population and rapidly growing economies that translate to higher per capita incomes, emerging markets are set to be reshaped by historic levels of urbanisation and consumer demand.
'Now is the time when you should be looking to get a bit more surgical and not just apply your money when you want to get an emerging-market exposure,' said Nick Thompson, head of non-flow-structured products at Macquarie. 'But maybe one should actually look at some of the sub-sectors within that, and infrastructure is a star sector within emerging markets.'
This month, Macquarie Research Equities introduced an index to track emerging-markets-based infrastructure companies as a way of equipping investors with a tool to improve their investments in this sector.
The index, called the Macquarie Emerging Markets Infrastructure and Development Index, follows the 50 largest emerging-markets infrastructure companies and is calculated by the FTSE Group.
Nine of the companies are from Hong Kong and the mainland, representing 18.94 per cent of the index as of March 26, according to a Macquarie website. China Mobile is tied with Mexico's America Movil, a telecoms giant, as the index's largest member.
The index highlights the emerging-markets-based infrastructure companies that provide the materials needed for development, perform the construction, and manage the finished logistical assets.
And with a vast, rising middle class throughout emerging markets - classified as 'Generation A' by Macquarie - the demand from these regions for telecommunications, roads, rail and electricity is expected to be unparalleled.
'Once you've got this trend following through, it's more like a supertanker that cannot be stopped and you must supply the essential services,' Mr Thompson said.
Inflation has crept up throughout emerging markets this year, however, threatening to put the brakes on the rapid economic expansion in these regions.
But there is little likelihood that 'all of this could fall over tomorrow because all of a sudden inflation is rising', said Stewart Ferns, an equity strategist at Macquarie. 'It's true it's a headwind, but this is a mega trend.'
And with the world's largest population and an economy that has expanded by double digits every year since 2003, the mainland is at the top of the list when it comes to infrastructure development.
'The Chinese growth will continue to be driven by an infrastructure boom and housing boom,' said Dong Tao, Credit Suisse chief economist for non-Japan Asia.
Dr Tao added that the mainland's commitment to infrastructure is plain to see from, for example, the extensive subway expansion in Shanghai and the massive plans for bridges and roads in the rest of the country.
But mainland infrastructure stocks have not been immune from this year's equity-market rout.
China Communications Construction, the world's largest builder of ports, has slumped 28.61 per cent so far this year compared with the benchmark Hang Seng Index's 18.77 per cent slide. China Railway Construction has slid 8.5 per cent since its March trading debut. But with limited downside in terms of fundamentals, investors may start to snap up these and other infrastructure stocks, as they are approaching more reasonable valuations.
'In the long run, I'm still positive on this factor because I think after the Olympic Games, China will expand its infrastructure to help its economy expand further in the future,' said Patrick Yiu Ho-yin, an associate director at CASH Asset Management.