As developing economies continue to strengthen, emerging market investors are increasingly looking for stocks that can profit from domestic demand rather than export-orientated plays. A key focus is spending on infrastructure, which, along with consumer spending, is "the best secular theme" in emerging markets, says Michael Hartnett of Merrill Lynch. Julian Pendock of Bedlam Asset Management says that infrastructure spending in southeast Asia is creating the employment opportunities that will underpin "sustainable consumer spending for decades".
Greater spending on emerging states' infrastructure is long overdue. The UN forecasts that the urban population will expand by about one million people per week in the next 25 years, putting greater strain on basic services in cities. At present, the electricity network in Latin America, for instance, covers just 89% of the overall population, and in Buenos Aires water and electricity services are so stretched that a moratorium on building permits has been imposed. All in all, the World Bank estimates that emerging economies need to double spending on infrastructure merely to keep up with economic growth, says Merrill Lynch. And now that emerging economies have plenty of cash (a collective current-account surplus of $700bn and $3trn of foreign exchange reserves), they are finally in a position to boost infrastructure spending. Merrill now estimates that spending in emerging markets will exceed $1trn in the next three years, with China, Russia and the Gulf accounting for 36%, 16% and 13% of the sum respectively. China will be concentrating on public transport and energy projects, and water and sewerage, while the Gulf's boom centres on the construction sector and oil and gas.
The companies highlighted by Merrill Lynch that are likely to benefit are Mexico's Cemex (NYSE:CX, $33), the world's third-largest cement maker; Egypt's builder and enginer Orascom Construction (LSE:ORSD, $94); and South Africa's Barloworld (LSE: BWO, ZAR17,065), an industrial equipment manufacturer. China Merchants (HKSE: 0144, HKD29), which operates container and cargo terminals, and Shanghai Electric (HKSE:2727, HKD3.40), which makes electrical power equipment, are also worth a look, while the world's biggest oil services group, Schlumberger (NYSE: SLB, $58) and Vallourec (Euronext: VK, e205), a global supplier of steel pipes, represent developed market plays on the theme.
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