Investing in Emerging Markets Infrastructure

by Carl Delfeld, Investment U Senior Analyst
Thursday, January 19, 2012: Issue #1690

First impressions are sometimes dead on.

Visit any emerging market country like Malaysia, Brazil, or Poland, and by the time you leave the airport and arrive at your hotel, you’ll have a pretty good idea of its economy.

Modern and reliable roads, airports, water, power, telecommunications and ports are to an economy what a healthy circulatory system is to our health.

Pretty damn important, I would say.

This is why I beat the drum for concentrating on infrastructure projects when representing the United States on the executive board of the Asian Development Bank in Manila.

This is one area that China has gotten right – spending 10% of its GDP on infrastructure. If anything, they risk overdoing it with plans to build 97 new regional airports by 2020.

Every country has its weaknesses and strengths. For example, only 5% of Brazil’s roads are paved, while South Africa has the fourth fastest-growing mobile-phone market in the world.

So why don’t governments go all-out to put in place a first class infrastructure?

First, infrastructure projects cost big bucks and the political payoff is many years down the road. Limited budgets and short-term politics works against putting up the capital. These projects also seem to be rife with corruption and mismanagement, making them unpopular with taxpayers.

India’s Gaping Needs

Let’s focus in on India, a country whose infrastructure needs seem endless.

• Mumbai, India has an astounding 18,424 people per square mile (New York has 1,274).
• About 75% of its national highways are only one lane in each direction and almost 90% of highways can’t support heavy truckloads.
• The National Highways Authority has set a goal of building 30,000 miles of roads over the next four years, but has completed only 3,223 miles in the past year.
• Only 45% of India’s road network is paved, compared to 80% for South Korea and 100% for Singapore, Taiwan and Thailand.
• To satisfy its power hunger, India would have to add 160,000 megawatts of capacity by 2017, an investment of $405 billion.
• The McKinsey Global Institute notes that India’s per capita power generation is half that of China and one-seventh that of South Korea.

The Private Economy of Mr. Adani

India’s roads, power and ports are so bad that entrepreneurs are seizing opportunities by taking matters into their own hands.

Mr. Gautam Adani, whose family owned a small textile firm, invested $11,000 in 1993 on some land around Mundra, an overlooked stop on the 600-year-old Indian Ocean trade route.

Adani Enterprises then built a jetty, a container terminal and a 40-mile railway to link with the national network. It has become the largest private port in India. Next, his company invested in coal production in Australia, bringing coal back to fire two power plants he helped finance. One of the plants has a capacity of 4,620 mega watts, the largest thermal plant in India.

Mr. Adani is now the seventh richest man in India. Bravo.

Speculators may wish to look at Adani Enterprises trading on the Bombay Stock Exchange. It has been a bit of a rollercoaster and has pulled back with India’s weak stock market over the last year.

An easier and broader play on private companies active in emerging markets infrastructure is the PowerShares Emerging Infrastructure (NYSE: PXR) exchange-traded fund.

PXR is a balanced hybrid with a developed country and emerging market companies driving growth. Giants like ABB and CAT sit aside Taiwan Cement. The leading country allocations are China, Taiwan, Brazil, South Africa and Indonesia, with U.S. companies at 5% of the basket. PXR is up 7.5% so far in 2012.

Good Investing,

Carl Delfeld

Article by Investment U