Emerging Markets Will Still Build

11/03/2008 11:00 am EST

Focus: ETFS

Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Carlton Delfeld, editor of The New Chartwell Global ETF Investor, says an emerging markets infrastructure fund should gain when markets recover.

With a global slowdown upon us, this may not be an ideal entry point [for an emerging-market infrastructure fund,] but it should lead the recovery.

In 1975 there were only three cities in the world of over ten million. In 2008, there are 20 cities of which 15 are in emerging markets. China alone has over 100 cities with a population exceeding one million. Along with this urbanization has come stronger economic growth and expanded international trade.

This means that unless these countries build more airports, roads, railways, seaports, and pipelines, they will literally choke on their growth. This also include communications infrastructure like mobile telecommunications and cable providers.

[Recently], I had a chance to speak with PowerShares about their brand-new Emerging Markets Infrastructure ETF (NYSEArca: PXR). The companies that are banking on profiting from this growing demand in emerging markets are global, [although] the country weightings [in the ETF] still tilt towards emerging countries with China at 15%; Russia, 11.4%; Brazil, 10.9%, and India at 5.6%, with South Africa adding 8.4%. So, PXR is a balanced hybrid with a developed and emerging engine. The sector breakdown is 50% materials, 48% industrials, and 2% utilities.

The industrial companies in the fund include giant engineers such as ABB (NYSE: ABB) and equipment makers like Caterpillar (NYSE: CAT). These companies design and build all of the bridges, toll roads, and sewer systems that infrastructure is all about. There are currently 66 companies in this index with none greater than 5%.

The key question is what impact the global slowdown will have on ongoing infrastructure projects and those in the pipeline. One argument is that tighter budgets will slow these projects, but equally persuasive is the argument that governments will be priming the pump to stimulate the economy.

Another reason to put PXR on your Buy list and wait before building a position is that it will give the ETF time to gain some assets and improve liquidity. While you wait take a good look at the iShares S&P Global Infrastructure Index (NYSE: IGF). It has 75 stocks and a slightly narrower focus. Fund investments include global infrastructure companies from both developed markets and emerging markets, including Williams (NYSE: WMB) and El Paso (NYSE: EP). Top sectors include utilities, industrials, and energy, while only a quarter of the fund’s assets are invested in American companies such as Caterpillar.

(PXR closed above $20 Friday, while IGF closed below $30—Editor.)

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