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Markets: The New, New Thing
New York: April 16, 2007
By John R. Stephenson

The newest investment theme is, well, things. But not just any old thing — big things such as bridges, toll roads and airports are what's in vogue. Decades of underinvestment have resulted in crumbling infrastructure systems both in North America and globally. The market for huge development projects in everything from ports to toll roads and power plants is booming with no end in sight. So much so, that according to the World Bank, the total value of infrastructure investment is pegged at roughly $17 trillion.

Not only is there a surge in infrastructure projects, but from an investment standpoint, an investment in portfolios of global infrastructure projects has outperformed global equities while, at the same time, delivering lower volatility and more dividends. Talk about having your cake and eating it too! Driving valuations of global infrastructure stocks higher is a potent combination of low interest rates, an aging population looking for defensive high-yielding stocks and the growing need among pension funds to match long-term liabilities with stable long-term cash flows.

Figure 1: The Global Infrastructure Market

In the United States, the nation's ports are bursting. Already capacity utilization is running at 90% and by 2020, every major US container port is projected to at least double the volume of cargo it handles. The country's railroads handle 40% more volume today than they did back in 1980 but with 35% less available track mileage. Out on U.S. highways, the situation isn't any better with a near doubling of vehicle miles traveled, but with only a 1% increase in highway mileage. Not only that, but many analysts estimate that it will take roughly $180 billion a year to maintain the nation's 50-year-old highway system. The total price tag to put the U.S. back on a stable infrastructure footing? Not less than $1.6 trillion over the next five years.

In Canada, the situation is largely the same. Nearly 60% of Canada's infrastructure is between 50 and 150 years old, and more than half of the systems have reached 80% of their service life. All the while, the share of Government spending on infrastructure as a share of total spending has been declining over the past three decades.

In the developing world, the situation is worse. In India, highways transport about 70% of the goods yet still account for 2% of the country's entire road system. Not only that, but about one-third of their highways are single lane highways. Indian ports need lots of work as well, with vessel turnaround times averaging 3-5 days versus Singapore where similar turnaround times are closer to 4-6 hours. In China, the need for port development is huge with global trade creating enormous demand for additional ports over the next several years. China will need to spend some $50 billion over the next five years to modernize and expand their existing ports (already home to nine of the world's top 50 ports).

As governments stumble in their efforts to play catch-up with years of underspending, private sector project financing is stepping in to fill the gap. With the need so great, investor appetite for this emerging asset class has been growing at record levels.

Figure 2: Private Sector Infrastructure Investment in Europe


In Europe, the volume of private sector infrastructure investments has tripled over the past five years and will likely continue to rise even faster over the next five years. In the U.S., which has traditionally relied on public funding of infrastructure assets, the tune has begun to change. States such as Texas and California have recently passed legislation encouraging public private partnerships ("P3s"). Helping to stir the pot further, record merger and acquisition activity in the sector is now running at all-time highs. Transmission and distribution systems, toll roads, as well as gas & electricity are currently leading the charge in terms of global merger and acquisition activity within the overall infrastructure space.

Figure 3: Activity Level by Sub-Sector: Merger & Acquisition Activity in Infrastructure

But, the proof is in the pudding. Since the beginning of the decade, global infrastructure portfolios have consistently outpaced those of global equities. In the past two years alone, listed global infrastructure stocks have delivered a spectacular 60% return, which is roughly 20 percent better than the return of the MSCI World Index. Making it all the more remarkable, is the fact that this was done with a lower amount of risk (standard deviation of returns) than the global equity benchmarks.

Figure 4: Investing in Infrastructure

With enormous demand globally, strong risk-adjusted returns and steady cash flows from ample dividend streams is there any reason not to consider a global infrastructure investment as part of your overall investment portfolio. For our money, there isn't.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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