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World Governments Are Pouring Trillions into This Industry

By Sean Goldsmith
Thursday, March 27, 2008

Half the world's population – more than 3 billion people – lives in cities.

The global population is expected to grow at an average rate of 1.6% a year, reaching 8.3 billion people by 2030. Most of this growth will occur in cities. By 2030, 5 billion people will live in urban areas.

Right now, the world just doesn't have the proper infrastructure to handle an extra 2 billion people. Even the most developed countries lack the infrastructure.

Take the U.S., for example...

In the past few years, the U.S. has seen an interstate highway bridge in Minneapolis collapse and kill 13 people... We've seen manholes explode in Manhattan... And of course, the mother of all infrastructure breakdowns, we experienced the failure of New Orleans' levee system.

We won't dwell on death and destruction here... You get enough of that in the news. But it's safe to say the amount of money we lose due to subpar infrastructure is astounding.

And then there's congestion. The U.S. Department of Transportation estimates congestion across our transportation system costs the country $200 billion each year. Road congestion wastes 3.7 billion hours of travel time and 2.3 billion gallons of gasoline annually.

The American Society of Civil Engineers gave the U.S.'s current infrastructure a grade of "D." ASCE estimates the U.S. would have to spend $1.6 trillion over the next five years for its infrastructure to be acceptable.

Of course, if you've traveled much, I'm sure you realize the ASCA is being a bit theatric. America's highways are still among the best in the world. The only hassle you're likely to encounter while driving from coast to coast is a state trooper trying to make his monthly quota.

If the U.S. receives a D, imagine what the infrastructure in many developing nations is like. For instance, the Economist recently pointed out that Kinshasa, the capital of the D.R. Congo, is home to around 15 million people, but has no sewer system. Now that's at least an "F."

But we're also not going to worry about letter grades here... We know the world needs a huge amount of new bridges, highways, transmission lines, clean-water systems, and various other types of infrastructure.

According to Booz Allen Hamilton, a top-tier consulting firm, by 2030, the world will spend $41 trillion on infrastructure. Here's how Booz Allen sees the breakdown by region:

Region

Inf. $ Needed

U.S./Canada

$6.5 trillion

South Am./Latin Am.

$7.4 trillion

Africa

$1.1 trillion

Europe

$9.1 trillion

Middle East

$0.9 trillion

Asia/Oceania

$15.8 trillion

The world is currently entering a massive cycle of infrastructure spending. Now, the same pattern could develop in global infrastructure that developed in real estate over the past 25 years...

In the early 1980s, real estate investment trusts (REITs) had a combined market cap of $20 billion. Today, thanks to Wall Street's rapid securitization of real estate assets, REITs have a market cap of more than $300 billion.

We could see a similar "changing of hands" in transmission lines, tollways, bridges, etc... That's going to lead to much higher returns for early investors.

There are lots of ways to invest in infrastructure. You can buy cement maker Cemex, steel producer ArcelorMittal, or construction company Foster Wheeler.

These companies and other producers will profit when the global infrastructure boom takes off... But what happens when the construction is finished, commodity prices have been bid sky high, and a huge supply is left on the market? Demand slows and prices plunge.

On the other hand, only a handful of stocks actually own the infrastructure assets these companies help build: toll roads, utility lines, and shipping ports.

These companies will flourish during the infrastructure build-out, and demand will continue to grow with the population once the boom slows. So long-term investors should keep an eye out for well-priced owners and operators, which will be less cyclical than commodity producers and provide steadier returns.

Good investing,

Sean Goldsmith





Market Notes


IT'S TIME TO PUT CHINA ON THE WATCH LIST AGAIN

With the benefit of hindsight, we can see the iShares China Fund (FXI) is one of the greatest ideas an ETF company has ever had. Introduced in 2004, the offering from Barclays quadrupled in price in just three years.

Longtime DailyWealth readers are familiar with some of the big Chinese stocks contained in this fund. We've covered the rise and fall of major holding China Mobile (CHL) several times in the past. CHL's giant selloff has helped send FXI down 40% since its October 2007 peak.

Now, this fund is one to add to your watch list. It's one of the most liquid ways to trade China's biggest energy, telecommunications, banking, and construction firms... nicknamed "red chips" by investors.

It's still too early to jump in... We haven't seen an uptrend yet, and folks are still too optimistic on these shares. But this fund's recent drop has to perk a contrarian's interest – China and its neighbors are the slam-dunk growth story of the next 50 years.

Buying at peaks like the one we saw last year is a recipe for disaster. Buying near lows, when folks couldn't care less about the "China story," is the way to make big money off the trend. We're getting closer to that point.



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