Infrastructure ??? The ???New Gold???

This is a small project I did in August2007, and I thought it still makes sense today, and thought why not publish it here with little modifications.

1) Jim Jubak mentioned in his article ???Infrastructure: The new gold??? dated 20Mar2007, that ?????????Increasing growth by building roads and other infrastructure projects has been a standard tool of governments at least since the days of the Qin emperor who started the Great Wall of China in the third century B.C. Spending on infrastructure creates jobs that lead to more economic demand that creates yet more jobs???..??? So it is essentially not a modern political or governmental function.

His idea to use infrastructure investment tools as a hedge as inflation, apart from the usual gold, which is more commonly known. Gold prices, however, due to speculative trades, has been going very much in line with the market cycle/ swings recently.

Jim Jubak is the Senior Markets Editor for MSN Money. Previously, he served as senior financial editor at Worth magazine and as editor of Venture magazine. Jubak was a Bagehot Business Journalism Fellow at Columbia University and has written two books: “The Worth Guide to Electronic Investing” and “In the Image of the Brain: Breaking the Barrier Between the Human Mind and Intelligent Machines.”

2) Then I came across an idea from Marco Consulting Group on breaking down the infrastructure theme into 4 major groups, explained here in this table:-

Infrastructure == > C.U.T.S (I re-phrased from their version “T.C.U.S” or something like that)

Source: The Marco Consulting Group



Now, we can zoom down to some SGX-listed stocks that may qualify under ???C.U.T.S???: -

C : Singtel (Owns or part-owns Thai???s AIS, Aussie???s Optus, India???s Bharti Group)

U : Hyflux, SPC, Oculus, SembCorp

T : Comfort Delgro, SBS, SMRT, Midas Holdings, China Toll Bridges, Yangzijiang, Cosco

S : Raffles Education, Econ Healthcare, ParkwayLife Reit

Infrastructure stocks: Macquarie International Infrastructure Fund, Cityspring Infrastructure, Babcock and Brown Structured Finance Fund

Mutual Funds

1) UOB United Asia Pacific Infrastructure Fund

2) First State Global Infrastructure

3) LionGlobal Asia Infrastructure Fund

4) PRU Asian Infrastructure Equity Fund SGD

5) SGAM India Infrastructure Fund S$

6) SGAM India Infrastructure Fund US$

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SWOT Analysis

Strengths

Why invest in Infrastructure?

- Jim Jubak???s idea of hedge against inflation. Example: UOB United Asia Pacific Infrastructure Fund???s benchmark is 6% absolute return.

- Smart money movement: Warren Buffett???s Berkshire Hathaway 2007 purchases in railway companies, such as Burlington Northern Santa Fe Corp and Fort Worth.

- Tax incentive (Singapore): introduced September2006 by the Monetary Authority of Singapore (MAS), which should help Singapore replicate its success with real estate investment trusts (Reits) in the field of business trusts. These include tax exemptions for investors on the interest income they earn from lending to qualifying infrastructure projects, or on interest earned overseas by infrastructure funds or other entities listed on the Singapore Exchange (SGX).

- Monopolistic - Many infrastructure projects have no competition. For example, there is typically only one toll bridge or electrical grid in a given region. When there is competition, it is usually limited by high barriers to entry.

- Long-lived assets/ projects: typically decades (examples: toll management, water treatment, bus/ train services-remember how bus/train fares increase?)

- Strengths of the Asian economies; See “Singapore: Your key to Asia profits”

Weakness

- Infrastructure Subject to general economic downturn and/or equity market consolidation.

- Interest rate = Cost of capital; Infrastructure equity usually under performs in a rising interest rate environment, due to the fact that facilities operators are only able to adjust their cost of capital only after a certain lock-in time-frame.

Opportunities

- In a Deutsche Bank publication,???.The European and US markets each represent some 4 to 5 trillion euro, which is around 25 to 35 per cent of the equity and bond markets??????.

- In Asia alone, the World Bank has estimated that infrastructure investments are set to exceed US$1 trillion over the next five years.

- In Asia, the largest four countries - Japan, China, South Korea and India - account for 85 per cent of the total regional economy and over 70 per cent of the total project value of all announced infrastructure projects.

- Countries to look at: Australia, China, India, Thailand, Malaysia, UK etc.

- Other themes to look at: Follow the major events- It is almost certain that it will benefit the infrastructure building or re-building sectors on the way leading to the events.

Examples: Olympics-organizer countries/cities, London (2012); Worldcup: 2010 Africa, 2014 South America (Latin Amercia/ Brazil/ BRIC funds)

Threats

- US sub-prime problems triggering a recession on a broad base.

- Inflation worries.

- High oil prices directly increasing cost of infrastructure projects.

- Governmental intervention, Environmentalists??? objection, market risk (interest rates).

- Lousy company management (if invest in equities directly)

- Lousy fund managers (if invest in funds or managed accounts).

Investing IDEAS:

- Use infrastructure as a thematic play, allocate not more than 10% of entire portfolio

- Drip in money

- D.I.Y portfolio:

i) 30% SGX-listed ???infrastructure- C.U.T.S??? stocks + 70% ???infrastructure??? funds.

ii) Stocks - sell/ reduce if equity prices >= **XX times target return within a year

iii) Funds - sell/ reduce if fund prices >= **XX times target return within a year

Benchmark indices

- S&P Global Infrastructure Index

- Macquarie Global Infrastructure Index