Martin Spring, in his OnTarget newsletter, examines where demand is likely to come from - and where profits could be made - as Asia's population graduates away from the countryside towards cities.
These eight themes in which you can invest to benefit from the growth of cities in Asia have been identified by the Swiss bank UBS:
Construction is a particularly important part of an economy in the early stages of development, before the economy becomes sufficiently urbanized and advanced for other parts to begin to grow more quickly. Construction of infrastructure and buildings will require lots of steel and cement, especially in "first stage" countries such as India, Vietnam and Cambodia.
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People need homes and related services. The relative growth rate in housing appears to be higher in countries in the early stages of urbanization. In India, for example, UBS estimates average annual real-estate construction will rise from 1.5 billion sq. ft in 1991-2001 to 3.4 billion in the 2008-11 period. This should drive 20% cumulative annual growth in India's real estate market -- 18-19% growth in residential, 55-60% in retail (shopping malls, etc) and 20-22% in commercial (primarily office space).
Urban populations need power to drive their machines and cool or warm their homes. Coal remains the fuel of choice for power generation in much of Asia -- especially China, India, Indonesia and Vietnam. It's generally one of the lower-cost options and is relatively plentiful. Construction costs for coal-fired plants are low. UBS forecasts thermal coal demand for the Asia-Pacific region (including Australia) at 4.6 billion tons in 2020, up from 1.8 billion in 2006.
Whereas the rural population, with much greater land area per person, can source its own water from rivers and rainfall, the urban population typically relies on either the government or private enterprise to provide it. There will also be focus on the quality of water supplied, which in many countries across the region is substantially below international standards.
Similarly, where the rural population can generally service its own sewerage requirements, the urban population requires service providers. As a consequence, during the early stages of urban development, investment in sewerage management is critical as populations grow strongly.
Communications and transportation
City-dwellers need to keep in contact with friends and family in rural areas and also have greater disposable income. Together, this increases the use of intercity roads and railway services, and expenditure on telecommunications products. The demand for intra-city road and railway networks also increases with increased urbanization. As cities grow, population migration to the suburbs begins, increasing demand for public transport services.
As disposable incomes rise, and with them home ownership levels, so does demand for microwaves and other white goods. So stage 2 economies that are rapidly urbanizing such as China and Indonesia already, and India from 2010, with large populations, strong economies and housing growth, are or soon will be attractive markets for household durable manufacturing and retailing.
In stage 2 of urbanization, industry owners have more profits that can be shared with workers to encourage migration to urban areas and jobs in manufacturing, incentives associated with urban work increase, and the population becomes wealthier. Penetration of home and car mortgages increases with the proportion of the population living in urban areas. New workers also typically have to open bank accounts to be paid. And a densely populated, urban population is far easier and less costly to service via branch and ATM networks than a dispersed, informal agricultural labour population.
From more than 200 listed companies with positive exposure to these themes, UBS has selected 20 as its "key picks":
In India its analysts favour ACC (BOM:500410), part of the largest cement manufacturing group; Grasim Industries (BOM:500300), part of the second biggest in cement; Steel Authority of India (BOM:500113), the No.1 producer; L&T (BOM:500510), the largest engineering and construction group; and Bharat Heavy Electrical (BOM:500103), a major player in the power equipment industry.
Elsewhere, UBS likes Perusahaan Gas Negara (JAK:PGAS), which has a near-monopoly in gas supply in Indonesia; Yanzhou Coal Mining (SHA:600188), producing 33 million tons a year from its six mines in China; PNOC Energy Development (PSE:EDC), in the Philippines, which is one of the world's largest geothermal energy producers; and Bio-Treat Technology (SIN:B22), which builds waste water treatment plants throughout China.
Also favoured are IVRCL Infrastructures & Projects (BOM:530773), which operates across India in drinking and industrial water supply, irrigation, desalination, sewage and waste management; PLUS Expressways (KUL:PLUS), one of the largest toll road operators in Asia; Astra International (JAK:ASII), with its leading position in Indonesia in auto and motorcycle manufacture; Bharti Airtel (BOM:532454), India's largest mobile phone operator; and China Mobile (HKG:0941), with its similar dominating position in China.
Other "key picks" are Gome Electrical Appliances (HKG:0493), the biggest consumer electronics retailer in China; Gree (SHE:000651), China's largest airconditioner manufacturer; Kasikorn Bank (BAK:KBANK) in Thailand, which focuses on the small/medium business and retail segments of the credit market; Bumiputra-Commerce (KUL:COMMERZ), a large and dynamic bank with strong franchises in Malaysia and Indonesia; Bank Central Asia (JAK:BBCA), Indonesia's second biggest; and ICICI (BOM:532174), India's largest private bank.
This article was written by Martin Spring in On Target, a private newsletter on global strategy
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