1 MACQUARIE GLOBAL INVESTMENTS INVESTING IN THEIR FUTURE: EMERGING MARKETS INFRASTRUCTURE
2 Emerging opportunities The Sao Paolo Metro serves the 11 million residents of Brazil s largest city. The transit system carries more than three million passengers each day and is undergoing a massive expansion to better meet the needs of the largest metropolis in the southern hemisphere. INVESTING IN THEIR FUTURE Thanks to increased population growth and urbanization trends, emerging markets are expected to grow from 30% to over 40% of the overall global market cap 1, welcome one million people to their cities each week 2, and generate over 50% of global economic growth 3 all within the next decade. Much of this growth will be channelled into the infrastructure of these countries to accommodate the increased demands on essential services like water, power, and transportation. 1 IMF, MSCI, Goldman Sachs ECS Research estimates 2 United Nations Population Division, BofA Merrill Lynch Global Research 3 World Economic Outlook (International Monetary Fund), October BofA Merrill Lynch Global Research estimates, government sources 5 United Nations Population Division, BofA Merrill Lynch Global Research As an asset class, emerging markets infrastructure is expected to benefit from: $6 trillion in government and private spending in the next three years 4 ; the healthy fiscal position of emerging countries compared to the debt carried by developed nations; and growing demand due to the population and urbanization trends in these countries. This booklet walks you through these key trends in emerging markets and the reasons why Macquarie believes emerging markets infrastructure is poised for substantial growth over the next few decades. Urbanization quick facts The UN projects that 21 of the 25 largest cities in the world will be in developing nations by Currently only 45% of the developing world lives in an urban setting versus 75% in developed nations 5
3 POPULATION (BILLIONS) Almost 300 powerful wind turbines will eventually dot the Romanian countryside in the Dobrogea Wind Farm. It is the largest onshore wind energy project in Europe and will power the growing needs of Eastern Europe s expanding commercial and industrial base. Two key trends in emerging markets Chart A 1 : Share of global GDP (based on purchasing power parity) 70% 65% 60% 55% 50% 45% 40% 35% 30% F 2013F 2015F Chart B 2 : Growing working age population in emerging markets Emerging markets Developed markets Working Age Population (15-59 yrs) F 2020F 2030F 2040F 2050F Emerging markets Developed markets Trend #1: Emerging markets growth is outpacing developed markets For the last two decades, emerging markets have represented an increasingly greater percentage of overall global growth. As Chart A shows, in the next five years emerging economies are forecast to account for half of all global growth easily outpacing the growth of more developed countries. 1 What s fuelling that growth? In emerging markets, there are more people making more money and looking to spend it. Trend #2: Emerging markets urban centres welcoming one million people each week 2 Higher birth rates in emerging economies have created bottom-heavy populations. The result: a young, ambitious workforce (Chart B). This strong youthful workforce is spurring additional output as well as furthering the trend towards urbanization as people seek jobs in industrialized cities and urban areas. With forecast global population growth reaching nine billion by 2050, it is estimated that each week, over one million people will be born into or migrate to cities in emerging countries. 2 1 IMF World Economic Outlook, October United Nations Population Division, BofA Merrill Lynch Global Research
4 In an effort to alleviate bottlenecks and support rapidly increasing demand, China has been working on an eight-year project to build 30,000km of six-lane expressways equivalent to circumnavigating Australia. Key reasons emerging markets infrastructure is poised for rapid growth Chart C 1 : Projected infrastructure spend ( , $US billions) Energy & Transport & Water & Construction Power Logistics Environment Housing Other Total China Russia Middle East/Gulf India Brazil Mexico South Africa Turkey CEE Total Reason #1: Governments and the private sector have committed $6 trillion in infrastructure spending 1 A significant amount of emerging markets infrastructure is inadequate to support population growth and urbanization trends. Aware of the need to build out urban infrastructure, governments of emerging countries have committed to substantial stimulus plans. In total, these countries are looking to spend $6 trillion on infrastructure investments in the next few years alone (Chart C). Chart D 2 : Ratio of debt to GDP for emerging vs developed markets PUBLIC DEBT/GDP, SPAIN $0.72 GREECE $0.376 EURO AREA $7.96 UK $1.44 US $7.55 JAPAN $7.96 CANADA $1.44 RUSSIA $0.17 BRAZIL $1.19 CHINA $1.52 INDIA $ IMF PROJECTED GDP GROWTH RATE Reason #2: Emerging countries are able to spend, thanks to healthy balance sheets These governments are in a strong position to make good on their stimulus plan commitments, as they are in an enviable fiscal position compared to the developed world. Developed nations are carrying higher levels of debt relative to GDP: emerging countries are in a much better financial position, with relatively low levels of debt compared to their GDP (Chart D). Lower debt implies lower real interest rates, which stimulate investment and raise output. International Monetary Fund estimates suggest that for every 10% decline in debt-to-gdp, output increases by 1.4%. Emerging nations outpace developed nations 3-1 in output growth, current and projected. They re in a strong position to invest, and committed to doing so. 3 1 BofA Merrill Lynch Global Research estimates, government sources 2 IMF WEO Database, CIA World Factbook, BofA Merrill Lynch 3 IMF, World Economic Outlook, October 2010
5 India s Golden Quadrilateral highway project will establish almost 6,000km of express highways between many major cities and ports. These new roads will improve the lives of everyone, creating better transportation corridors from the agricultural hinterland to major cities and global transit hubs. Understanding emerging markets infrastructure Infrastructure refers to the basic facilities, systems and services necessary for a population to thrive. Commonly referred to as essential services, it is what societies rely on day-to-day to function and it s reached the forefront of fiscal policy as growth can only be sustained if the right infrastructure is in place. Basic urban infrastructure includes roads, bridges and highways, power plants and grids, communication systems, ports, railways, transit and airports, schools, healthcare, housing, water and sewers. Emerging market infrastructure quick facts 1 Russia has committed a spend of $400bn on 304 infrastructure projects by 2015 and $300bn on railways by 2030 India continues with its $44bn national highway development project (22km of new road are being built every day) In 2009 alone, Mexico built or made repairs to 8500km of highways China has initiated a railway project with a projected length of 42,000km Infrastructure has unique characteristics that make it a relatively stable asset class Inelastic demand Fixed cost base Linked to inflation Essential services Regulated returns Infrastructure demand is driven domestically because of its essential service nature. This demand tends to be more stable and less sensitive to changes in price compared with other products or services. Once an infrastructure asset is developed, ongoing operational maintenance expenditure may be relatively low. That means increases in revenue result in increased free cash flow. The underlying revenue of infrastructure assets may be linked to inflation, sometimes directly through a regulatory framework or through concession agreements that link price growth to inflation. So future growth is protected. Many infrastructure issuers are the sole providers of an essential product or service to a segment of the population. These issuers often retain this characteristic for an extended period of time, providing stability. Monopoly-type market environments may bring access to predictable returns through domestic regulation of the product/service or long term contracts. 1 Merrill Lynch, Investment Week, government sources, Marketwire
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