The next big investment theme – high speed rail

To the average British rail commuter, the notion of sleek, efficient, high speed trains seems laughable. Just finding a train that can get you from point A to point B at somewhere near the promised time is an achievement. Doing it without bankrupting yourself is another thing altogether.

High-speed rail links are a dream that’s been promised to the British commuter by various governments for years. Yet it never seems to come true.

But the outlook for commuters elsewhere in the world is far more promising. While you were slogging your way in and out of work yesterday, China was unveiling the fastest train line in the world.

And this isn’t some bold but ultimately doomed ‘prestige’ project like Concorde. It’s merely the latest addition to an already extensive network of high-speed rail links.

Indeed, I reckon high speed rail could be one of the most important investment themes of the next few years. Here’s why.

The world’s fastest train runs between Shanghai Pudong International Airport and the city outskirts. As it glides along the track, LED screens in the carriages show the speed tick up to as much as 431km an hour (that’s 268 miles per hour). A return journey costs £7.50. That’s less than the price of a peak-time London Underground ticket.

By contrast, one of Britain’s high-speed trains, the Virgin Pendolino, travels from Birmingham to London at about 200km an hour (or 125 miles an hour).

When it comes to high speed rail, China is thinking big. By 2020, all major cities in China will be connected by trains that run at 350km an hour. Beijing is investing $300 billion upfront. The World Bank described the project as “the biggest single planned program of passenger-rail investment there has ever been in one country”.

The rest of the world is now playing catch up. Billions of dollars are being poured into high speed rail – and just a handful of companies are equipped to scoop it up.

How China took the lead in high speed rail

The Shanghai train is a ‘Maglev’, short for ‘magnetic levitation’. It actually floats just above the track. Magnets propel it forward silently and the lack of friction allows it to reach phenomenal speeds.

Ironically, the world’s first commercial Maglev ran from Birmingham International to Birmingham airport back in 1984. But the UK let the technology slip through its fingers. The route was dismantled in 1995 and replaced by a bus.

Special FREE report from MoneyWeek magazine: Don’t be fooled – house prices will fall again!

  • Why UK property prices are set to collapse by 30%
  • When it will be time to get back in and buy up dirt cheap property

Meanwhile, Beijing has eagerly sucked up all the cutting-edge rail technology it can find. When it announced its plans back in 2004, the companies that came forward to bid for the biggest rail contracts in history were a who’s who of rail technology: Bombardier (Canada), Siemens (Germany), Alstom (France) and Kawasaki Heavy Industries (Japan).

In the competition for contracts, the companies agreed to onerous terms and conditions. Production had to occur in China, and they had to agree to ‘technology transfers’, effectively helping to set up their own cheap Chinese competitors. Beijing has a word for this acquisitive process: ‘digesting’.

Six years later, high speed rail companies are now having to compete with the Chinese rivals they created. Two Chinese manufacturers, CSR and CNR, are already among the world’s top four train makers, as the chart below shows.

These companies are now snapping at each other’s heels to land contracts world wide. We’re about to see the biggest expansion of rail since the days of the Wild West. Billions of dollars are being pumped into high-speed rail projects worldwide, from Bologna, to Argentina, to California. It could be one of the most lucrative investment themes of the decade.

Why are governments so taken with high speed rail?

First off, there’s the ‘green’ vote – ‘greenhouse gas’ emissions can be up to 90% lower than flying. It makes economic sense too – better transport links mean a more mobile, productive workforce, which makes life cheaper for companies. And rail schemes are also big employers. The Beijing-Shanghai link alone employs 110,000 workers.

In the US, $8bn of stimulus funds has been set aside for high speed rail projects. A $2.7bn project in Florida is set to open in 2015, and a Los Angeles-to-San Francisco link costing upwards of $40bn should open in 2020. And on Tuesday 28 September, Amtrak unveiled a $117bn, 30-year vision for a high speed rail line linking the entire East Coast.

Political grandstanding by the Republicans may cause problems for some of these projects. But the US is just one of many countries looking at high-speed rail. Here in Britain, construction on a line linking London to the cities of Birmingham, Manchester and Leeds is due to start in 2015. And projects are also underway in Spain, Italy, South Korea and India.

So how can you get in on the action?

In terms of rolling stock, the major international high speed rail manufacturers should all continue to do very nicely. Companies to investigate further in the sector include Bombardier, Kawasaki Heavy Industries, Siemens and KTX-Sancheon.

As for signalling, the UK’s Invensys is up there with the best, as is France’s Thales. Meanwhile other large Chinese rail businesses are China High Speed Transmission Equipment Group, China Railway Construction and China Railway Group.

Editor’s note: Paul will be keeping a close eye on this sector, along with other major investment themes, in his newsletter, Precision Guided Investments.

Our recommended article for today

Where to take shelter from quantitative easing

Western governments are about to set out on another bout of money-printing. So what can you do to protect your wealth? Bengt Saelensminde looks at one sector that could provide you with a safe harbour.

  • Bubu

    What about Midas of Singapore?

  • Daniel Victor

    Sorry to sound gloomy,but Crossrail has already been thrown into question by the deficit problem.The future of projects further down the line must also be doubtful.The Government would of course prefer to avoid any more bad news right now – but by 2015 the problem may be even worse.The absolute size of the National Debt is still rising – the recently announced cuts will only slow the rate of creation of further debt.

  • Michael

    You almost said it yourself in your first paragraph, why not invest in the existing network to perfect it before creating
    a high-speed network. Also China probably has a bit more space
    to be able to create a high-speed network.

  • tudorg3

    I thought this was a brilliant article but, where did the Uk go wrong? we used to export rail all over the world how did we lose so much? is it unions protectionism? maybe gov’t lack of a long view? whatever, its a bit late now & how come we are sending £m’s to China for some reason? and they are showing us the way, the UK does not even feature in the list of rail companies involved. I would love to see a massive people protest against -(for 1) our membership of the EU.That would save us over £20m/day.

  • Ali

    You mention the US has set aside 8 billion. This does not buy much in terms on high speed rail. This is more just a political gesture!

  • Stephan

    @5 – exactly. Didn’t Beijing set aside $300billion? And that’s just upfront investment.

    @4 – We went wrong with our ludicrous mismanagement of the existing rail network, the creation of Network Rail, dodgy franchise arrangements which have demonstrated an incredibly poor return for taxpayers, while lining the pockets of FirstGroup, Virgin, et al. I could go on. Decent rail infrastructure in Britain is unobtainable – at least for the next 10-15 years.

  • Jon, London

    …i second 3. Michaels’s comments: HSR in the UK is political grandstanding of the highest order.

    Utterly irrelevant in this small island where due to acceleration and deceleration to/from HS only makes sense for the longer trips – to the detriment of Normal SR which is muscled out of the way. And for what reason ? To shave 20 minutes off the Birmingham to London direct journey ?

    Pah ! Why not “AlmostHSR” ?

  • John Jefkins

    Upgrading existing lines costs far more than the equivalent new line (compare the WCML upgrade costs with HS1) and still would not get the speed difference necessary to win the new markets from air travellers.
    CrossRail IS being built (as confirmed last week), despite not being as profitable as High Speed Rail. 200mph rail DOES typically pay back its construction costs – providing you win a new air market. For Britain, that means doing enough to win the Scottish Air market – ie getting London-Preston at 200mph and averaging 120mph for the rest of the way to Carstairs would be enough to get London-Edinburgh and London-Glasgow to 2.5hrs and thus win 80% of the 10million/yr air market.

  • Jeff

    Our railways went wrong when they were nationalised in the 1940s.

    Our rail network was built by the private sector and we had the fastest trains in the world in the 1930s.
    Nationalisation followed in the 1940s and within little over a decade, the government was shutting large parts of the network.

  • John Jefkins

    Don’t worry – it is being nationalised again now by stealth!

    D Bahn (the German national railways) is buying up more and more of British Rail (EWS, Arriva etc).

    Our railways were one of the only growth industries during the recession – and show every sign of being very successful in the future.
    Our competitors (France,Spain, Holland,Italy, Germany etc) all have thousands of km of brand new 200mph lines. It is high time we got our new line to Scotland built – and wired up Heathrow to HS1. We need it to compete these days.

  • Velocity

    Dream on Paul Hill.

    High speed trains, like trains and green energy, are a Gov’t subsidised (taxpayer propped up ) jokes.

    It’s no surprise Gov’t runs railways, politicians love playing with their train-sets worldwide, because these ghastly uneconomic dinosaurs would never pay their way in the private sector.

    In Britain alone over £1 in every £8 thieved off motorists props up trains and their freeloading user base. Without cross-subsidy trains would be toast.

    So wether it’s trains, green energy, healthcare or any other sham run Gov’t system, taxpayers and investors should steer clear of these bankrupt industries because as Gov’ts start to run out of (our) money, these propped-up old dinosaurs will become extinct.

    Don’t touch trains with a barge pole. You’ve got to be an idiot (ie. a politician) to think these have any future

  • Jim

    I found the paragraph “In the competition for contracts, the companies agreed to onerous terms and conditions. Production had to occur in China, and they had to agree to ‘technology transfers’, effectively helping to set up their own cheap Chinese competitors. Beijing has a word for this acquisitive process: ‘digesting’. “, very amusing.

    For a country that was waving the little red book of “chairman Maos thoughts” a few years ago, they certainly caught on to the capitalist system.

    I sometimes hear about a capitalist gene that certain ethnic groups are supposed to have. It makes me wonder when compared to how Russia is progressing along with other european nations.

  • D.W. Major

    Hypersonic High Speed Rail

    In today’s world where time means money it is wasted mostly traveling in obsolete ways.
    Getting around is mostly a waiting game.
    So what if you can save all this money by traveling from City to City as fast or faster then an airplane?
    Wouldn’t we all be happier and save a lot of time and effectively money?
    That is where the Air Stream Train comes in.
    It offers just that, fast clean and safe transportation for a new Generation.
    A Generation of Transportation that offers more for less.
    Faster Safer Cheaper Cleaner Silent Simpler Better then anything else.
    I encourage Investors to put there money behind this Technology which inevitably will change the world.
    And it is good business too.
    For the future is Zero Emission Technology and Hypersonic Rail.

    D.W. Major