Odysseus-Strategie. of the Global Economy

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1 Behavioral Analysis & Trends Finance in Aktion Überliste Infrastructure Dich Selbst: The Backbone Die Odysseus-Strategie of the Global Economy

2 PortfolioPraxis: Akademie 2

3 Analysis & Trends Content 4 Infrastructure The Backbone of the Global Economy 5 Globalisation: Global trade as growth driver 6 The future belongs to the city 6 Energy the key to economic development 8 Utilities: high need for investment to safeguard living standards 1 Transport growth countries in the fast lane 11 Telecommunications 3.5 billion potential new users 12 Social infrastructure an important factor 12 Enormous need for infrastructure investment worldwide Imprint Allianz Global Investors GmbH Bockenheimer Landstr Frankfurt am Main Global Capital Markets & Thematic Research Hans-Jörg Naumer (hjn) Ann-Katrin Petersen (akp) Stefan Scheurer (st) Data origin if not otherwise noted: Thomson Reuters Datastream Allianz Global Investors 3

4 Analysis & Trends Infrastructure The Backbone of the Global Economy In many places, global demographic change is creating the need for investment in infrastructure. This need is particularly great in the emerging countries, but investment is required in the industrial countries, too, in order to ensure quality of life and economic growth. November 26: a breakdown in the German power grid leaves about 1 million people in Europe in the dark. September 211: a massive power outage leaves five million people without electricity, paralyzing large sections of the south-western US and Mexico. July 212: India is hit by one of the largest power outages in more than 1 years. More than 6 million people are affected. These examples show that electricity blackouts don t just happen in developing countries, they can also occur in the industrial countries of Europe and in the US. Why? The answer is globalisation. The global population is growing. People are increasingly mobile, demand for goods and services is increasing and energy consumption is on the rise. It is clear that the infrastructure in place cannot meet the challenge of these developments. Governments need to invest millions in new streets, bridges, clinics, airports and social services in order to meet these requirements. What is infrastructure? There is no standard definition of the term infrastructure. In general, infrastructure is considered to mean the basic facilities needed to ensure the func tioning of a country s economy. This includes the following areas (see Chart 1). Chart 1: What is infrastructure? Economic infrastructure Social infrastructure Transport Energy & utilities Telecommunications (Toll-)roads Bridges & tunnels Airports & seaports Railways Underground railways Logistics centres Oil and gas pipelines Gas/electricity supply Gas/electricity networks Water supply Water distribution Waste-water disposal Renewable energy Cable networks Radio masts Satellite systems Schools Hospitals Prisons Courthouses Sports stadiums Exhibition halls Source: Ernst & Young, CFA Institute, Allianz Global Investors Capital Markets & Thematic Research 4

5 Chart 2: High contribution of emerging markets to growth Development of world population, 195 to 25 (in millions) World Population (in millions) 1, 9, 8, 7, 6, 5, 4, 3, 2, 1, Source: United Nations (UN), World Population Prospects: The 21 Revision, October 211, Allianz Global Investors Capital Markets & Thematic Research Globalisation: Global trade as growth driver According to United Nations statistics, the world population was around 2.5 billion in 195; it has now risen to more than 7 billion and it is expected to exceed 9 billion by 25 (see Chart 2). Global population growth continues inexorably, with five babies being born every two seconds. Growth in the industrial countries is much less dynamic than in the emerging economies, and particularly in the developing countries. The UN estimates that the share of the world population of the industrial countries will decline from almost 19 % in 25 to 14 % in 25. The share of Developed Countries Emerging Markets Developing Regions Forecast the emerging countries will remain virtually unchanged at about 67 %, while the developing countries share will rise from just under 12 % to 19 %. The increasing world population and growing globalisation are driving global trade. A steadily growing and increasingly prosperous society is demanding more goods and services. This can be seen in the fact that global trade has risen twice as fast as world economic growth since According to the World Bank, low-income countries will grow twice as fast as high-income countries in the coming decades (see Chart 3). Chart 3: Globalisation World trade as a driver of growth World trade has grown twice as the economy since 1987 Global trade has grown twice as fast as the global economy since indexed Global GDP ; real ; in US$ Global Trade and Services ; real ; in US$ Source: Datastream, Allianz Global Investors Capital Markets & Thematic Research, August

6 Analysis & Trends 1 Source: McKinsey Global Institute: Preparing for China s Urban Billion, 28. The future belongs to the city In 198, 39 % of the world s population lived in cities; now, more than half live in major cities, and this figure is expected to rise to 67 % by 25, according to a United Nations forecast. The trend is clear: the future belongs to the city. In Europe (74 %), North America (83 %) and Latin America (8 %) the share of the population living in cities will already be high in 215, but it will rise even more by 25. However, Asia and Africa are undergoing amazingly rapid development, and more than half the population is expected to live in cities by 25 (see Chart 4). The result of this urbanisation is the rise of megacities, a trend that now seems to be irreversible. While just five cities had a population of at least 1 million in 1975 (New York, which is the oldest megacity, Mexico City, Sao Paulo, Tokyo and Shanghai), the UN expects there to be 22 by 215, 17 of which will be in developing countries. In 212, Asia is already home to seven of the world s ten largest megacities. The industrial and service metropolises will see a particular need for replacement investment in infrastructure facilities in the coming years. The emerging and developing countries, in contrast, are faced with severe congestion, environmental and socioeconomic problems, as well as an extreme infrastructure deficit. In order to counteract these developments, a wide range of investments is needed in utilities, construction, telecommunications, transport and social infrastructure. The example of China makes this especially clear. One billion people will be living in Chinese cities in 23, according to McKinsey. By that time, there will be 221 Chinese cities with a population of more than a million people (in Europe the figure now is just 35). In the next 2 years, 4 billion square metres of living and working space will be created in 5 million buildings, 5, of which will be skyscrapers (this corresponds to 1 times the volume in New York City). 1 Energy the key to economic development In addition, the strong growth of the emerging countries has greatly increased the need for investment in the area of energy infrastructure in recent years. And the need will probably continue to grow. The Organisation for Economic Cooperation and Development (OECD) estimates that, in the period from 23 to 23, China will have to invest about USD 2 trillion in power plants for electricity generation and distribution, because energy consumption in China is growing at a rate of 4.5 % annually, among the fastest increases in the emerging countries (India: 4.9 %) (see Chart 5). Chart 4: More than half of the world s population live in cities Proportion of city-dwellers in % of the world population 1 % 9 % 8 % 7 % 6 % 5 % 4 % 3 % 2 % 1 % % 82 % 74 % 67 % 89 % 83 % 74 % 64 % 87 % 8 % 64 % 58 % 48 % 54 % 67 % 39 % 37 % 27 % 28 % Europe North America Latin America Asia Africa World (f) 25 (f) f = forecast Source: United Nations (UN), World Urbanization Prospects: The 211 Revision, March 212, Allianz Global Investors Capital Markets & Thematic Research 6

7 Chart 5: Electricity consumption is rising steadily particularly in developing countries India s annual growth rate for power consumption is 4.9 % between in THW 14, 12, 1, 8, 6, 4, 2, OECD Emerging Markets China India Latin America Middle East Africa (f) 23 (f) f = forecast Source: OECD (26), Allianz Global Investors Capital Markets & Thematic Research But the industrial countries also have a lot of work to do in terms of infrastructure: According to the OECD, the US and Canada are expected to invest nearly as much in their electricity infrastructure as China in the years to come (see Chart 6). Past failures are the main reason that this investment is necessary. Existing plants have not been adequately maintained and investment has not been made in replacement plants. Chart 6: Cumulated expected investment requirements in electricity, worldwide 23 23* Infrastructure is not only something that affects the new emerging world China North America OECD Europe East Asia South Asia OECD Pacific Latin America Transition Economies Africa Middle East 5 1, 1,5 2, 2,5 Generation Transmission Distribution in bn USD * based on a constant local price series by its 2 USD value. Source: OECD (26), Allianz Global Investors Capital Markets & Thematic Research 7

8 Analysis & Trends 2 Source: OECD, Infrastructure to 23, Source: OECD, Infrastructure to 23, 26. Utilities: high need for investment to safeguard living standards Take water, for example. Water covers about 71 % of the earth s surface. A bottleneck for a commodity that is so important to people is not really expected to come about in the future. But in addition to the fact that only.3 % of the world s water supply is actually available for human use, it is important to note: that only about 83 % of the world s population has access to clean water and 58 % to sanitation. The need for investment seems to be greatest in the developing countries (see Chart 7). that in 225 the agricultural sector (7 75 % share of global water consumption), industry (2 %) and households (5 1 %) will together use up to 4 % more water than is the case today to maintain the standard of living (see Chart 8). that global water availability has fallen since 195 and will continue to decline until 23. Example: By 23, per capita water availability in the industrial countries will be 4 % lower than in A high level of investment is required to find new sources (see Chart 9). 2 Infrastructure investments are necessary to improve the supply infrastructure, in particular. In London, for example, up to 5 % of the water produced leaks away because the water pipes date, in part, from the 19 th century. The OECD forecasts that an annual volume of investment in infrastructure of over USD 6 billion for the next 2 years is needed to ensure the water supply. But sanitation is just as important as the water supply. The greatest demand is in the emerging countries. China is expected to spend more than USD 2 billion by 225, India about USD 1 billion and, for the US, the figure will probably be USD 15 billion..3 Chart 7: Almost full access in industrialised nations Proportion of the population with access to a water supply and sanitary facilities (in %) in % World Developed countries Eurasia Developing regions water supply sanity equipment Source: OECD (26), Allianz Global Investors Capital Markets & Thematic Research 8

9 Chart 8: Water consumption is rising rapidly along with costs and investment Global water consumption of households (km 3 /year) in km 3 /year 6, Forecast 5, 4, 3, 2, 1, Losses (reservoirs) Industry Water for residential areas Agriculture Source: OECD (26), Allianz Global Investors Capital Markets & Thematic Research Chart 9: Availability of water is declining further Expected global availability of water* in % (f) 22 (f) 23 (f) Developed countries Developing countries - humid Developing countries - arid f = forecast * availability per head compared with 195, in % Source: OECD (26), Allianz Global Investors Capital Markets & Thematic Research 9

10 Analysis & Trends In 2 there were 4 vehicles for every 1 people worldwide. The OECD expects the number of vehicles to nearly double by 23. And in Brazil, China, India, Indonesia and Russia the number of vehicles is expected to triple. Nevertheless, only one in seven people in these countries will own a vehicle (see Chart 1). 4 Source: Ministry of Road Transport and Highways (India). 5 Source: Transport Corp. of India, Indian Institute of Management, Calcutta. Transport growth countries in the fast lane Beijing s airport increased its passenger numbers from 27.1 million to 77.4 million from 22 to 211, an annual rise of slightly over 25 %. This is not an isolated case, although growth rates of the world s 15 biggest airports are much lower at 1 % to 15 % according to the Airport Council International. In China alone, the International Air Transport Association (IATA) expects that China will see an increase of almost 9 million passengers from 21 to 215. Given this growth, China plans to build 56 new airports by the end of 216, which will put the total number at around 24. The trend is clear: people are more mobile, and this fuels globalisation. The picture is the same for road transport. The emerging countries are also in the fast lane in terms of expected expenditures. The OECD forecasts that these countries will increase annual investment in road construction alone from its current level of around USD 1 billion to nearly USD 7 billion in 23. Globally, around USD 2 billion will be required annually for the maintenance of existing roads and the construction of new roads (see Chart 11). For example, India is planning to triple the length of its expressways (an increase of 1,6 km) in the coming years. 4 By way of comparison, China already has 74, km of expressways. 5 Chart 1: By 23 Only One in Seven Will Have a Vehicle in Developing Countries Vehicles per 1 persons, (f) 22 (f) 23 (f) OECD World Big 5 (rhs)* Non-OECD (rhs) f = forecast * China, India, Russia, Brasil, Indonesia Source: OECD (26), Allianz Global Investors Capital Markets & Thematic Research 1

11 Chart 11: Not only in road construction are emerging markets in the fast lane Road construction, 2 23, in billion US Dollar USD bn USD bn (f) 22 (f) 23 (f) OECD World Big 5 (rhs)* Non-OECD (rhs) f = forecast * China, India, Russia, Brasil, Indonesia Source: OECD (26), Allianz Global Investors Capital Markets & Thematic Research Telecommunications 3.5 billion potential new users Given its penetration thus far, it is reasonable to conclude that the impact of the Internet is only just beginning to be felt, even if daily life and the working world have already radically changed in many ways. This is because it is primarily people from countries with more developed economies who have had access to cyberspace. In the US nearly 8 % of the population is already on line, while the figure is a bit over 6 % in Europe, and somewhat more than 25 % in Asia. The Asian countries not only represent more than half the global population, they make up nearly 5 % of all Internet users. The annual growth rates since 2 are impressive: the number of Internet users in Asia increases by 2 % every year, and in Africa, which has thus far been extremely underrepresented, annual growth stands at more than 3 % (see Chart 12). Chart 12: Internet usage by region The impact of the Internet is only now being felt in % Penetration (% of population) % of World Growth p.a. Africa Asia Europe Middle East North America Latin America/Carib. Source: Internet World Stats, 211, Allianz Global Investors Capital Markets & Thematic Research 11

12 Analysis & Trends Chart 13: Water needs the most Investment Expected global expenditure on infrastructure per year in billion US Dollar, 2 3 USD bn 1,2 1, Road Rail Telecoms Electricity Water 2 1 (f) 21 2 (f) 22 3 (f) f = forecast Source: OECD (26), Allianz Global Investors Capital Markets & Thematic Research Social infrastructure an important factor Any review of the topic of infrastructure should not ignore so-called social infrastructure. Educational facilities and hospitals are needed for the vital role they play in the economic system; the lines between economic and social infrastructure overlap: for example, communications networks support learning processes. Enormous need for infrastructure investment worldwide The OECD estimates average worldwide investment volume for new infrastructure, or for maintenance of existing infrastructure, to be around USD 1.8 trillion annually (!) from 21 to 23 (see Chart 13): The water sector is expected to see the highest expenditure (USD 9 billion per year). Around USD 27 billion will be spent on road construction per year. About USD 21 billion annually will go to the power supply. Whether it s the energy supply, the improvement of utilities and transport infrastructure or telecommunications a country s infrastructure requires constant maintenance and renewal. Globalisation, coupled with worldwide demographic change, will make enormous infrastructure investments necessary in the coming decades in both the industrial countries and the growth countries. Stefan Scheurer 12

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14 Analysis & Trends Notes 14

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16 Allianz Global Investors GmbH Bockenheimer Landstr Frankfurt am Main September 212