Tags: ABB, Asia, Asia Investments, Canada, China, Economic Recovery, EU, GCC, Huaneng Power International, India, Infrastructure, Infrastructure Spending, Japan, Keith Fitz-Gerald, Navios Maritime Holdings, OECD, URS, Yingli Green Energy

Eight Ways to Profit From the World's Biggest Spending Boom

By , Contributing Writer, Money Morning •

Back in the 1970s, environmentalists feared we were going to "blacktop the Earth." It's not likely that will ever happen. However, governments around the world do have plans to pave a good portion of it in the decade to come. And they also plan to build bridges, power plants, water systems, and to develop other infrastructure projects that will bolster the global recovery and meet the needs of an increasingly modern global population.

What's more, the projected pace of new infrastructure spending is accelerating, meaning there's still plenty of time for new investors to climb aboard - and profit from - the trend.

Just a year ago, an analysis by CIBC World Markets (NYSE: CM) predicted worldwide government spending on public works projects would total $35 trillion over the next 20 years. By the middle of 2009, a number of analysts - reviewing projected demands in the commodity and raw materials markets - had raised that forecast to $40 trillion, with nearly $4 trillion of that coming in 2010 and 2011 alone.

And most recently, a report issued by analysts from Credit Suisse Group AG (NYSE ADR: CS) cited predictions by the Organization for Economic Co-operation and Development (OECD) that total new spending over the next 20 years could skyrocket to $71 trillion. The report called infrastructure "the backbone of the world economy."

All these estimates may even prove to be low, says Money Morning Chief Investment Strategist Keith Fitz-Gerald.

"An explosion in worldwide infrastructure spending is definitely under way," says Fitz-Gerald, who also manages the Geiger Index and New China Trader advisory services. "And the overall numbers being cited recently may actually turn out to be conservative. If you examine revised estimates for individual sectors - electrical power grids, alternative energy, water systems, roads, other transit systems and the like - it appears the comprehensive totals could far exceed current projections."

Infrastructure Investments Now Seen as a Necessity

 The stimulus packages aimed at helping economies around the world rebound from the worldwide financial crisis have been the trigger for some of the proposed spending, but the bulk of it is a matter of sheer necessity.

"The recent events in Haiti highlight a problem that is faced by much of the world," Fitz-Gerald says. "Even absent a major natural disaster like the Haiti earthquake, stuff is literally falling apart - and what hasn't already deteriorated is inadequate to serve the needs of the growing world population (expected to increase by 800 million by 2020) and its demands for new technologies."

The problem of deterioration and its cause in many instances were both documented in the CIBC report, with Canada used as an example. The Canadian government had a huge budget deficit in the 1980s, which it eliminated by stopping virtually all infrastructure spending for two decades, the result being an "infrastructure deficit" - overdue maintenance spending - surpassing $120 billion.

Now most governments are recognizing the folly of such a policy of neglect, realizing that they are better off spending a reasonable sum every year on infrastructure upkeep and modernization rather than waiting and being forced to spend huge sums replacing outdated or failed public facilities.

"That attitude shift was already apparent in funding plans," Fitz-Gerald notes. "But the necessity of speeding up the process has been driven home by the Haiti disaster. Similar fits by Mother Nature in other countries are almost a foregone conclusion, so governments need to begin getting infrastructure in shape now or face their own future catastrophes. It's literally a race against time - and winning it means spending money."

In the developed world - North America, Europe and Japan - much of the infrastructure spending will targeted at rebuilding and upgrading existing systems, with some funding devoted to new areas such as alternative energy.

To that end, state and local governments around the United States are expected to spend roughly $150 billion a year during the coming decade, with the Obama administration targeting about $20 billion a year for "green and clean" technologies, including power-grid improvements and development of renewable energy sources. The $787 billion federal stimulus package (the American Recovery and Reinvestment Act of 2009) also includes $51.2 billion for roads, bridges and other transportation-related projects.

These needs have been strongly emphasized by the American Society of Civil Engineers (ASCE), which last year gave America's infrastructure a letter grade of "D," saying $1.6 trillion in new investment is needed over the next five years.

"Bridges collapsing, highways cracking, levees breeching, state power grids failing ... our roads, ports, dams, water systems, highways, power plants, airports, etc., are all in desperate need of new investment," the ASCE report said. "Our infrastructure has been badly neglected and has been allowed to deteriorate for far too long."

Near-term expenditures in the European Union are projected at $252 billion, plus a separate $42 billion in Germany, with a major focus on power and transit projects. Japan, meanwhile, could spend as much as $65 billion a year.

In the developing regions of the world - particularly in Asia - expenditures could be far higher, primarily because many countries are starting their infrastructure programs from scratch, building highways, power grids and water systems for the first time, as opposed to refurbishing and upgrading existing infrastructure.

Asia: The New Nexus for Infrastructure Investments

According to a recent article in The Journal of Commerce, infrastructure spending in Asia (not including Japan) could total roughly $1.4 trillion in the next two years, with China committing $585 billion or more. India is also projected to spend more than $500 billion by 2015.

"Asia is by far the biggest market for new infrastructure construction," says Money Morning's Fitz-Gerald.

China is already at work on 12 major highway projects connecting rural areas to urban centers, which will give the country 53,000 miles of highways by 2020.

"The old Silk Road is not only being paved, it's about to be turned into a super highway," Fitz-Gerald says.

One of China's most ambitious projects was announced in December - a $10 billion combination of man-made islands, three miles of undersea tunnels and a 23.6-mile bridge that will physically connect the mainland and the former colonies (and current "special administrative regions") of Hong Kong and Macau. It's an important project: Macau has spent the past decade transforming itself into the Las Vegas of the East, and Beijing wants to strengthen the economic ties between Macau and the mainland. Completion is targeted for 2016.

China is also in the midst of a $200 billion campaign to expand its railways and freight-handling facilities, and plans to build 97 new airports by 2020, including 10 with the capacity to handle more than 30 million passengers per year.

All told, China is expected to account for more than 28% of global infrastructure spending over the next two decades reports CG/LA Infrastructure LLC, a Washington-based consulting firm for the construction industry.

India is also focusing heavily on improved transportation. According to infrastructuredeals.com, the country on Jan. 20 announced that it will award contracts on 122 new road projects worth $20 billion between now and June 2010. The jobs are part of India's Highways Infrastructure program, the largest road-paving campaign in the world, covering more than 11,000 kilometers (6,835 miles). India has also unveiled future plans for construction of more than 17,000 (10,560 miles) kilometers of new expressways.

Although the needs are equally great, near-term infrastructure spending plans in Africa ($10.2 billion) and South America ($17.6 billion) are far smaller. By contrast (the recent Dubai financial debacle notwithstanding), many Middle Eastern nations - flush with the extra revenue from higher oil prices, have ambitious and expensive public works projects on the drawing boards.

Zawya, the leading Middle East business information service, reported Dec. 30 that the six countries of the Gulf Cooperation Council (GCC) - Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates (UAE) and the Sultanate of Oman - have plans to spend $10.6 billion on roads over the next 10 years. Projections also call for outlays of $109 billion on railroads, including urban transit systems and a new trans-GCC line that will connect the commercial centers of the Arabian Peninsula.

In spite of those plans, however, Zawya's analysts cautioned that Middle-Eastern builders, cement producers and other construction sectors aren't yet prime investment prospects because of excess capacity created by the building boom the region has experienced over the past decade. Industry insiders predicted it would take at least 12 months for demand to rebound in Saudi Arabia and 18 to 24 months for the situation to improve in the UAE. Continued turmoil is also expected to inhibit growth in Iran and Iraq.

Despite the negative outlook for that one region, Fitz-Gerald says there are plenty of other areas ripe for investment - and it's not too late to begin mining the sector.

"Ordinarily, investing in infrastructure is about as exciting as watching paint dry," he says. "But now, with such raw explosive growth ahead in many areas of the world, infrastructure is going to be one of the top-performing sector choices of all time."

Finding the New Leaders

 How to profit from this trend? Leaping blindly into unproven companies just because they have tenuous ties to the infrastructure boom isn't the way to go, Fitz-Gerald says. The companies that will provide the greatest rewards, he predicts, will be those that already have a well-established business and a position of market leadership. Three keys to look for are:

  • Revenue certainty as demonstrated by a history of stable demand, a monopolistic position thanks to either government controls or supply exclusivity, and/or products that are either price-regulated or inflation-indexed.
  • Profitability based on real revenue, high operating margins, the use of sustainable leverage and a cost structure appropriate to the industry.
  • And stability.  Regardless of where a company's revenues come from - an example being foreign suppliers to China - it should be based in a country with a stable political system, a firm economic foundation, well-regulated markets and an equitable legal system.

 Fitz-Gerald recommends looking first - but not exclusively - at companies in China or that will benefit from Chinese spending plans. Some potential candidates are:

  • Huaneng Power International Inc. (NYSE ADR: HNP): China's largest independent power producer, with 16 operating power plants in 12 provinces and partial or controlling stakes in 18 power companies, HNP will grow as new government-funded power grids come online, expanding service to rural areas. Beijing is also helping fund refitting of the company's older coal-fired power plants, construction of new "clean" plants and generation of alternative energy, which Huaneng will sell.
  • Yingli Green Energy Holding Co. Ltd. (NYSE ADR: YGE): China's only totally "green" power company, Yingli makes photovoltaic (PV) power cells and modules, which it incorporates into solar energy systems. As such, it will be a major beneficiary of the reported $33 billion that China plans to spend on alternative energy over the next decade. In addition, Yingli will benefit from similar campaigns in Europe, since it has substantial sales in Germany, Spain and several smaller EU nations.
  • Navios Maritime Holdings Inc. (NYSE: NM): A Greek shipping company with more than 40 vessels for hauling dry bulk products, Navios also operates port facilities in South America and has long-term contracts with commodity producers to deliver to customers around to world, including most of Asia. China is also using Navios to transport raw materials needed for infrastructure and other construction projects.
  • URS Corp. (NYSE: URS): URS performs engineering and construction work for the private sector and for U.S., state, local and foreign governments. In any given quarter, 30% to 40% of revenues come from the federal government for construction projects and such basic service functions as equipment maintenance. URS also offers flight services and training for the U.S. Department of Defense, along with hazardous- and nuclear-waste management for the U.S. Department of Energy.
  • ABB Ltd. (NYSE ADR: ABB): This Swiss conglomerate is the biggest - and arguably the best - direct play on the global push to build, upgrade and maintain electrical systems. ABB provides power-production, transmission and automation technologies to utility and industrial customers in 100 countries around the world - including in China and other developing markets - and has a solid earnings foundation from Europe, where it gets about half its total sales.

 Global-infrastructure investing has also become a primary focus of a number of exchange-traded funds (ETFs). Three that industry specialist ETF Trends follows and says are worth considering are:

  • PowerShares Emerging Markets Infrastructure (NYSE: PXR).
  • iShares S&P Global Infrastructure Index (NYSE: IGF).
  • SPDR FTSE/Macquarie Global Infrastructure 100 (NYSE: GII).

However you choose to go, Fitz-Gerald says there's little doubt that increasing growth in infrastructure spending will be a dominant theme over the next decade - and beyond - simply because the world's governments have no other choice.

"Some argue that the costs of infrastructure are prohibitive for governments, given the present economic situation," Fitz-Gerald notes. "But it's becoming steadily more apparent that the price of not investing is even higher."

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