Global infrastructure mammoth opportunity done with electricity tattoo book

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Infrastructure companies are seen as good long-term bets, though many of them have run up mountains of debt and are facing existential pangs. However, the opportunities offered by infrastructure development and finance are pretty huge, as also the equity investment in them. By McKinsey estimates, the world’s infrastructure stock is valued at USD 50 trillion.

In an exhaustive report titled, ‘Build It And They Will Come–Global Public Infrastructure Primer,’ Felix Tran and Beijia Ma, equity strategists at BofAML, says the current state of infrastructure is hugely inadequate globally, with $97 trillion of infrastructure spending required by 2040, but will leave an investment gap of USD 18 trillion, with China accounting for $1.9 trillion of this gap and the USD 3.8tn.

In India, roads, highways and railways are the fastest-growing infrastructure segments. “Our India Industrials Team estimates that the infrastructure segments with the highest growth potential from 2017-19 are roads/highways, railways, defence, power generation & transmission. Power transmission, roads and renewables (mostly solar), which constitute 28 per cent of the order inflow, remain the only bright spots in terms of both ordering and execution, and are likely to lead the capex revival,” the equity strategists said.

In fact, the construction sector is one of the largest in the world accounting for about 13 per cent of global GDP, or $10tn spent on construction-related goods and services today. McKinsey says the sector would continue to grow strongly at 3.6 per cent per year to an estimated $14tn by 2025.

Looking further ahead to 2030, the global construction market is set to grow to $17.5tn at a compound annual growth rate (CAGR) of 3.9 per cent. Construction will account for 14.7 per cent of global GDP by 2030 and cumulative construction volumes will reach $212tn over 2014-30, with $77.8tn in emerging Asia alone, going by Oxford Economics and Global Construction Perspectives.

In construction spending, McKinsey says the real estate sector accounts for 62 per cent of spending, followed by civil infrastructure—transportation, pow-er, water, and telecoms—at 25 per cent and industrial construction, including mining, at 13 per cent.

The 11 Indian companies that are in the global list of companies that have exposure to public infrastructure-related solutions under the BofAML Global Public Infrastructure Stock Universe are Larsen & Toubro, NBCC, Dilip Buildcon and Gujarat Pipavav in the public-private partnership/construction segment and Indiabulls Housing Finance, HDFC, LIC Housing Finance, Oberoi Realty, Prestige Estates, Godrej Properties and DLF in the affordable housing segment. All these have been given a Buy rating by BofAML.

The report says, “Although it is difficult to accurately gauge the link between such exposure and share price performance (as many factors outside the scope of this analysis are likely to play a role in short- and long-term price development), we still consider public infrastructure solutions exposure as an important and positive point to track given that public infrastructure is a global "Transforming World" theme with a long lifespan.”

Pointing to the emerging opportunities, the report says many notable developed markets and emerging markets are lagging behind in infrastructure ranking. Switzerland ranks globally as best in overall infrastructure and Mauritania the worst. Other notable rankings include: Singapore (No. 2), Japan (6), the US (10), Germany (12), the UK (27), Saudi Arabia (30), Australia (39), India (46), China (47), Russia (74), Brazil (108), and Nigeria (131). It may be noted that India’s infrastructure ranking is a notch above China and far above its other BRICS peers Russia and Brazil.

The report says most of the global infrastructure investment gap is in the road and electricity sectors. A $8tn infrastructure investment gap is in roads alone represents more than half the total global infrastructure investment gap. The majority of that gap is in emerging markets.

Pointing the infrastructure sectors capacity to attract equity investment, the report says of the $106tn of institutional capital available, only 1.6 per cent is directed towards infrastructure. The investors with the greatest amount of assets under management (AUM) are banks ($40.2tn), investment companies ($29tn) and insurance companies and private pensions ($26.5tn).

The report said that “There is no shortage of private capital but the key is to mobilise this into effective infrastructure investments. Appetite for infrastructure is increasing. In a 2017 poll of 186 institutional investors, 90 per cent planned to increase their investment allocation to this space vs. 65 per cent in 2016, implying a 25 per cent year-on-year increase. With the global AUM of pension, life insurance and sovereign wealth funds expected to grow 5 per cent per annum and reach $106tn by 2030 (more than doubling from $52tn in 2015), we believe the infrastructure asset class is likely to capture a growing share of this.”

According to IPE Real Estate Research, the world’s top 100 ranked largest infrastructure investors—across pension funds, sovereign wealth funds, insurers and other institutional capital owners–have more than $360bn in infrastructure assets, as of October 2017. They include Abu Dhabi Investment Authority (ADIA), Canada Pension Plan Investment Board (CPPIB), APG, Legal & General, PGGM, Allianz, Aviva, and AXA.