@ a glance newsletter

Infrastructure, an entry point into emerging markets

(April 2011)

Q&A with Sarah Shaw, Senior Analyst Global Listed Infrastructure

We hear a lot about opportunities in emerging markets but how do we actually define the range of countries within the ‘emerging market’ label?

You’re right, the term emerging markets is a very general term with no standardised definition. We use a very broad definition of emerging markets to save constant re-definition as opportunities present themselves. At the moment our emerging market investments are confined to the likes of Latin America and emerging Asia. However, we expect to see future opportunities across Africa and emerging Europe - and our current definition is broad enough to encompass all of these.

What do you consider some of the most interesting opportunities in emerging markets to be?

I think there are a lot of opportunities in infrastructure across emerging markets as governments look externally for financial support to implement major development and allow their economies to evolve.

For example in Brazil the government has implemented the PAC program (Growth Acceleration Plan) in 2 phases which will see over USD$ 1trillion in investment by 2016. This pattern of seeking external finance support is supported by each government’s willingness to create the right type of investment conditions for external parties. The Brazilian government for example, is actively encouraging private investment in these “PAC” projects by offering advantageous funding terms. And as the middle classes continue to expand and levels of internally driven consumer demand continue to rise I think we can reasonably expect the opportunities in infrastructure in emerging markets to continue.

I travel a lot in the emerging markets and over the last 10 years have visibly witnessed the improvements in infrastructure and the way this impacts people’s quality of life. For example when I first started looking at China, road quality was poor and travel was very difficult. By contrast the last time I went to China I traveled 170kms in half an hour in air conditioned comfort on the high speed rail. I was in Brazil in January and it was the first time that US dollars were not the currency of choice and everything had to be paid for in Brazilian Real or at a premium.

What are the risks involved in investing in emerging markets?

As with any investment, there are risks involved and in emerging markets the particular risks can be assessed at multiple levels. Unexpected changes to the political and regulatory environments are one of the risks that people would associate with emerging market investment, however while there’s no perfect way to predict changes in this area, a good manager should be paying particular attention to this in their analysis.

A further recognised risk is inflationary spikes (which is what we’re experiencing today). We believe these are generally food driven and self correcting over the medium term and we expect these will become more common as emerging markets evolve and domestic wealth improves. We’re not fundamentally concerned while core inflation remains stable.

However, for investors concerned with these spikes, infrastructure offers a good opportunity to access the upside of emerging markets while mitigating the inflationary impact. This is because infrastructure assets generally offer a direct hedge. Market volatility however will persist around these periods and we believe these dips can represent a good opportunity to add emerging markets infrastructure exposure as the fundamentals remain in tact.

How would an individual investor identify opportunities in emerging markets?

It’s quite difficult for an individual investor to research and identify specific infrastructure opportunities in emerging markets. And that’s really because the type of developments we’re talking about probably don’t get much coverage in our own media. You really need to be out there on the ground talking with management, government and consumers to understand the opportunities available today, the pitfalls to avoid and the outlook for future investment.

Important note: Investors should consider the Product Disclosure Statement (PDS) available from AMP Capital Investors Limited [ABN 59 001 777 591] [AFSL 232497] for the AMP Capital Infrastructure Securities Fund before making any decision regarding the fund. The PDS contains important information about investing in the Fund and it is important that investors read the PDS before making any decision whether to acquire, or continue to hold, or dispose of any units in the Fund. To invest in the Fund, you and your clients will need the Fund’s current Product Disclosure Statement (PDS) issued by Permanent and available from AMP Capital on its website. The PDS contains important information about investing in the Fund and it’s important you and your clients read the PDS before making a decision about whether to acquire, continue to hold or dispose of units in the Fund. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. You and your client should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.