Emerging Market Infrastructure Needs Highlight Global Opportunities

The winner of Brazil’s presidential election, shortly headed into a second round between current president Dilma Rousseff and her opponent, Aécio Neves, will have much to do to kick-start the country’s sagging economy. And addressing Brazil’s infrastructure lacuna will be a major part of that mandate.

It’s no secret that among emerging market nations, Brazil has been a laggard when it comes to infrastructure spending and that’s been a big disappointment to investors. Brazil is in dire need of roads, ports, and you-name-it, said Aaron Visse, portfolio manager of the Forward Global Infrastructure Fund, “but infrastructure hasn’t been a particularly strong part of Dilma’s track record. Brazil spends only 1.5% of its GDP on infrastructure compared to the global average of 3.8%.”

Should things change in a new administration – and that would include a better framework and terms for private sector participation in infrastructure projects – then Brazil would throw up some exciting opportunities for investors, given the huge potential it offers.

Overall, though, the development of global infrastructure, both in emerging markets and in the developed world makes for an interesting sector to invest in. Here are three reasons why.

Continued Global Growth

In the emerging markets, there’s only one trend: Urbanization, and that means that infrastructure has to keep pace, Visse said. As incomes continue to rise in many countries, more people will buy cars and roads will be more trafficked, which means new ones must be built.

In the West, many countries need to rebuild waning infrastructure. It’s clear, though, that federal tax budgets are very strained and private sector funds will be needed for new builds and to improve existing infrastructure, said Wilson Magee, Director of Franklin Global Real Estate and Infrastructure Securities team and portfolio manager of Franklin Real Asset Advisors.

Case in point: Last week, the British government modified the funding for a £16 billion power plant in Somerset in order to reduce the burden on tax payers.

“In developed markets, we are going to see the private sector play a far greater role in funding roads, power plants, telecom,” Magee said. “In developing markets, water and waste water investment will be critical. Water related companies are a relatively small part of our listed infrastructure universe, but we expect that it will become much more significant going forward. In Europe, we’re in the early stages of transforming power generation away from coal and Germany in particular needs to do that in a dramatic fashion because they’re closing their nuclear power plants. In China, too, there’s no question that they will have to gradually move away from coal and incorporate cleaner energy sources for power generation.”

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