Investment Adventures in Emerging Markets

Urbanization: Building a New World

In this two-part series on urbanization, I will share my thoughts on how urbanization is driving infrastructure development and spending, which in turn can lay the foundation for potentially sustainable, long-term growth in emerging markets, both in terms of the economy and per capita income. Investment in infrastructure has been gathering momentum all over emerging markets, from plans to construct a high-speed train in Brazil connecting Rio De Janeiro to São Paulo, to bridges and tunnels springing up in China and India. Brazil, an export-driven economy with a large consumer market, also needs to improve its infrastructure ahead of hosting the 2014 FIFA World Cup and 2016 Olympic Games. Better infrastructure can provide the basis for potentially sustainable long-term economic growth, which in turn paves the way for interesting investment opportunities.

Over the next few decades, I believe we are likely to see an increase in several types of infrastructure investments due to rapid urbanization, which drives the increasing global demand for resources, mainly from emerging markets. I expect there will likely be many opportunities, particularly in the energy and materials sectors. Rapid urbanization in emerging markets, driven by rural populations migrating to cities in search of work and better opportunities, has put pressure on resources and prompted governments to pump money into a range of urban infrastructure-related sectors such as housing, transportation, sanitation, water, electricity and telecommunications.

I have a particularly positive outlook on infrastructure growth in Africa, especially in South Africa, Nigeria, Egypt and Kenya. On average, Africa’s urban centers are collectively growing at a faster rate than anywhere else in the world. Today, 40 percent of its one billion people do not have access to water and sanitation — a clear indication that the continent’s rapid urbanization has outpaced its capacity to provide these essential services.1 However, larger emerging markets have recently been investing in Africa. Most notably, China is engaged in a number of major infrastructure projects most often involving government-to-government agreements with African nations.

China already has substantial experience with rapid urbanization—some Chinese cities are among the fastest-growing in the world, largely thanks to the government’s decision to adopt a pro-urban approach to economic development. It is estimated that by 2025, roughly two-thirds of China’s population will live in cities, and by 2030, China’s urban population is projected to reach one billion.

I was recently in China for some company visits and stopped in cities such as Beijing, Changsha, Chongching and Chengdu, where I saw that growth in infrastructure and housing was continuing apace. Some are concerned about a real estate bubble; and to some extent, there has been some overbuilding of luxury and high-end housing beyond the reach of the majority of Chinese consumers. Much of the demand for these apartments and homes has been from investors who see property as a long-term investment, purchasing a number of apartments, for example, and leaving them vacant. Like many other markets and sectors, we will continue to monitor developments in the real estate sector closely. However, many parts of China still suffer from a poor state of residential housing and there is a real need for quality, affordable housing. The Chinese government has specifically recognized this need in its new five-year plan. With new programs, the government could potentially approach its goal to supply more affordable housing to a significant portion of the population.

Infrastructure projects can act as both the drivers and results of economic growth, and could be an interesting way to potentially benefit from the high economic growth in many emerging markets. Among the infrastructure-related areas that have historically proven to be interesting are companies involved in construction and construction supplies. However, many of these projects, such as those related to power and water utilities, are often dependent on government intervention and regulations, which can sometimes be problematic. In addition, the actual construction of projects could also involve environmental and social challenges. As a result, we have to be very careful and cautious in our selection of potentially interesting investment opportunities related to infrastructure and urbanization projects. Detailed research is generally crucial to evaluating the profitability potential of investment opportunities in this space, as is familiarity with local regulations, customs and cultural sensibilities.

In my next post, I will expand on how the increase in infrastructure spending has been one of the drivers of increased commodity demand, which, as it outpaces supply, is likely to push up prices for a range of natural resources and commodities.

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