How to invest where consumer demand is set to explode

We’re looking at a large-scale grouping who suddenly want to consume more premium products and services that have previously been out of reach. A new audience for more expensive consumer goods like vitamins. New consumers of whitegoods. New consumers of cars. A new group of travellers.

More often than not, when we think of exposure to emerging markets we consider it in terms of which consumer companies are trying to tap into the market. It’s not a pure exposure, but it’s still exposure. But could there be a better way that gives you more exposure and still manages the risks of investing in emerging markets?

Short answer? Infrastructure.

“You have access to 100% to the domestic demand story while hedging some of those key risks that I mentioned, which are inflation and also sovereign risk, as well as actually capitalising on some of the biggest growth thematics of the next 20-30 years,” says Sarah Shaw, portfolio manager and CEO/CIO for 4D Infrastructure.

In this edition of Expert Insights, Shaw explains how infrastructure offers a hedge against key emerging market risks and some of the opportunities she is looking at in the space.

Can you discuss the opportunities you are excited about for infrastructure?

They are the developed market replacement spend, population growth with the emerging world getting younger and the developed world getting older, the emergence of the middle class in developing economies, and the energy transition.

Why do you see this opportunity as compelling?

The emerging markets are expected to grow rapidly over the coming years to really displace or change the world economic order that has been in place since World War II. That's going to be driven by the middle class. If you consider the size of the emerging markets, they make up 75% of the global population. China, India and Indonesia are 40% alone. Growth in their middle class or growth in their middle populations is going to have significant ramifications for investment opportunities, both internally as well as at a global level.

If you take it at an individual level, as your wealth improves, your spending patterns change. It starts with a desire for three meals a day. It moves to things like, “I want indoor plumbing, I want waste treatment, I want gas for cooking and heating”. That's infrastructure. Once you have that, you then want a fridge, you have a TV, that's more infrastructure and it's also logistics chains, port capacity, road networks. And over time, you get that scooter or you get that car and you want to travel, you want to move, and that all demands even more infrastructure. So what you can see from that, is that infrastructure is a real driver in the emergence of the middle class as well as a key beneficiary. 

That's just a really exciting infrastructure proposition both in-country as well as at a global level.

How do you manage the risks associated with emerging economies in your investments?

Interestingly, it's not just the emerging world. To be honest, some of the things I'm most worried about today are in the developed world. We've got debt ceilings and interest rates and an energy crisis. But if you're looking at the emerging world or if you're looking at country risk in general, it's something that 4D has been very focused on since in inception. 

We have a single analytical cycle that combines both country risk assessments with company risk assessments. And that's because we do see that countries do have risk, they do change and it can influence your investment decisions. We do a country risk assessment before we even look at companies in that country. We consider the key sovereign risks, which are economic, financial, political, and sustainability goals and we give them a ranking based on a traffic light system of green, amber, or red.

For the emerging markets that we are invested in, they have screened through this country risk before we even look at the investments in that country. If we're going to take it directly into the emerging world, there are some key EM risks or key risks at a country level that you can mitigate through infrastructure investment.

Infrastructure can offer you the access to the growth profile, which is why you're going into the emerging markets, but mitigate some real key risks such as inflation because you get an inflation hedge and sovereign risk. 

You are actually helping the governments achieve their goals and expand their economies and evolve their communities. While you are helping them achieve their goals, then you're pretty comfortable that they're going to uphold your return profiles.

Can you share some examples of investments you have identified in this space?

Consider that less than 10% of the Chinese population currently have a passport, yet pre-covid, the world was welcoming significant amounts of Chinese tourists. Consider in India, it's less than 5% that have a passport. 

These are the two most populous countries in the world. In three years time in a normalised world, China's going to outpace the US as the number one aviation market and then India's going to be number three... and Indonesia is going to be number 10. You can see the opportunity set just from these countries starting to travel. And that's in both global airports as well as the domestic airports.

Motor vehicle penetration in emerging markets is generally really, really low, but it's correlated to economic growth. So as your wealth evolves, so does motor vehicle penetration. Again using China as an example, there is less than 20% motor vehicle penetration in China at the moment yet motor vehicle sales in China have outpaced that of the US since 2010 where motor vehicle penetration is over 70%. Now I don't care what car you're driving as long as you're driving it on a road that I own.

These are two big thematics internally, but also externally with that global airport capacity as well as just the opportunity set as people start moving around and travelling. And it's not just confined to China. I know I've mentioned China a bit, but we've got other parts of the world also capitalising on this, as you see in double-digit passenger growth in Mexico, etc.

What tips do you have for investors looking at this opportunity?

You have access to 100% of the domestic demand story while hedging some of those key risks that I mentioned, which are inflation and also sovereign risk, as well as actually capitalising on some of the biggest growth thematics of the next 20-30 years in terms of population growth, the middle class as well as the energy transition, which the EMs must be on board with if we're going to achieve net zero by 2050.

Invest across the globe

4D Infrastructure is a Bennelong Funds Management boutique that invests in listed infrastructure companies across all four corners of the globe. For more insights on global infrastructure, visit 4D’s website.

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4D Global Infrastructure Fund (Unhedged)

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