The Global Infrastructure Boom, How To Profit With ETFs (PXR, FLM)
This world is in desperate need of infrastructure. The Cohen & Steers 2009 Global Infrastructure Report shows that clearly enough. Over the next 25 years, the world should spend $40 trillion on such projects. That includes power, sewage, roads and telecommunications… exactly what makes the world economy turn.
The Report detailed what, where and how much, for example:
- Water: $22.61 trillion, including over $9 trillion in Asia and nearly $5 trillion in Latin America
- Electricity: $9 trillion, including $4.23 trillion in Asia and $1.53 trillion in North America
- Road and Rail: $7.8 trillion, including $3.12 trillion in Europe and $2.11 trillion in Asia.
- Airports and Seaports: $1.59 trillion, including about $0.5 trillion in Asia.
China and India alone need to spend $10 trillion in the next 25 years. But it isn’t just the emerging world that needs to strengthen those areas. In fact, well-established countries might even be worse off…
The Glacial Decay of Global Infrastructure
Tim Stone, chairman of global infrastructure and projects for KPMG notes: “The problem is that infrastructure decays at a glacial pace. So no one notices until it falls down.” The I-35 bridge collapse in Minnesota in 2007, which killed 13, proved that all too well.
Many governments fail to keep proper tracking of public infrastructure altogether. That includes vital information about age, deterioration, maintenance requirements, etc.
The U.S., unfortunately, falls into that category. It needs to spend roughly $40 billion a year to update just its roads. Most of its highway system dates back more than 50 years ago. And it has been poorly maintained since.
Even the UK should spend about $59 – $73 billion a year through 2030 on infrastructure.
More Infrastructure Problems
Of course, in order to service any type of infrastructure, governments first need proper funding. And in today’s economic climate, finding that kind of financing is extremely tough.
Most of the sources they would normally rely on have dried up. Banks still don’t seem eager to lend. And private capital supplies aren’t readily available either.
Tony Poulter, global head of consulting at PriceWaterhouseCoopers, notes, “Finding equity for these projects is a real challenge for the foreseeable future.”
Comparatively speaking, the U.S. and larger European counties have it the worst. China, on the other hand, has a massive expansion of its rail network underway. Much of it is for modern, high-speed trains and all of it is funded by state-owned banks.
Likewise, the oil-rich Middle East has it much easier. There, sovereign wealth funds provide a significant source of potential capital.
Yet even with all of that money, they still share a big problem with the rest of the world. Because there are only a very limited number of companies out there that can handle such large, complex projects.
That’s bad for individual countries but very, very good for the global construction, engineering and related equipment provider firms that are big enough to take on the job.
KPMG’s Stone points out “Governments are no longer in control, and they will have to work increasingly hard to make their projects attractive [to infrastructure firms].”
Investors, on the other hand, have much better choices when it comes to infrastructure.
Among them, are Flour (FLR) and Jacobs Engineering (JEC), which my colleague, David Fessler recently recommended.
Or there are two excellent ETFs that offer diversified exposure:
- First Trust ISE Global Engineering and Construction Index Fund (FLM)
- PowerShares Emerging Markets Infrastructure Portfolio (PXR)
Both have an emphasis on the engineering and construction companies that the world will have to rely on in order to fix its infrastructure problems.
That makes them a superior choice to other so-called infrastructure funds. Too many others focus on utilities and other infrastructure providers… companies that will be paying millions of dollars to the Flours of the world.