Building Roads to Riches

From Standard & Poor's Equity Research

The distance that nations in emerging markets must travel on their journey toward "developed" status starts to shrink whenever ground is broken for the construction of infrastructure projects. Standard & Poor's believes this is a potentially lucrative opportunity for U.S. companies that supply and service governments and corporations in developing nations.

Investors may participate in this growth by taking positions in U.S. outfits that we have identified as those most likely to benefit from the construction of basic networks of roads, rails, ports, and airports that are badly needed in remote, yet growing, corners of the world. These include American Standard (ASD; S&P investment rank: 4 STARS, buy), Clarcor (CLC; 4 STARS), Ingersoll-Rand (IR; 5 STARS), Jacobs Engineering (JEC; 5 STARS), Manitowoc (MTW; 4 STARS), Pentair (PNR; 4 STARS), Shaw Group (SGR; 4 STARS), and URS (URS; 4 STARS).

In general, these are companies that we believe can better weather global economic ups and downs. "S&P believes U.S. multinationals in the industrial sector are benefiting from dramatic emerging-market infrastructure buildout, as developing markets like India, China, Brazil, Mexico, Russia, and Eastern Europe reinvest newly minted export income in new highways, airports, public transportation, power plants, electrical grids, environmental-treatment facilities, commercial office space, and residential developments," says Alec Young, equity market strategist at S&P.

WAYS TO PLAY.

  Young notes that this massive global construction effort requires equipment such as turbines, tractors, elevators, air conditioners, heating equipment, and industrial adhesives -- and all of them are largely being provided by leading U.S. multinationals.

For those who want a single-play on this sector, we think the Select Sector SPDR-Industrials exchange-traded fund (XLI) can be a good way to get exposure to all of these companies, as well as others. For a pure play in emerging markets, investors might consider iShares MSCI Emerging Markets ETF (EEM), which we believe could augment the relatively modest profits U.S. companies may generate in emerging markets.

The fastest-growing economies are likely to be those with the most dramatically inferior infrastructure, despite the fact that they're generally considered to have educated populations with the skills, professional expertise, and capacity to build hospitals, schools, homes, workplaces, and transportation networks.

INDIA'S NEEDS.

  Infrastructure -- either old or lacking in more remote areas -- has been an impediment for emerging markets. But we believe the investment by foreign companies has accelerated economic development exponentially. India, for example, recently opened its construction and engineering industry to foreign investment. The world's fastest-growing democracy needs a network of highways and transportation hubs to make it easier to move around the subcontinent, and foreign investment should help develop the infrastructure more quickly.

The Indian government says it's aware of the pressing need to enhance the country's infrastructure if its economic growth, which has been about 8% for the last several quarters, is to be sustained. Datamonitor, an industry research firm, says an estimated $10 billion is needed to upgrade India's airports over the next 10 years.

The government's plan to complete 13,000 kilometers of new roads before 2009 is estimated to cost more than $12 billion. And with other nations needing similar upgrades, U.S. outfits may be busy providing the tools for some time to come.