Look east for big investment

May 27 2009 by Andrew Miller, The Journal

IN recent columns we’ve highlighted our preference for Asia (excluding Japan) over other major equity market regions, reflecting the fact that Asia is still poised to deliver reasonable GDP growth this year and stronger than average in the long term.

Another plus is the fact that its governments and consumers are under less financial stress than those in the UK and US, so economies there are likely to bounce back faster than those in the West. Last but not least, China’s major fiscal stimulus should help to create an environment in which corporate earnings can grow.

There is another reason why Asia should warrant investors’ attention – infrastructure. This has always been interesting in Asia because the region’s persistent need has meant lack of demand has never been a major issue for firms in this sector.

What makes infrastructure more interesting now, however, is the manner in which it has become the centrepiece for most fiscal stimulus packages in the region.

China is the most obvious and oft-quoted one, but both Taiwan and South Korea, for example, have set aside fairly significant amounts for the next few years. We believe this is a theme that is not yet close to running its course.

Those investors who believe Asia has built enough highways, ports and power stations should refer to a recent report by the Asian Development Bank (ADB) in which the authors conclude the region will need to invest close to $8.3 trillion on infrastructure in the next 10 years. A visit to any part of developing Asia will amply demonstrate that most countries and cities still have plenty of scope for further investments.

ADB data from 1990 to 2004 show Asia has been a consistent infrastructure investor for some time: Asian telephone line penetration grew at 25.8%, electricity generation at 8.41% and roads at 1.8% over this period, all faster than equivalent G7 rates.

Governments in the region have chosen infrastructure as the key component of their fiscal stimulus packages.

China plans to spend almost half its $550bn stimulus on infrastructure; most of Taiwan’s and almost all of Malaysia’s fiscal stimulus will go on infrastructure. Though infrastructure-linked equities have risen on the news, we believe there is still some way for them to go.

Andrew Miller is regional office head of Barclays Wealth