The New Wave of Infrastructure Investing - JP Morgan

by: Tiernan Ray May 21, 2008 | about stocks: JPM    
Tiernan Ray

Tiernan Ray

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“What’s about to happen is a huge wave of infrastructure investing,” said Michael Cembalest, JP Morgan’s Chief Investment Officer and the morning keynoter at the JP Morgan technology conference in Boston, which ends today.

For that reason, the bank has been putting money into technology and industrial stocks. Cembalest made the case that the trough in equity markets has happened, and that those touting dire things to come are Cassandras.

As proof, he noted that earnings in Q1 were up 11% excluding financials, showing that this market slump is a crisis of the banks, and specifically not a broad-based earnings slump like that of 2001. “2001 was a broad-based earnings decline. This recession is a financial collapse,” said Cembalest.

The banks’ mistake was that they loaded up on assets just as all other sectors were “getting religion” and cleaning up their balance sheets. The monoline insurers such as MBIA (MBIA) are the poster children of this recession, with 1% equity and trillions in complex structured credit assets that they couldn’t handle. “The banks went crazy: They drove up their assets relative to their equity.”

Non-financials are in good shape from a balance sheet perspective, and valuations for equities broadly speaking are low, Cembalest noted, at around 17x to 19x for technology stocks. Relative to where inflation is, valuations are low. You only get much lower valuations on stocks when inflation is 6% or 7%. The message: as long as inflation stays where it is, it’s not likely valuations are getting much cheaper on tech. (Cembalest expects a devaluation of the Euro and a rise in the US dollar and various Asian currencies as countries realize they face inflation pressure as they keep printing money.)

Cembalest sees a global infrastucture boom to solve some very basic problems. Fully a third of rice in Asia rots because it can’t get to market, Cembalest observed.

“There’s evidence that foreign central banks know that productivity leapt in the US in the five years after the completion of the interstate highway system. They know they can make some good investments in infrastructure.”

More specifically, “China is planning on spending a trillion dollars on basic transportation. We went and bought Chinese cement companies.”

So, Morgan is delving into tech stocks and Chinese cement makers, among other industrial stocks. “Somewhere in there, there are some promising implications for new technology.”

Cembalest closed by noting the diminished position of the US in the world.

There are a handful of countries in Asia whose GDP combined is more than the US. This is the first time in a long time that the US represents less than 50% of global market capitalization.

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This article has 5 comments:

  •  
    May 21 03:12 PM
    Yes, Asian currencies will rise against all Western currencies while multinational corporations take away from the West and give to the East where there are more potential consumers. First, the governments in the West need to speed-up their dumbing down of the populations before they can complete the transfer to avoid social unrest. If Asians don't allow their currencies to appreciate rapidly over the next two years, they will slip back into poverty; the government can only subsidize so much and needs to pay the bill for all these infrastructure products in the form of usage taxes/fees.
    Reply | Link to Comment
  •  
    May 21 04:11 PM
    OK great, are any of these Chinese cement companies publicly traded? The earthquake really plays to this short term...
    Reply | Link to Comment
  •  
    May 21 05:27 PM
    Many of the western infrastructure firms selling into the asian markets are booming due to growing demand, weak currency. Here are a few sotcks and funds that are benefitting:


    everydayfinance.blogsp...


    Reply | Link to Comment
  •  
    May 22 01:51 AM
    I like First Trust Materials AlphaDEX Fund (FXZ)

    It's up 11.49% in the last 3-months and 7.62% YTD

    Also, it's trading at a 0.41% discount as of 5/20/2008 !

    Here are their top 10 holdings
    Cleveland-Cliffs Inc. CLF 3.78 %
    Fluor Corporation FLR 3.26 %
    Westlake Chemical Corporation WLK 3.16 %
    AK Steel Holding Corporation AKS 3.08 %
    The Mosaic Company MOS 2.86 %
    Crown Holdings, Inc. CCK 2.74 %
    Nucor Corporation NUE 2.73 %
    Steel Dynamics, Inc. STLD 2.71 %
    Reliance Steel & Aluminum Co. RS 2.69 %
    McDermott International, Inc. MDR 2.64 %

    Here's a link to their website
    www.ftportfolios.com/R...
    Reply | Link to Comment
  •  
    May 22 02:14 AM
    Actually FXZ may not be much of a global play. I have been tracking iShares S&P Global Infrastructure Index (IGF) for a few months and it's done OK but what's with the Macquarie Global Infrastructure Total Return Fund (MGU)? It's trading at a discount of -6.60% with a 5.71% dividend, paid quarterly.

    www.etfconnect.com/sel...
    Reply | Link to Comment
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