It seems a long time since desperate stimulus measures were hastily pushed through in the depths of the crisis to combat the recession. Yet much of the spending has still to be done. In fact, the bulk of government stimulus for infrastructure is set to be spent in 2010.
Robeco estimates that some 35-40% of the total $2.3 trillion planned stimulus measures that have been announced globally is earmarked for infrastructure investment. That is equivalent to around 1.5% of global GDP.
The companies that will benefit from this spending are construction companies in the infrastructure segment -- builders of roads, property, communication networks and electricity grids -- rather than infrastructure operators.
Corporate spending to rebound
Yet it isn’t only governmental spending that is supporting the segment. For one thing, capital expenditure by corporates is likely to rebound from the very low levels seen in 2009 sooner than most investors currently assume. That’s because the last capex cycle was artificially cut short by the credit crunch. This has led to unfilled demand for productive capacity in several industries -- such as mining and oil & gas -- and should lead to capex increases once confidence in the economic recovery takes hold.
Two strong secular drivers
Meanwhile, there are two strong secular drivers that will drive an acceleration in global spending on infrastructure over the next five to ten years. First, rapid population growth, accelerated urbanisation and increasing wealth in emerging economies look set to drive ongoing high spending on infrastructure projects. Interestingly, many developed market companies are benefiting from these developments.
Second, mature economies have under-invested in their infrastructure since the mid-1970s. Now, these economies have to modernise their ageing infrastructure, not only to replace obsolete assets but also to boost competitiveness, improve energy efficiency and reduce pollution.
Biggest boom in infrastructure ever
The combined effect of these two drivers will result in the biggest boom in infrastructure spending the world has ever seen. Robeco estimates that spending on infrastructure could roughly double as a percentage of global GDP in the next five to 10 years. Indeed, various studies suggest that up to $50 trillion of investment will be required over the next 30 years. This effectively translates into average annual growth rates of 10-15% for companies exposed to this increased infrastructure spending, depending on the nominal growth path of global GDP.
Yet market valuations of companies exposed to this mega trend generally do not reflect this growth acceleration. As a consequence, they offer considerable re-rating potential, as well as high organic revenue and earnings growth.
Constructors more sensitive to economic cycle
However, focusing on the construction part of the infrastructure value chain, rather than the operators, is somewhat unfashionable. There are reasons for this. One is that constructors are more sensitive to the economic cycle. In the turbulent equity markets of recent years, their lower sensitivity to the economy made infrastructure operators -- such as utilities, telecoms and toll-road operators -- popular with investors.
But that popularity means these operators are currently less attractively valued than the constructors. The valuation of infrastructure builders looks particularly appealing when their long-term growth potential is taken into consideration. The operators are certainly not going to benefit from the surge in infrastructure spending. In fact, they will have to invest -- often to the benefit of the constructors -- before they have new assets to operate.
All this does not mean it will be plain sailing for the infrastructure constructors. They struggled in early 2010 and may not have an easy time in the period ahead as investors discount the political, regulatory and economic risks that follow from the eventual unwinding of fiscal and monetary stimulus.
Markets likely to start factoring in improved earnings in H2 2010
Some parts of the segment, especially construction & engineering and heavy electrical equipment manufacturers, can be considered late-cycle and will only hit their earnings stride in 2011 or 2012. Investors will probably start to anticipate those 2011/2012 earnings in the second half of this year. Hence, the longer-term outlook is bright.
Surprising as it may seem in the light of the hefty infrastructure spending in the pipeline, most infrastructure theme funds invest in asset operators. By contrast, Robeco sees better opportunities for asset constructors. Although they have a clearly higher risk profile than asset operators, infrastructure constructors also offer superior return prospects. This is an ideal opportunity for entry for investors with long-term targets who wish to benefit from one of the mega trends of our time.
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