HE end of the 19th century, British investors were funding railways throughout India and across South America, telephone cables underneath the Atlantic and gold mines in the South African Transvaal. In the first great age of globalisation, the most important thing was to build infrastructure, only after which could trade follow.
That is as much the case now as it was a century ago. Countries from across the developing world offer huge potential for consumer led growth, but if they are to get it, they will all need unprecedented investment in infrastructure. In China, the state has been able to draw on remarkable levels of public saving, but other countries are not so well endowed. Is it about time for fund managers to help out?
The arguments certainly look convincing. As Phillip Poole, head of investment strategy at HSBC, argues, India, Russia and Indonesia have experienced rapid growth recently, but all three will require immense infrastructure overhauls if they are to maintain their growth.
Poole thinks Indonesia will prove to be a good choice for investors: “Indonesia is growing rapidly, but there’s not that much investment – the Asian crisis stopped it and it never really came back”. He argues that thanks to strong demographics, a reasonable natural resource endowment and more reliable politicians, Indonesia should be well placed to grow strongly over the next decade – but only if it can construct the necessary transport links, power plants and so forth.
It is a similar story in Russia. Matthias Siller, the investment manager of Barings’ Russia fund, believes that investments in Russian infrastructure will do very well over the next decade. He says that though the Kremlin has been hostile to foreign investors in the past, because it needs to attract investment and expertise to develop Russia’s vast natural resources, it ought to be more cooperative with foreign investors in the future.
Siller points out that “Russians earn more in real terms now than they ever have before, but they still don’t have many things we take for granted”. As Russians demand better healthcare and houses and more consumer goods, the country will need people to build hospitals, roads and ports to get them there. He also argues that the recently awarded World Cup may help investors, because the Kremlin will be determined to look good in 2018.
Another World Cup host, Brazil, might do even better, however. Alex Gorra, head of international platform at Bank of New York Mellon ARX (the group’s Brazilian asset manager), thinks that Latin America has several advantages over other emerging economies.
“Brazilian infrastructure has been virtually ignored since the 1970s, mostly because of high interest rates” he says. “Everyone put their money into government bonds.” Thanks to recent reforms, rates have fallen and investor sentiment is finally moving into infrastructure.
Moreover, unlike in many more authoritarian Asian economies, “in Latin America, it is the private sector running things, so projects tend to be more profitable”. Gorra points out that investors in Brazil or Mexico can easily put money into sectors like road building, railways and port operators, which tend to be more government dominated elsewhere.
And those are exactly the sorts of sectors that large Western investors should be interested in, Much has been made of the potential demand of the developing world’s middle classes for glitzy consumer goods, but those consumers are also going to need roads, railways, hospitals, warehouses and all manner of other infrastructure. That was so in the 19th century, when British investors first started building railways. It is still so now.