Some of the most crucial infrastructure assets revolve around transportation:
Letko, Brosseau & Associates Inc. has been actively involved in emerging markets for more than 20 years and is well positioned to provide investors entrance into this exciting world.
There is a seismic humanitarian shift occurring that is exerting considerable impact on our planet. In 2019, approximately 55% of the globe’s 7.5 billion people live in cities. The World Bank estimates that by 2050, close to 70% will dwell in urban areas. With 85% of the earth’s population currently calling a developing country home—and with women and men there multiplying at twice the rate of that in developed areas of the world—an astounding number of villagers are morphing into urbanites daily.
But how will burgeoning capitals in such countries as Brazil, Russia, India, and China—not to mention in the 20 other nations comprising these “emerging markets”—withstand such a great influx of human beings? The answer is “infrastructure, infrastructure, infrastructure.”
For our purposes, infrastructure is the sum of fundamental systems, services, and structures a society needs to not only operate efficiently but to thrive. “It’s well-maintained, dependable, paved roads people can use to confidently travel from one point to another,” says Senior Portfolio Manager Rohit Khuller, a 20-year veteran of Letko, Brosseau & Associates Inc. who since 2011 has been charged with leading the firm’s emerging markets efforts. “It’s delivery systems by which gas lights up a home’s stove. It’s basic water supply and sanitation. If you look at these developing countries, a big chunk of their populations already don’t have access to washrooms and clean toilets. How will they manage when their populations multiply?”
Clearly, the powers-that-be in emerging markets must ramp up substandard infrastructure immediately if they are to fulfill just the present basic needs of their citizens. This urgency is magnified when factoring in the imminent increases in demand due to urbanization. There’s also an important domino effect at play. Consensus Economics reports that in 2017, just 12% of India’s population was considered middle class. By 2030, that number is expected to hit 80%. Therefore, in addition to compounding the burden currently imposed on flawed, failing, insufficient infrastructure, people migrating from villages to cities will—as they obtain higher-paying jobs and enjoy newfound disposable income—yearn for even more goods, services, and travel that will require additional amelioration and expansion of existing systems. Simply put, stresses are swelling across the board, and show no signs of ceasing.
While a wide array of emerging market infrastructure assets are in need of enhancement to support this uptick in urbanization and consumerism—and to allow for the growth of GDP per capita—two of the most crucial revolve around transportation and utilities.
“For instance, in emerging markets, flying penetration is still very low,” says Khuller, adding that only two to three percent of India’s people travel by air. “As incomes rise over time, more people will be able to afford that. We’ll have to improve and expand existing airports—even build new ones—to handle this higher traffic. We’ll need to invest in runways, terminals, baggage-handling facilities, and security.”
When the same principle is applied to highways, railways, and seaports, it’s clear to see that opportunities for growth are both significant and varied. For example, currently, less than 15% of Brazilian highways are paved, and only 1% of that country’s roads are in private hands. Similarly, ports in Brazil are clogged and railroads outdated. According to The World Bank, the cost of exporting a 20-ft container—which includes inland transportation expenses and all related fees—is about U.S. $2,215 in Brazil, but only U.S. $500 in China.
Electric, water, and sanitation utilities suffer similar urgent, emergent needs. Again according to The World Bank, 1.2 billion people (just under a fifth of earth’s population) live without access to electricity. With their necessary reliance on wood, charcoal, dung, and coal for cooking meals and heating homes, another 2.8 billion are at risk of indoor air pollution, the cause of some four million unnecessary deaths annually.
India has one of the lowest per capita electricity consumption rates on the globe—28% of China’s and 6% of that in the U.S. “I would imagine India requires several decades of new investments in the electricity sector to meet its people’s basic needs,” says Khuller. “Of that country’s half a million villages, I don’t know of any that has a good, uninterrupted supply of power in any given 24 hours.” These facts represent reality today. In coming years, as residents abandon small towns for big cities, demands will increase exponentially. “If you are in a remote part of Brazil, India, or China,” explains Khuller, “you’re not consuming as much electricity or gas as you will when you relocate to a large urban area.”
Clean water—a substance crucial to life that is already experiencing a decrease in supply in the developed world—is even scarcer in emerging markets. In China, 54% of households are not connected to water pipelines, 74% are not equipped with bathing facilities, and 77% lack any type of lavatories, proper or not. More than 400 of China’s 600 cities suffer from water shortage. Finally, as a result of rapid industrial growth, half of the nation’s wastewater is released untreated into rivers and seas.
“Many emerging markets lack universalization,” says Khuller, “which means clean, drinkable water is not available on demand 24 hours a day. When water is available—for three or four hours—people must fill up their tanks quickly and use their supply gingerly.”
The World Bank’s forecast that by 2050, 5.7 billion people will live where clean water is limited sustains its claim that a $6.7 trillion investment in infrastructure is immediately needed.
In emerging markets, investments in infrastructure and utilities represent the potential for great returns. The prospects of these economies are supportive of high revenue and earnings growth expectations. Price sensitivity is paramount to long-term investment performance and careful attention must be paid to assessing company-specific, industry-specific and country-specific risks (political, corruption, currency and governance).
Publicly traded markets offer investors a liquid, regulated and transparent way to participate in enticing growth opportunities across the emerging world. Letko, Brosseau & Associates Inc. has been actively involved in emerging markets for more than 20 years and is well positioned to provide investors entrée into this exciting world.
This document has been prepared by Letko, Brosseau & Associates Inc. for informational purposes only and is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. Where the information contained in this document has been obtained or derived from third-party sources, the information is from sources believed to be reliable, but the firm has not independently verified such information. Any opinions or estimates contained herein constitute our judgment as of this date and are subject to change without notice. This presentation contains certain forward-looking statements which reflect our current expectations or forecasts regarding securities, and economic and market conditions. Forward-looking statements are inherently subject to risks, uncertainties and assumptions that are believed to be appropriate in the circumstances which could cause actual events or results to differ materially from those expressed in, or implied by, these forward-looking statements. These statements may also include the expression of opinions that are speculative in nature and should not be relied on as statements of fact.