Market Memo: It's about infrastructure (and we're not talking U.S.)

12-01-2016

The U.S. is not the only country looking to rebuild and improve aging roads, bridges, airports, rails and other physical assets. Countries throughout Southeast Asia where I recently visited are underbuilt and set to splurge on infrastructure projects in the next few years. Improvements are needed across the spectrum to support anticipated growth in intraregional trade on the heels of last December’s launching of the Association of Southeast Asian Nations Economic Community (ASEAN EC), a region encapsulating 10 countries with a combined market of $2.6 trillion.

A key issue is funding. While ASEAN country balance sheets have capacity, foreign capital also is needed. In Thailand, where there is sufficient domestic liquidity to support more infrastructure spending, the emphasis is on transportation. Some of this is being driven by concerns that its logistic costs—what companies pay to transport and store goods and services and generally manage operations—are undermining the country’s competitive position. It’s estimated logistic costs as a percentage of GDP top 14% in Thailand. Other ASEAN members have similar worries, with logistic costs closer to 20%. By comparison, logistic costs as share of GDP are around 8% in the U.S. Thailand also is pushing to upgrade its airports to accommodate a boom in Chinese tourism, up 88% in the most recent fiscal year.

The ASEAN economies are not monolithic—some are far more developed than others—nor are their infrastructure needs. Power and digital services are major themes in Indonesia—demand for 4G telecommunications is surging on rising e-commerce and increasing digital content usage. In Malaysia, a top priority is the build-out of its rail system over the next 5 to 10 years to improve and enhance local and regional connectivity. At least 10% of Malaysia’s GDP has been earmarked for railway projects. Perhaps the greatest needs are in the Philippines, which in recent years has underinvested and experienced deteriorating logistics performance. Infrastructure spending there is said to be a key focus of the current government, with an emphasis on transport.

Key risks in all of these countries are the transparency of governance/regulations and land acquisition, especially for major transportation projects. But the opportunities are hard to ignore. According to McKinsey & Co., the ASEAN region serves as a major hub for global manufacturing; is experiencing increasing tourism; is one of the fastest-growing consumer markets in the world (with more than 622 million people, it’s more populous than either the European Union or North America); and has a large, relatively young labor force that’s still in the early stages of household wage and earnings growth. IHS projects the region’s economy will rank as the world’s fourth largest by 2050. These are attractive attributes as we search for areas and companies in which to invest.