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Investing in Emerging Market Infrastructure

Morgan Stanley's (NYSE: MS) $22 Trillion Bet

Written by Brian Hicks
Posted June 18, 2014 at 8:00PM

Go to any emerging market country — or anywhere in the United States, for that matter — and you will see a wide-open ocean of opportunity.

The market in question has ample demand and opportunity for growth that is both profitable and rapid. While there is competition, the pie is huge enough to offer all at the table a slice.

This market is infrastructure.

And with emerging markets coming out of deep freeze and just beginning a new uptrend, this is an ideal entry point.

This compelling investment theme is tied to an unmistakable trend: the rise of megacities.

The Rise of Megacities

In 1975, there were only three cities in the world with populations over 10 million. In 2012, there were 22 of these cities, of which 17 were in emerging markets.

China alone has over 100 cities with populations exceeding one million, and every week, one million people are either born in or migrate to cities around the world.

Along with this urbanization has come stronger economic growth and expanded international trade, meaning that unless these countries build more airports, roads, railways, seaports, and pipelines, they will choke on their growth.

Morgan Stanley predicts $22 trillion will be spent on these projects over the next decade.

Here are some interesting facts that highlight this blue-ocean infrastructure opportunity:

  • Only 5% of Brazil’s roads are paved.
  • Merrill Lynch projects that $6 trillion will be spent on global infrastructure during the next three years.
  • The Royal Bank of Scotland estimates an average $1 trillion a year will be spent by emerging markets through 2030.
  • China is planning to build 97 new regional airports by 2020.
  • The top 20 container terminals have seen growth of 42% during the past three years.
  • 40% of Indian households do not have access to electricity.
  • Half of Jakarta’s 10 million citizens do not have access to running water.
  • Mumbai has an astounding 18,424 people per square mile (New York has 1,274).
  • South Africa is world’s fourth fastest growing mobile phone market.
  • Mexico City's population will soon pass 20 million.
  • China is spending just under 10% of its GDP on infrastructure a year.

The companies that are profiting from this growing demand for emerging market infrastructure are global in nature. The key question is what impact the current global slowdown will have on ongoing infrastructure projects and those in the pipeline.

One argument is that tighter budgets will slow these projects, but I believe the opposite — that governments will be priming the pump to stimulate the economy.

Let’s take advantage of this opportunity using my low-risk shotgun strategy.

The Shotgun Strategy: PXR

The PowerShares Emerging Markets Infrastructure (NYSE: PXR) basket has about 10% in American countries, 4% from Canada, plus 10% from France and Switzerland.

The country weightings still tilt towards emerging countries with China at 15%, Russia at 11.4%, Brazil at 10.9%, and India at 5.6%. The BRIC countries comprise 43%, with South Africa adding 8.4%.

So PXR, on sale and on an uptrend (up 7% so far this year), is a balanced hybrid with both a developed and an emerging engine.

The sector breakdown is down the middle: 50% materials, 48% industrials, and 2% utilities. The materials sector includes a fair amount of mining stocks and companies like Caterpillar (NYSE: CAT), Vale (NYSE: VALE), Atlas Copco (OTC: ATLCY), and Taiwan Cement.

The industrial companies in the fund design and build all of the bridges, toll roads, and sewer systems that infrastructure is all about. There are currently 66 large-, mid-, and small-cap companies in this basket, with no one company representing more than 5%.

Take advantage of low valuations and pent-up demand by taking a stake in this unstoppable trend.

Until next time,

Carl Delfeld for Wealth Daily

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