Asian infrastructure increasingly attractive
Vijay Pattabhiraman, Chief Investment Officer for Asian Infrastructure in the Global Real Assets Group of J.P. Morgan Asset Management believes that investing in Asian infrastructure can capture the growth in Asian economies.
Mr Pattabhiraman said, "Asian infrastructure is becoming increasingly attractive as a proxy for capturing the longer-term growth outlook of the various Asian economies in light of inflation and rate rises."
He explained that urbanisation, the expansion of a wealthier middle class and increasing domestic consumption have been the key drivers of Asia's strong growth trends. As a result, he said, the increasing demand for all types of infrastructure has heightened.
Mr Pattabhiraman went on to say, "The increased demand for infrastructure which follows years of underinvestment has created a situation where supply is unable to keep pace with demand. Emerging Asia's large economies, such as China and India, are significantly behind their more developed peers in the west, which we view as a tremendous opportunity in the upcoming years."
Citing some examples, Vijay Pattabhiraman said that India's electricity supply has a percentile ranking of 19%, meaning it is in the bottom 25 countries (of 133 surveyed) globally in terms of power. India's government is forecasting to add over 175 gigawatts of new capacity by 2017 (100 gigawatts of this is planned for 2012-2017) in an effort to improve the situation.
Other examples include coal-fired power, which is still one of the cheapest and fastest ways to build base-load supply. Five of India's largest private power developers are now in various stages of developing 40+ gigawatts of new thermal-fired power stations. Such expansion plans will likely create significant strain on India's internal resources; J.P. Morgan analysts forecast India to have a thermal coal deficit of 186 MT by FY2014. Mr Pattabhiraman said this requirement, combined with the fact that China (the world's largest coal producer) has become a net importer of coal, has created a significant boom in the economies of coal exporters such as Indonesia, driving further the trend of intra-Asia regional trade.
Further to this, Indonesia has continued its dominance as the world's largest thermal coal exporter having exported approximately 230 million tons of thermal coal in 2010. The impact on the domestic economy of an influx of coal-derived income is noticeable as Indonesia's GDP/capita is increasing at the rate of ~5% per year (GDP/capita in the U.S. has declined by 2% over the same period). While increasing levels of wealth fuels Indonesia's growth, new demand has placed significant strain on domestic infrastructure. For example, Jakarta's Soekarno-Hatta International Airport handled 37.1 million passengers in 2010 (15.2% increase year-over-year), making it the fastest growing airport (outside China) in Asia Pacific for 2010.
Mr Pattabhiraman said, "With India building power stations, Indonesia selling the required coal and China importing everything in between, it is clearly evident Asia is booming and private investment, as well as government spending, is funding this much needed spend on infrastructure. However, Asia's growth is not without a price. Themes of inflation which had been waiting in the wings toward the end of 2009 have since been pushed into the forefront of Asia's central bankers' minds. Although in terms of absolute levels, headline inflation in Asia remains below the 2008 peak, it has already risen in this cycle by more than it did three years ago."
To help combat further increases, central banks across the region have been tightening, many for several months now, Mr Pattabhiraman went on to say. Economies such as China, India and Indonesia are forecast to lead the increase in rates, given their growth and inflation outlooks. Governments are apprehensive to raise rates too quickly however, given the potential for "hot money" to follow rate increases (i.e., foreign investors looking to capture relatively higher rates of return on their capital). J.P. Morgan economists forecast Asia's central bankers will meet rising inflation with a combination of increased rates and dearer exchange rates.
Mr Pattabhiraman concluded by saying, "It is evident Asia is growing and infrastructure is central to its development. While, immediate impacts such as rates rises and inflation are increasingly a concern for some investors we believe infrastructure investing is capturing the long-term growth outlook."