Harry mentioned investing in infrastructure and that got me thinking.
I like infrastructure plays because typically spending in this area just makes good sense. For one thing, good infrastructure provides a stable foundation for economic growth. Countries that underinvest in infrastructure claim they’re saving money, but in reality they’re choking off future growth.
What’s more, it’s possible for governments, and the private companies with which they contract, to earn positive rates of return on infrastructure investments. Toll roads, for example, provide streams of income that work to pay back initial investments.
The same cannot be said for all government spending, as is the case with many social programs.
But these aren’t the issues that piqued my curiosity when Harry mentioned infrastructure investment. Instead, I began to wonder how the infrastructure investment trend would look in the emerging world compared to the developed world…
To gain some insight, I pulled up charts of two infrastructure funds – the iShares Global Infrastructure Index (IGF) and the iShares Emerging Markets Infrastructure fund (EMIF). The latter would tell me what’s happening in the emerging world, where infrastructure spending is in a rapid “catch up” phase.
Here are two charts that I found particularly interesting…
First, since the start of 2012, amidst the backdrop of a bullish equity market, the Emerging Market Infrastructure fund (EMIF) outperformed the Global Infrastructure Fund (IGF) by nearly four-to-one. EMIF is up 10.7% year-to-date, while IGF is above water to by just 2.9%.
But looking back to 2011 shows a different perspective…
Here’s a chart of the Emerging Markets fund in orange, the Global fund in in green and a ratio of the two funds in yellow.
The sharply declining ratio I’ve highlighted shows that the Emerging Market fund’s outperformance deteriorated between April and October 2011. This came during a significant market downturn, when the S&P 500 lost about 15%.
What does this ratio comparison tell me?
Well, both EMIF and IGF declined during this period. But the Emerging Market Infrastructure fund’s decline was steeper. In fact, EMIF lost nearly twice as much
(-31%) as IGF (-18%).
The conclusion seems straightforward. In bullish, risk-on environments emerging market infrastructure plays will outperform. But outperformance will come at the potential expense of increased volatility. That’s because in risk off environments, emerging market infrastructure plays tend to get hit harder.
If you haven’t done so already read the Survive & Prosper issue on “Is a Dow Jones Average of 3,300 Really Too Bearish?”