Investment spending in emerging markets is outpacing expenditures in developed economies for the first time, as a surge in infrastructure supports global growth and profits at companies from Siemens AG (SIE) to Caterpillar Inc. (CAT)
The “biggest investment boom of recent decades” will help boost expansion worldwide about 4 percent this year and next, compared with a long-run average of just below 3 percent, according to Michael Saunders, Citigroup Inc.’s chief European economist. International Monetary Fund data show investment will top 24 percent of global gross domestic product in 2012, the most in more than two decades, and then rise above 25 percent, the highest since records began 30 years ago.
Saunders calculates that developing nations will probably secure the largest share of it this year. That’s showing up in the bottom line of Siemens, Europe’s largest engineering company. The Munich-based business predicts profits will rise about 75 percent to at least 7.5 billion euros ($10.6 billion) in the year ending Sept. 30.
“The growth momentum from the emerging economies is fully intact,” Peter Loescher, Siemens chief executive officer, told Bloomberg Television’s “On The Move” with Francine Lacqua on May 4. “We have refocused the company on a broad-based infrastructure portfolio, on sustainability solutions, and we see the need for it all around the world.”
Caterpillar, the world’s biggest manufacturer of construction equipment, last month lifted its full-year earnings forecast to between $6.25 and $6.75 a share from “near” $6 amid higher demand from emerging markets.
Emerging Market Demand
Investors can take advantage of the “megatrend” for infrastructure expenditure by buying the stocks of building- material suppliers China National Building Material Company Ltd. and France’s Cie. de Saint-Gobain SA, said Giles Keating, Zurich-based global head of research for private banking and asset management at Credit Suisse Group AG, which manages the equivalent of about $1.5 trillion.
Credit Suisse’s emerging-market infrastructure index advanced 36 percent between the start of 2010 and the end of last month, compared with a 19 percent rise in the MSCI World (MXWO) Index of developed nation equities.
Demand for copper, steel and other commodities used in construction also may “provide a floor” beneath raw-material prices, said Bob Baur, chief global economist at Des Moines- based Principal Global Investors, which oversees about $235 billion. The Standard & Poor’s GSCI Index of 24 commodities has fallen by about 10 percent this month.
Phoenix-based Freeport-McMoRan Copper & Gold Inc. (FCX), the world’s largest publicly traded copper producer, said April 5 it is confident the need for Chinese cooper will continue to grow even if the country’s economy slows.
Global fixed investment will reach $23.2 trillion by 2016, an increase of 61 percent from last year, according to Saunders’ calculations based on IMF data, as urbanization prompts developing countries including China and India to plow cash into roads, power stations and water systems.
Foreign direct investment in China climbed 15 percent to $8.5 billion in April as companies including Starbucks Corp. (SBUX) and Walt Disney Co. (DIS) expanded, the Ministry of Commerce said yesterday. Builders broke ground for a $4.4-billion Shanghai Disney Resort on April 8, the company’s first theme park in mainland China.
The number of people in cities worldwide will grow by 1.5 billion in the next two decades, according to the research division of McKinsey & Co, a consulting firm. Outlays on railways and other basic structures may rise to $3.7 trillion in 2030 from $1.6 trillion in 2008 as spending on residential real estate more than doubles to $4.9 trillion.
Another New York
Richard Dobbs, a Seoul-based director at the McKinsey Global Institute, reckons China, the world’s No. 2 economy, would need to add residential and commercial floor space equivalent to building New York City every two years, to keep pace with population growth. India would need to add the footprint of Chicago each year.
China also will lengthen its rail network to 120,000 kilometers (75,000 miles) from 86,000 by 2015, and its roadway capacity will surpass that of the U.S. within five years, from 70 percent of the size today, Morgan Stanley analysts project.
The country’s urbanization ratio is rising toward the level of developed nations, to 63 percent longer-term from 47 percent now, the analysts said in an October study.
The investment required to meet such needs is helping companies around the world, providing a buffer against weakness elsewhere in the global economy. U.S. expansion decelerated to 1.8 percent in the first quarter of this year after a 3.1 percent increase in the previous quarter.
“We don’t see the demand in the U.S. being near as strong as the opportunities that we have elsewhere, particularly the Asia-Pacific region,” David Rosenthal, vice president of Exxon Mobil Corp. (XOM), said on an April 28 conference call.
Siemens said May 4 that orders from emerging markets totaled $7.48 billion euros in the quarter ending March 31, an increase of 52 percent. Zurich-based ABB Ltd. (ABBN), the world’s largest maker of power-transmission gear, identified “positive signs” of recovery in its infrastructure-related businesses when it said April 27 that first-quarter profit rose 41 percent.
In the U.S., Deere & Co. (DE), the world’s biggest maker of farm equipment, said April 27 it plans to spend $100 million to expand manufacturing in India, where it expects an increase in mechanization. Caterpillar says it aims to deliver earnings of $8 to $10 a share in 2012 as demand for excavators, trucks and wheel loaders increases with construction of roads and buildings in China, India and Brazil.
“Companies like Caterpillar and Deere are going to benefit continually from the infrastructure build,” said Nick Calamos, who helps to manage $39.1 billion in assets as co-chief investment officer at Naperville, Illinois-based Calamos Asset Management Inc. The companies “are in a great position,” he told Bloomberg Television’s ‘Street Smart’ on May 3.
Not every country will benefit, said Saunders at Citigroup in London. While Germany and Sweden should gain from greater demand for their products, Greece, Spain and the U.K. may not do as well, even as they need higher exports to offset fiscal austerity. The reason is that they have less trade with the countries that are driving spending, he said.
The investment boom may end up raising borrowing costs by reducing the amount of capital, said Nobel laureate Michael Spence, an adviser to Newport Beach, California-based Pacific Investment Management Co., which runs the world’s largest bond fund. Real U.S. interest rates are currently about 150 basis points below their 3.3 percent average of recent decades, McKinsey estimates.
Awash With Money
“It’s reasonable to expect a fairly sharp rise in interest rates in the relatively near future,” Spence said. “Investment’s going to go back up to at or near post-World War II levels.”
The chase for capital still may take time to trigger higher borrowing costs because “the world is awash with money,” said Axel Merk, president of Merk Investments LLC in Palo Alto, California. The 10-year Treasury yield has fallen to 3.11 percent from 3.61 percent at the start of this quarter on signs of a U.S. slowdown and continued purchases by the Federal Reserve of $600 billion in government debt.
The next stage may be for emerging nations to accelerate their investment abroad as they look to reinvest their newfound riches. The United Nations last month reported that developing and transition economies accounted for 28 percent of such spending flowing elsewhere in 2010, up from 15 percent in 2007.
China will invest more than $1 trillion abroad by 2020, according to estimates in a report published this month by the Asia Society and Woodrow Wilson Center for International Scholars.
“There’s a new reality out there that the growth economies are the emerging markets and that they need infrastructure investment,” said Richard Threlfall, head of infrastructure, building and construction at KPMG LLP in London. “It creates an opportunity for countries to invest in those markets, but it also creates the opportunity for China, India and others to invest elsewhere.”