The preference of the rising middle class, which the broker dubs "Gen A," for life in the big city will require big investments in infrastructure
Macquarie is launching an emerging markets infrastructure and development index that capitalises on rapid urbanisation in Asia and Africa. It is a timely move. This year, the world's urban population will equal the rural population for the first time, driven by a growing middle class—a group of people that Macquarie is calling Generation A.
A is for aspiration. These are people, says Macquarie, with an annual income of $3,000 to $5,000, who have moved to a larger city and for the first time own things such as mobile phones and fridges, and are considering buying their first car and taking their first holiday. They plan to send their kids to university and want better healthcare and financial services.
Their effect is already being felt in rising food and commodity prices—as well as in a rash of investment products targeting these sectors. But Macquarie, the largest owner of privately held infrastructure in the world, comes at this transformational phenomenon from a slightly different perspective.
Stewart Ferns, an equity strategist at Macquarie Research Equities, says that these rapidly growing, newly urban populations will place a huge burden on basics such as water, sanitation and electricity generation. As these people start to own cars, they will demand more and better roads, and as they start to own phones and computers, they will want improved telecommunications networks.
In China alone, mass urbanisation is expected to result in more than 200 cities with populations of more than 1 million by 2025. In Europe there are 35 such cities.
Generation A's preference for life in the big city will fuel significant investment in infrastructure. During the next two years, China and India combined are expected to invest more than the US in roads, railways, utilities and buildings—a total of $2.2 trillion.
Macquarie's new index is set up to provide transparent exposure to emerging market infrastructure. It is calculated by the FTSE group and tracks the 50 biggest pure emerging markets infrastructure-related companies in 15 countries.
During the past three years, ending April, the index has earned an annualised return of 36.5% in dollar terms, which is more or less on a par with the rival Standard & Poor's index, though Macquarie argues that its index provides a purer exposure to emerging markets than the S&P index, which includes developed market infrastructure companies that are active in the emerging markets.
As a sector, infrastructure tends to be less volatile than broader emerging markets investments—50-day volatility on the index is currently around 15, compared to 22 on the MSCI Emerging Markets Index Fund.
Macquarie launched its original family of infrastructure indices in 2005 and says the development of a focused emerging markets index was a natural response to client demand. "It reflects the evolution of how institutions are looking at infrastructure," says Nick Thompson, head of non-flow structured product sales for Macquarie Equities. "They are becoming more surgical, they want to differentiate their investments within the emerging markets."