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Powershares Emerging Market
Infrastructure (PXR)
Overview and Rationale:
With a global slowdown crashing down upon us, this may not seem to be the best time to invest in infrastructure or emerging markets but I believe this sector will lead the recovery. This investment theme is tied to two unmistakable trends: the urbanization and infrastructure gap in emerging nations.
In 1975 there were only three cities in the world of over 10 million. In 2008, there are 20 cities of which 15 are in emerging markets. China alone has over 100 cities with a population exceeding 1 million. Along with this urbanization has come stronger economic growth and expanded international trade.
This means that unless these countries build more airports, roads, railways, seaports, and pipelines, they will literally choke on their growth. Morgan Stanley predicts that $22 trillion will be spent on these projects over the next decade. This also include communications infrastructure like mobile telecommunications and cable providers.
Here are some interesting facts that highlight the infrastructure opportunity.
- Only 5% of Brazil’s roads are paved
- Canada recently launched a $33 billion infrastructure plan
- China is planning to build 97 regional airports by 2020
- The top 20 container terminals have seen growth of 42% during the past three years
- Mumbai has an astounding 18,424 people per square mile (New York has 1,274)
- South Africa is 4th fastest mobile phone market in the world
- Mexico City will soon pass a population of 20 million
- China is spending 10% of its GDP on infrastructure a year
For the index that PXR tracks, about 9% of the firms are U.S. based, 4% from Canada, plus 10% from France and Switzerland. The country weightings still tilt towards emerging countries with China at 15%, Russia, 11.4%, Brazil, 10.9% and India at 5.6%. The BRIC countries comprise 43% with South Africa adding 8.4%.
So PXR is a balanced hybrid with a developed and emerging and emerging market engine. The sector breakdown is right down the middle: 50% materials, 48% industrials and 2% utilities. The materials sector includes a fair amount of mining stocks and companies like Taiwan Cement. The industrial companies in the fund include giant engineers such as ABB and equipment makers like Caterpillar.
There are currently 66 companies in this index with none greater than 5%. PowerShares uses a modified market-cap weighted methodology to select its 57 holdings. Index components are divided into three segments: large, medium and small-cap.
Catalyst:
The key question is what impact the global slowdown will have on ongoing infrastructure projects and those in the pipeline. One argument is that tighter budgets will slow these projects but equally persuasive is the argument that governments will be priming the pump with more ambitious infrastructure spending to stimulate the economy. China’s recent $460 infrastructure plan is one example.
Valuation:
PXR was just launched in October and has been bouncing around and just recently has exceeded its launch price. It is trading at about 7 times projected 2009 earnings.
Risk Factor:
Moderate to High
Risk Management:
Suggest an 8% trailing stop loss
Tip:
Investor may wish to pair PXR with the iShares Global Infrastructure ETF (IGF). IGF has a 25% weighting in US stocks and lower direct exposure to emerging markets.
Best regards and Happy Holidays,
Carl Delfeld
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