As our working-age population shrinks, we see construction opportunities grow.

All Roads Lead to Construction

February 12, 2018 • Infrastructure

  • The push for new and improved infrastructure is the product of an expected rise in the global population, combined with an accelerated pace of urbanization.

  • The number of megacities is expected to rise above 40 worldwide in the next two decades, represent a 50% increase from four years ago.

  • Governments are now ready to spend taxpayer dollars to reduce the global infrastructure deficit, following a period of fiscal restraint in the wake of the financial crisis.

One of the sure signs of a progressing economy is the steady drone of jackhammers and bulldozers heard across construction sites around the world. This is as true in Vancouver as it is in London, Beijing and most other major cities in between, where efforts to repair roads, bridges and tunnels is being met equally by initiatives to build new structures and networks.

Managing this global infrastructure boom over the long run will require huge financial commitments from both the public and private sector and may become one of the biggest ongoing challenges of the 21st century. But with tens of trillions of dollars at play, it also has the potential to be a lucrative investment opportunity.

At its core, the push for new and improved infrastructure is the product of an expected rise in the global population combined with a confluence of factors from aging workforces to climate change and the accelerated pace of urbanization that is turning the world’s cities into megacities, and megacities into supercities, like the Pearl River Delta Metropolitan region in China, which now boasts 50 million residents and counting.

The percentage of the world’s population living in urban areas accounted to 54% in 2014 and is projected to reach 66% by 2050, according to a recent report from the United Nations Department of Economic and Social Affairs. Meanwhile, the number of megacities of 10 million or more inhabitants is expected to rise above 40 worldwide in the next two decades, a near 50% increase from only four years ago. 

Much of this increase in urbanization is expected to take place in emerging nations like China, where a young, burgeoning middle class is migrating from the country’s rural areas in search of better economic opportunity and improved social mobility.

But many countries in the developed world are also set to see their biggest cities expand. One of the biggest drivers in this regard is the inevitability of aging workforces and the need for more immigration to pick up the employment slack. In Canada, one quarter of the population will be over the age of 65 by 2031, which will likely lead to an increase in demand of skill workers from abroad, most of whom will settle in the country’s largest municipalities.   

As a result, the need to improve existing infrastructure and build more of it has become a major priority in both developed and developing nations. While fiscal restraint was apparent immediately following the financial crisis, many governments are now ready to spend taxpayer dollars to reduce the global infrastructure deficit, which by varying estimates is now worth tens of trillions of dollars.

As an example of increased infrastructure spending, Canada’s federal government has committed $180-billion to infrastructure spending over 12 years, and has recently introduced an Infrastructure Bank to help fund future projects. Meanwhile, U.S. President Trump has made infrastructure a key priority, promising to spend upwards of US$1-trillion in this area.  

As more money gets deployed, one area of potential return for investors is the construction industry. This runs the gamut from engineering and architecture firms to heavy equipment manufacturers, and involves local privately-owned companies as well as larger, publicly-traded multinationals that have global reach.

Investing in infrastructure isn’t just about who builds it, but also who owns it. In today’s low-yielding interest rate environment, many of the world’s biggest institutional investors and pension plans are allocating a growing percentage of their portfolios to owning infrastructure because of the potential these real assets have to generate steady income and cash flow over the long term, in addition to diversification benefits.

Canada Pension Plan Investment Board (CPPIB), which all working Canadians have a stake in, now has an extensive infrastructure portfolio including various toll roads in North America, a port operator in the United Kingdom, and a car park management business in Belgium.

Ultimately, infrastructure-related investments are expected to become a growing component in the portfolios of all types of investors. Those who make the most of it will be the ones who pay close attention to the potential drivers of return and opportunities involved.

Commentaries contained herein are provided as a general source of information based on information available as of February 12, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.

AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), Highstreet Asset Management Inc. (Highstreet), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA).

AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.

Published date: February 12, 2018