21st Century Investment Themes

Urban age

At a glance:

  • More than 60% of the global population is expected to live in a city within the next two decades
  • Increased urbanisation in emerging markets requires significant investment in core infrastructure
  • Much of the urban infrastructure in the developed world is decades – if not more than a century – old and in need of upgrade
  • Stimulus plans enacted in response to the economic slowdown allocate significant resource to infrastructure investment
  • The vast investments requiring to be made into infrastructure will necessitate greater use of private sector funding
  • There are a rich variety of sectors and listed companies that give investors access to the infrastructure story

Within the next two decades, more than 60% of the world’s population are likely to live in a city. In Europe and North America, the busiest decades of urbanisation were the 1960s and 1970s. Much of the growth today stems from cities acting as a magnet for economically-motivated populations across the developing world. The United Nations forecasts that the urban population of Asia will grow by 1.8 billion by 2050, while Africa will see nearly one billion people join city life and 200 million from Latin America and the Caribbean will leave their rural homes behind.

chart 1

While it is often educated young adults who make the move from the country, the development of export-led manufacturing industries across the poorer countries of Asia have created considerable demand for low and medium-skilled labour. Regardless of educational background, the attraction of city life lies in the financial incentives found there. Take China, for example. Already urban incomes are estimated to be three times those of the rural population and studies forecast that urban China will come to have disposable incomes and consumption demand twice that of Germany by 2025. Through the process of much-increased urbanisation, it is expected that, in time, more than 90% of China’s GDP will be generated by its urban economy.

The need for new infrastructure

But city infrastructure in the developing world is coming under increasing pressure as population numbers rise. Countries like China need to build out electricity grids, water mains and transport links to support the growing urban populations. At the same time, investment is still needed in the developed world. There, the ageing infrastructure that has been in place for decades and, sometimes, more than a century, is in need of upgrade. One study by the Organisation for Economic Co-operation and Development (OECD) in 2007 proposes 3.5% of world gross domestic product needs to be invested each year into electricity, road and rail transport, telecoms and water networks. Asia as a whole could invest $400 billion annually. Europe looks on track to spend around $200 billion each year and the US $180 billion.

Emerging investments on a grand scale

China and India are among the developing nations that have announced major stimulus plans centred on infrastructure investment.

India may be one of the fastest-growing economies in the world but its infrastructure has failed to keep pace. The Indian government is committed to raising infrastructure investment, with various studies suggesting $500 billion needs to be spent to bring the country up to standard.

The power and transport sectors are expected to attract around 60% of that money. With a large power supply deficit and low per-capita power consumption, it is the government’s intention to increase generation capacity by 80,000MW by 2012.

Meanwhile, China will experience the largest urban migration ever seen over the coming decades as up to 70% of its population moves from the country to urban areas. 350 million people will move into China’s cities, taking China’s urban population over one billion. This could create one of the greatest booms in mass transit construction in history. Outside of the cities, a massive rail network is also being built to connect the cities to rural areas. By 2012, China could be laying as much as 10,000km of new rail track each year. To put that in context, the UK rail network is just 16,000km.

Redeveloping the developed world

While emerging markets must build out their core infrastructure from scratch, in the developed world, much of the infrastructure in place but is now ageing and in need of replacement. To remain competitive in a world that is increasingly influenced by the economic might of the developing world, the developed world must invest heavily in its infrastructure stock. Failure to make significant progress towards upgrading the basic infrastructure of the West could prove costly in terms of congestion, unreliable supply lines and growing environmental issues, not to mention the implications for standards of living and quality of life.

It is therefore little wonder that the global recession led to plans for massive government stimulus directed at rebuilding the crumbling infrastructure.

“We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together.” So said President Obama in his inaugural address in January 2009. He went on to commit around a third of his $825 billion stimulus package to new infrastructure projects, including $150 billion to be spent over the next ten years on clean energies. More than a year later, much of the investment has still to be made and so expect there to be ample opportunity for private industry to become involved alongside the government, through public-private sector finance initiatives.

Us stimulus plan spending on infrastructure

A public-private affair

Indeed, the private sector has the opportunity to play a significant role in many infrastructure projects. Across the world, a large proportion of infrastructure is already in private hands. Since the 1980s, more than $1 trillion of assets have been privatised in OECD countries. It is likely that further assets will transfer into private hands as emerging market countries look to new ways to finance their national infrastructure. Already, the private sector supplies 20-25% of infrastructure financing in the developing world.

A multitude of private companies will be well-placed to benefit from the increasing demand for new infrastructure build or infrastructure management and ownership. Developed market capital goods providers and contractors are tapping into the opportunity to bring their expertise to the developing world (while continuing to find demand for replacement infrastructure in developed markets). The surge in new business that they are seeing from emerging markets is likely to be sustained for many more years.

With decades of experience in developing cutting-edge high-speed trains, the French rail sector is thriving. Faiveley makes high-tech train parts such as couplings, air conditioning systems and doors, and is seeing increasing trade with China.

Meanwhile, new home-grown champions are also forming in the emerging markets. Emerging market private sector firms are diversifying into infrastructure provision or, in some cases, ownership. These companies, with their local connections and understanding, are becoming meaningful competitors and/ or partners to the developed market players.

Rural Electrification Corporation is an Indian government-owned company with the objective of financing and promoting rural electrification projects all over the country. As a financier, its asset growth is expected to trace the growth in the power sector.


A country’s economic goals are often intertwined with the path to urbanisation. The great centres of civilisation, commerce and administration have been urban – from ancient Rome and Constantinople to London, New York and Tokyo today. The opportunities to be found in cities acknowledge their role in generating demand growth, industrial activity, real estate development and retailing but also in their need for more robust infrastructure and unique financing.

But the benefits of urbanisation critically depend on having the infrastructure in place to house, educate and transport the masses. As governments invite assistance from the private sector to meet these demands, the sectors which stand to gain most include construction, materials, capital goods and transportation – and, of course, finance. The opportunities, however, will be much broader in time.

An investment in the urban age is an investment in the future of the majority of the world’s people and an investment in the future growth of its economy. It could be an opportunity like no other.

Important information

The value of investments and the income from them can go down as well as up and you may get back less than you invested.Overseas investments are subject to currency fluctuations and emerging markets may be more volatile than established markets.

This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Reference to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity.