World Governments Are Pouring Trillions into This Industry
By Sean Goldsmith, editor, S&A Dividend Grabber
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 |
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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
Editor's note: Sean Goldsmith is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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