- May 31, 2011
- Railway Revolution Builds China's Consumer Culture
Frequent readers of my “Frank Talk” blog and the weekly Investor Alert should be familiar with the story of China’s high speed rails. We’ve previously discussed how China is building the world’s largest network of high speed rails at an incredible speed.Since opening the first high speed line between Beijing and Tianjin in 2008, the country has laid down more than 4,600 miles of new tracks. This is three times more than Japan, where the bullet train was invented, and this is just the start. Once completed near the end of this decade, the high speed rail system will connect more than 250 Chinese cities, span 18,641 miles and reach roughly 700 million people.
Currently, the high speed rail network connects about one-third of China’s cities. That figure is set to nearly double over the next two years. If current forecasts hold true, 100 percent of the China’s cities will be connected through high speed rails by 2019.
While linking megacities such as Beijing and Shanghai carries significance, connecting the urban East with rural areas of West and Central China is equally as important. This data from Morgan Stanley shows that the West and Central regions of China lag considerably in terms of GDP per capita, urbanization rate and property prices.
Many, including our investment team, believe that connecting these areas of the country could have a similar effect to what took place in the United States when Eisenhower’s interstate highway system linked cities such as Chicago and Philadelphia with their counterparts on the West Coast including Seattle and San Francisco.
The effect this massive buildout can have on commodities is evident: thousands of miles of new track, hundreds of new stations and dozens of new trains will certainly boost demand for steel. But there’s also a corollary effect that can expedite the transformation of China’s economy. More people traveling across the country means there will need to be more places for them to eat, sleep and shop.
Take hotel rooms for example. Currently, the U.S. has just fewer than 5 million hotel rooms spread across the country; China has about half that amount. However, Morgan Stanley forecasts that the two are set to switch places near 2025 as China pushes to offer more than 9 million hotel rooms by 2039. Familiar names such as Wyndham, Starwood and Hilton are planning major additions to their pipelines in China.
Morgan Stanley also says that the high speed rail expansion presents opportunities in areas such as consumer staples, car rentals and tourism. The latter is especially important because the average Chinese citizen is going to be able to explore culturally rich areas of the country that were previously too difficult or expensive to visit. A poll from CLSA’s China Reality Research last year showed that travel remained a top aspiration.
Rail passenger traffic has a strong correlation with instant noodle consumption (79 percent positive correlation) and soft drink volume (86 positive correlation), according to Morgan Stanley. This means that chains such as McDonald’s (1,300 stores in China) and KFC (4,000 stores in China), both of which are largely concentrated in the eastern third of the country, will likely follow the high speed tracks into Central and Western China.
These are all examples of how the dynamics of the Chinese consumer are forever changing. As investors, it’s important to understand these intermarket relationships and how a development in one area of an economy can dramatically affect another seemingly unrelated area of the economy. Being able to spot these trends and developments before they bubble up to the surface is how active money managers can create alpha for their shareholders.
Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.
None of U.S. Global Investors Funds held any of the securities mentioned in this article as of 3/31/2011.
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- May 27, 2011
- Global Infrastructure a $6 Trillion Opportunity
A few weeks back we highlighted the strong link between GDP growth and oil consumption by showing you how oil consumption per capita has risen in selected countries as per capita incomes rise (Each week, more than one million people are either born in or migrate to cities around the world. Much of this rapid urbanization comes from the emerging world, putting tremendous pressure on that country’s feeble infrastructure. Pipes burst, roads are jammed, the water is tainted and the lights even go out.
You can see that Brazil has the worst overall ranking among the countries listed. Though the country is a large exporter, the extremely poor condition of the country’s roads and rails has hampered the growth of internal textile and farming industries. However, there is light at the end of the tunnel for the country, as the government already has a plan in place to improve these conditions (Read: Brazil’s Infrastructure Plays Catch Up).
India’s infrastructure also rates poorly, and is slowing the country’s ascent to top of the world’s economies (Read: India’s Achilles Heel). One of India’s key issues is electricity. Merrill says that nearly 40 percent of Indian households do not have access to electricity, the worst of any major developing economy.
Power is also a problem in South Africa where a major power plant has not been built in 20 years and blackouts/power outages have hurt the country’s mining industry in recent years. Merrill projects $54 billion will need to be spent on the country’s power system over the next three years, accounting for nearly half total infrastructure spending.
China, which accounts for more than half of that $6 trillion estimate, ranks far above emerging peers in terms of infrastructure at the 65th percentile. Merrill says that one of China’s biggest needs is in water and environmental development. The firm estimates that the Asian country will need to build roughly 40,000 reservoirs at Rmb 12.5 million a piece to create an internal water distribution system and alleviate pressure when regions experience extended droughts such as what China is seeing presently.
The needs of a growing global population set to reach 7 billion later this year and investment needed to supply these people with sufficient water, roads, housing and power is why we identified infrastructure as a megatrend in 2007 and made it the key investment theme of the Global MegaTrends Fund (MEGAX).
Although some infrastructure investments, such as those in Russia, have seen delays as fiscal dollars have been diverted during the financial crisis, we continue to believe in the long-term viability of the story.
Read How Policy Reforms are Paving the Way for Indonesia
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk.
"http://www.usfunds.com/investor-resources/frank-talk/Energy-Natural-Resources/The-Strong-Link-Between-GDP-and-Oil-Consumption-5331/">Read: The Strong Link Between GDP and Oil Consumption).
Specifically, we noted the potential for China’s oil consumption—already the second-largest oil consumer in the world—to catch up on a per capita basis with other Asian countries such as Taiwan and South Korea.
That’s where we think China’s oil consumption is headed, but this chart from Carnegie shows how strong oil consumption per capita growth has been over the past 50 years. Back in the days of Chairman Mao, China’s oil consumption per capita was roughly 0.2 barrels per year (b/y). When Deng Xiaoping took over in 1982, that figure had grown to roughly 0.6 b/y.
Since then, there’s been no looking back. China’s oil consumption per capita has increased over 350 percent since the early 1980s to an estimated 2.7 b/y in 2011. In fact, consumption per capita has risen nearly 100 percent in just the past decade.
Oil consumption per capita in the U.S. currently ranks among the top industrialized nations in the world at 25 b/y. However, today’s consumption levels are approximately 20 percent lower than they were in 1979.
China isn’t the only emerging country to show big increases in per capita consumption; in fact, the growth in consumption for several other countries far outpaces China. You can see from this next chart from Carnegie that consumption per capita in Malaysia has nearly quadrupled since the mid-1960s. Consumption in Thailand and Brazil has more than doubled to roughly 5.7 b/y and 4.8 b/y, respectively.
Meanwhile, many developed countries—especially those in Western Europe, have experienced substantial declines.
Today’s per capita consumption in Sweden is roughly 12 b/y, down from 25 b/y in the mid-1970s. That’s one of the largest declines in the developed world over that time but isn’t the only one. France, Japan, Norway and U.K. all use less oil on a per capita basis than they did in the 1970s.
This trend is why we feel emerging countries, especially Asia, are the epicenter of oil demand growth for years to come.
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Merrill Lynch estimates that $6 trillion will need to be spent by selected emerging market countries over the next three years to meet the basic needs of these citizens. Water, transportation and energy investments will consume the bulk of these funds, accounting for 82 percent of total projected spending. Nearly every emerging market country Merrill researched will make an investment in all three.- May 12, 2011
- Policy Reforms Pave Way for Indonesia
Known as the world’s largest archipelago, Indonesia is made of 17,000 islands—eight major ones—between the Indian and Pacific Oceans with the most volcanoes in the world. Almost half of the country’s population lives in an urban environment. Jakarta, the capital and largest city, is home to more than 9 million people. Literacy in Indonesia is high: 90 percent of the population aged 15 and over can read and write.
Yet this highly literate country lags nearby southeastern Asian countries when it comes to infrastructure, according to a recent report by Morgan Stanley.
- Less than 10 percent of the population has access to the Internet compared to 25 percent of people in nearby countries of Thailand and Vietnam.
- About 40 percent of the roads are unpaved in Indonesia, whereas Singapore and Thailand have nearly 100 percent of the country’s roads paved.
- A third of Indonesia’s population has no electricity, while Malaysia, the Philippines, Thailand and Vietnam all have electrification rates close to 100 percent.
This should improve soon. As I often say, government policy is a precursor to change and recent major policy reforms, along with an attractive cost of capital and access to funding, are now paving the way for Indonesia to commit dollars to their sorely needed roads, railways, airports, electricity and telecom projects.
By Morgan Stanley’s estimation, Indonesia will spend approximately $250 billion over the next five years on infrastructure alone.One third of this amount – $85 billion – is estimated to be spent on electricity, 27 percent will go toward roads, and 21 percent on telecom. This investment in infrastructure should help to push the southeastern Asia country’s GDP growth to more than 7 percent a year by 2015.Multiple resource companies should be benefactors from this infrastructure spending – 50 percent of all the projects are cement-intensive, to give one example – and that’s why we plan on keeping an eye out for opportunities for the China Region Fund (USCOX).
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio.
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- April 15, 2011
- Middle East to Spend $80 Billion on Public Transport
This week, the International Association of Public Transport (IAPT) World Congress held its 59th annual conference in Dubai. Two thousand delegates from 80 countries around the world attended the four-day event. In between their meetings, delegates took rides on the city's public transportation, including the longest driverless metro line in the world, completed less than two years ago.
Long known as a city dependent on its cars for convenient and comfortable travel, Dubai has been ramping up its infrastructure to relieve increasing traffic congestion driven by urbanization. Car traffic is forecasted to increase four times by 2020 as the population jumps from 1.2 million people in 2005 to more than 5 million by 2020.
To realize its vision of “Safe and Smooth Transport for All,” Dubai’s Roads and Transport Authority (RTA) has been fervently working on projects that cover several different modes of transport. These include 166 miles of metro lines, 268 new tram lines, 90 bus routes with 2,000 buses and 5 new waterways covering 130 miles with 67 water taxis.
Dubai is only one of several areas focused on these projects. The RTA Executive Director estimates that countries in the Middle East would most likely invest $80 billion in the public transport system over the next 10 years. A special report produced by the Financial Times highlights the progression of these projects. Across Saudi Arabia, Qatar and United Arab Emirates, numerous rail commuter and long-distance links are under construction or projected to be underway soon.
One high-speed rail project, the Mecca-Medina line, highlights a unique travel need in the region. To fulfill the requirements of the hajj, Muslims are expected to make the hajj pilgrimage to Mecca, the sacred city of Islam, at least once in their lifetime. And millions do.
Known as the largest annual gathering of people in the world, during the last month of the Islamic year, 2-to-3 million believers make the pilgrimage every year. Last November marked the first time that a metro light rail transported those making the journey at an estimated 199 miles per hour.
It will be interesting to see these exciting projects develop over the next several years. Between the urban areas of already crowded cities, to the spread-out, low-density regions across the desert, the pace of growth demands the infrastructure to support “safe and smooth” public transportation for local residents and visitors around the world.
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- February 17, 2011
- Riding the World’s Fastest Train
The world’s largest network of high-speed rails now has the world’s fastest train running on its tracks. In China in early December, a 16-car train set a new world record during a trial run by speeding faster than 302 miles per hour. During regular service, the train will travel just over 236 miles per hour.The world’s fastest train is currently running from Shanghai to Hangzhou, a city about 120 miles to the southeast. The $445 million project cuts train travel time in half, from 90 to 45 minutes.
A first-class ticket on this route costs a little less than $20, double the cost of an ordinary Chinese train ticket. In comparison, a first-class seat on the express train from Washington, D.C. to Philadelphia, a distance of 136 miles, will run you nearly $240, according to J.P. Morgan. This train’s average speed is only 70 miles per hour.
This is just the latest development in the fascinating story of China’s transit systems. Back in November we discussed how China’s high-speed rails were expanding into the interior of the country and connecting the country’s major cities (Read China’s High Speed Rails).
Rail expansion plays a big role in the 12th Five-Year Plan announced in November. Capital expenditure on rails is expected to total $455 billion over the next five years, according to J.P. Morgan. The goal is to lay 10,000 miles of track by 2015.
These amazing feats and ambitious goals are not imported from the developed world, but products of Chinese innovation. The world’s fastest train was built by a Chinese company (China South Locomotive & Rolling Stock Corporation) which has become the third-largest high-speed train producer behind Bombardier (Canada) and Alstom (France).
As China continues to develop its infrastructure and build higher-end manufacturing industries, the incubation of engineers and innovators should pay dividends for the country’s growth into a global powerhouse.
None of U.S. Global Investors family of funds held any of the securities mentioned in this article as of December 31, 2010.
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