I would guess that Caterpillar would be an "Infrastructure" play but I don't think too many investors agree with the author.
Posted on 01/27/2009 6:01:19 PM PST by Libloather
How investors can cash in on economic stimulus
Levi Folk, Financial Post
Published: Monday, January 26, 2009
As the global economic downturn sinks in, bipartisan politics is taking a backseat to broad support for Keynesian style fiscal stimulus and infrastructure projects in particular are getting a major boost because they are quickly implemented and lead to immediate job creation.
Monday, the Conservative government unveiled the $7-billion in infrastructure spending, to take place over the next two years.
Share prices of publicly listed companies in the infrastructure space are reacting to this near term investment opportunity, this against a backdrop of long term spending given the infrastructure deficit in the developing world and a trend of population urbanization in India and China.
Infrastructure is the backbone of the global economy. It includes pipelines and electricity transmission and distribution in the energy sector; transportation such as airports, ports and toll roads; communications; and water and waste treatment.
Over the next two years, US$650-billion in additional infrastructure spending will occur according to a recent report by CIBC World Markets. That number looks high: the authors of the report assume that China will spend roughly 80% of an announced US$600-billion stimulus package on infrastructure alone. Details of China's stimulus package are murky, but authorities in China have backed off their initial announcement, and they have since redirected a chunk of this money toward projects that could stimulate consumer spending.
Long term, there is an US$25-trillion "infrastructure gap" over the next 25 years that needs to be closed, says Kim Redding, CEO of Brookfield Redding in Chicago, a subsidiary of Brookfield Asset Management.
Investment in infrastructure tends to be less volatile because projects tend to have stable cash flows, high capital costs and therefore high barriers to entry. Share price performance of publicly listed companies in the infrastructure space does not necessarily reflect the conservative nature of these assets and many are down considerably in sympathy with the broader markets.
Average earnings growth for the universe of infrastructure projects is not highly volatile, rising maybe 2% to 3% a year according to Redding. Yet prices are down so valuations are better.
"Assets are cheap particularly in the public market," says Redding.
Credit markets have been largely closed to high-risk credit deals since last year. In contrast many low risk infrastructure projects continue to be funded. 407 ETR International and Enbridge Inc. both raised $500-million debt offerings recently, says Craig Noble, analyst with Brookfield Redding. Lenders are funding these projects because the income of toll roads and pipelines are stable and the assets are long-lived.
Investors may want to consider buying into these investment grade credits in the near term. Spreads have widened recently so the added risk of default over government bonds is being compensated for in contrast to razor thin yield premiums that were the case in recent years.
Another option is to own bonds issued by Brookfield Asset Management, one of the biggest private investors in the infrastructure space.
The company owns a portfolio of infrastructure assets worth roughly US$90-billion in North and South America. It is one of the biggest owners of electricity assets in Ontario, Brazil, and Chile, a major owner of Timber assets in North America, and has.a 17% stake in Transelec which accounts for 98% of the electricity generation in Chile.
Brookfield asset management is a strong cash generator producing roughly US$1.5-billion in annual cash flow; it has debt as a ratio of market capitalization below 50%; investment grade bonds; and almost US$4-billion in cash and other liquid assets.
Finally, Brookfield Redding is the sub-advisor to AIC Global Infrastructure Fund. The company focuses extensively on value principles when evaluating prospective investments whereby securities are valued based on discounted cash flow, earnings, net enterprise value (to account for debt) and yield metrics. Top ten holding American Power supplies cellular towers to telecom companies around the world that are building out third generation wireless networks.
Private/public partnerships in infrastructure projects are increasingly commonplace given the lack of funding for many of these projects by the public sector alone. This is equally true in the U.S. as it is in India. The opportunity is long-term in nature, and after a rough year for equity and bond investors across this asset class the smoke is lifting and the entry point is looking increasingly clear.
How about IYM as a materials’ ETF?
Investors should be saying HELL NO.
I would guess that Caterpillar would be an "Infrastructure" play but I don't think too many investors agree with the author.
With a touch of WTF?
Ewwwww. Enviro-nuts are now in favor of building ROADS? Sweet irony...
Today’s paper said Cat is laying off 20,000 people!!
That’s the way to gear up for the huge infrastructure projects coming down the pike, huh?
Investors AND management alike don’t buy the Obambi crap.
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