Infrastructure

By Roger Nusbaum | August 29, 2008 | 1:40 PM | 1 Comment

David Enke has been all over the current events unfolding in the infrastructure theme. It has been a fascinating few months for this part of the market.

First the positive aspects from a big picture perspective.

Money must be spent globally on the building up, modernizing and fixing the world's infrastructure. You can find estimates all over the world of how much this will be and while numbers vary it is safe to say it will be in the trillions over a period of several years. The money is going to get spent.

There are of course risks as well. First up is that managing infrastructure funds (not ETFs that own stocks) is complicated. They are transaction oriented businesses that require access to the debt market. A mucked up bond market impedes the ability for everyone, including infrastructure funds, to access capital. Obviously this hurts the business of running the funds which hurts the funds and the business models of the banks running these funds, most notably Babcock & Brown and Macquarie.

This can either threaten the existence of a bank, like with Babcock, or appear to more of cyclical problem like with Macquarie.

I am a big fan of things like toll roads and airports (the cash flow stories in the segment) because I think they can be very good proxies for what is happening on the ground but right now the things that are happening on the ground in many countries are not good. Based on stock prices we can infer that global economies are either really slowing down or just appear to be slowing down (I am phrasing it this way to point out that perception is more important than reality). 

If you can separate the long term from the short term you can maintain a modest exposure to the theme. Relative to the next few months the timing may or may not be good but looking out to the middle of the next decade the money is going to be spent.

As important as I think the theme is I maintain a modest exposure, mid single digits. To me, the case is obvious that this must work but I could be wrong. I think it is important to not leave yourself so exposed to an opinion than it take your whole portfolio down or sets you back by several years. 

Also a fan Not only bridges and toll roads but basic needs such as water, utilities, etc. One problem is this theme is often lumped in with global growth and not allowed to stand on it's own merits so to speak. This could be exasperated by the advent of ETFs I presume. It makes it difficult to segragate exposure to pure infrastructure plays. Submitted by greenspan on Fri, 2008/08/29 - 2:46pm » reply |