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Accessing Asia: Investing in the
infrastructure imperative
August 2014
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IN BRIEF
Developing Asia collectively is one of the world’s fastest-growing economies. Forecasts
call for it to generate 42% of global GDP by the end of the decade. Driving its growth
is a monumental wave of urbanization. Between now and 2035, the populations of the
cities of China, India and Indonesia will swell by an estimated 530 million.
The scale of public investment required by this unprecedented dynamic makes the
participation of private capital not merely desirable but absolutely essential. We
believe the combination of economic growth and capital requirement creates an
attractive opportunity for investors, particularly for those able to identify and
access the most attractive markets and infrastructure sub-sectors.
AUTHORS
Developing Asia does not merely have promising
demographics and a large aggregate GDP. It has
reached a stage where, in economies in the past, real
per capita GDP has soared and industrialization has
taken off. To take the next step, Developing Asia must
address what we call the infrastructure imperative.
The case for infrastructure investment is already well known and amply proven:
• Infrastructure entails the essential building blocks of a productive society. Similarly,
infrastructure investment is the one investment upon which all others depend.
Michael C. Hudgins
Executive Director
Real Estate Strategist
Global Real Assets
• Many infrastructure investments serve as “pure plays” on local economies. This has
two advantages. First, the investments tend to have minimal correlation to global
financial market volatility. Second, they have direct exposure to regional growth
and change—the dominant economic and demographic themes of emerging Asia.
• Because of the long-term contractual nature of many infrastructure project
revenue models and/or the inelasticity of captive infrastructure demand, the sector
offers attractive risk-adjusted returns at just the point where conventional financial
assets may not.
Pulkit Sharma
Vice President
Portfolio Construction
Global Real Assets Omni
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The phenomenon of “Developing Asia” and the opportunities it
offers are not news to institutional investors:1
• Developing Asia, with a total population of 3.1 billion—
almost 45% of the global total2—has 157 cities with a million
or more residents.3
• Predictions call for an additional 64 cities in the region
to exceed one million or more residents by 2025. (For
purposes of comparison, the U.S. has a total of 10 cities
with a million or more inhabitants, and Europe has 16.)
• The regional economy of the emerging and developing Asian
countries already accounts for just over a quarter of global
GDP. According to forecasts, its share will grow to 42%, on a
purchasing power parity basis, by 2020 (Exhibit 1).4
Developing Asia’s population and consumption share of the
middle class—gaining and highly correlated
EXHIBIT 1: POPULATION AND CONSUMPTION AS A PERCENTAGE OF
WORLD TOTAL
Americas
Europe
Middle East and Africa
Asia Pacific
100
80
28%
23%
42%
Percent
54%
60
40
20
0
2009
2020
Population share
2009
2020
Consumption share*
Source: J.P. Morgan, Brookings Institution; data as of June 30, 2011.
*Based on purchasing power parity.
Why Developing Asia?
The demographics, favorable as they are, do not fully explain
the appeal of the infrastructure investment in Developing Asia.
Using history as a guide, we predict that the region’s
economies are approaching or have already arrived at an
inflection point in the process of their urbanization. In the
United States and Japan, and more recently and more vividly
1
2
3
4
For most of our analysis, except where indicated, we have used the
International Monetary Fund definition of Developing Asia, which includes
China, India and the ASEAN Five of Indonesia, Thailand, Malaysia, the
Philippines and Vietnam. The IMF lists Japan, Korea, Australia, Taiwan,
Hong Kong SAR, Singapore and New Zealand as Advanced Asia, so we
have treated them as Developed Asia. We have excluded Vietnam from
much of our analysis due to a consistent lack of data.
World Bank, 2011 revision.
United Nations, 2011 revision.
IMF, as of April 2014.
2 | Accessing Asia: Investing in the infrastructure imperative
At critical urbanization mass in the past, growth in real per capita
GDP reached takeoff velocity
EXHIBIT 2: URBANIZATION RATIOS AND REAL GDP PER CAPITA—ANNUAL
(1960–2012)
Real GDP per capita (USD, 000s)
INVESTMENT
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50
45
40
35
30
25
20
15
10
5
0
U.S.
Japan
Korea
= India
0
20
= China
40
60
Urbanization ratio (%)
80
100
Source: J.P. Morgan, FactSet, United Nations, World Bank; data as of
December 31, 2012.
in Korea, once more than half of the total population had
migrated to cities, real per capita GDP soared (Exhibit 2).
China has nearly reached that stage, and India is progressing
toward it.
Correlation in this example does not, of course, proxy causality,
but the infrastructure investment required to put rapidly
urbanizing populations to work does seem to be a driving
force. At its earliest stage, basic infrastructure investment—
roads, ports and power generation—attracts manufacturers
that export goods and import capital and labor. As “first mover”
manufacturing takes root, an industrial ecosystem emerges.
Allied manufacturing and services cluster, attracting more
migrants and creating demand for a progressively more
skilled, wage-earning workforce. The process evolves into a
self-perpetuating virtuous circle.
From the very start, no phase of this progressive buildout can
happen without an infrastructure catalyst. As manufacturing
develops, it requires infrastructure and related resources
from an expanded set of sub-sectors, including more roads,
ports and electricity generation, plus distribution, logistics,
warehousing and health care. The increasingly affluent urban
population, with growing “quality of life” needs and expectations, becomes the source of different but complementary
infrastructure development.
Epic migrations, epic implications
The conditions are nearly in place, in our view, for Developing
Asia—and for its three largest economies in particular—to
make the quantum developmental leap that Korea, Japan and
Largely because of the magnitude of Developing Asia’s urbanization, infrastructure expenditures, in contrast to the world’s
developed regions, are not deferrable or discretionary. The
need is urgent and ongoing. China, India and Indonesia will add
another 530 million residents by 2035,7 an influx that equals
the combined current populations of the eurozone plus Brazil.
This has two immediate investment implications. First,
Developing Asia’s infrastructure expenditures, based on a 2012
forecast, have been expanding at an accelerated rate compared with Developed Asia—especially compared with Australia,
long a favored destination of global infrastructure investors,
where it is actually declining (Exhibit 3). Second, Developing
Asia’s governments are increasingly turning to private capital
to fund these investments. Exhibit 4 tracks the accelerating
cumulative investments in private participation infrastructure
across the economies of Developing Asia.
Spotlight on the markets: Many similarities
but also many differences
The sheer range of projects across Developing Asia suggests that
infrastructure investors may want to maintain a flexible and
opportunistic stance with a broad pan-Asian strategy. We believe,
5
6
7
J.P. Morgan; Asian Development Bank Institute, “Estimating Demand for
Infrastructure in Energy, Transport, Telecommunications, Water and
Sanitation in Asia and the Pacific: 2010–2020” (September 2010); Deutsche
Bank, “India Infrastructure Sector” (April 2012) (referencing India Planning
Commission); Investment Board of Thailand, “Infrastructure Development
Plan for 2012–2016;” National Development Planning Agency, Government
of Indonesia, February 2012; Philippines National Economic and
Development Authority, “Comprehensive and Integrated Infrastructure
Program,” undated (estimated 2009); PPIAF (PPI Project Database,
accessed May 2012 by Royal Bank of Scotland), “The Roots of Growth,”
September 2011. (The required expected amount of Asian infrastructure
private equity investment” assumes historical trends continue.)
Asian Development Bank Institute, “Estimating Demand for Infrastructure
in Energy, Transport, Telecommunications, Water and Sanitation in Asia
and the Pacific: 2010–2020,” September 2010.
United Nations, Department of Economic and Social Affairs, Population
Division, October 2012.
Developing Asia* should outstrip Developed Asia**
infrastructure spending
EXHIBIT 3: COMPOUNDED GROWTH RATE OF INFRASTRUCTURE
SPENDING (2012–15) 8
Growth rate infra spending (%)
20
15
10
5
0
-5
Australia
Developed
Asia
China
India
Southeast
Asia†
Source: J.P. Morgan, CLSA, Euromonitor, World Bank; data as of August 31, 2013.
*Developing Asia: China, India, Indonesia, Malaysia, Philippines, Thailand.
**Developed Asia: Australia, Japan, Korea, Singapore.
Southeast Asia: Indonesia, Malaysia, Philippines, Thailand.
†
The Developing Asia infrastructure trend is running in favor of
private sector participation
EXHIBIT 4: PRIVATE PARTICIPATION IN INFRASTRUCTURE INVESTMENTS
350
$ billions (cumulative)
the U.S. made earlier. The region has come far in both
soft measures (regulation, law and education) and hard
investments (infrastructure and residential and commercial
development). It has made great strides, but it has further to
go to fill its potential. The absolute level of the infrastructure
investment required is immense. Estimates indicate that the
major Developing Asian country markets will need about $750
billion in infrastructure investment every year for the next five
years, or almost $4 trillion in total by 2019.5 (More critical for
investors is the fact that most regional governments expect
that about 25% of the aggregate investment will need to come
from private sources, for a total of roughly $1 trillion.)6
300
China
India
Indonesia
ASEAN 5
250
200
150
100
50
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Investment year
Source: J.P. Morgan, World Bank; data as of December 31, 2013.
however, that the large qualitative differences among local
economies make it necessary for even the most committed
pan-Asian investor to identify those geographies and
infrastructure sub-sectors that combine the most attractive
opportunity sets and the highest prospective returns. We have
developed a proprietary seven-factor filter, described in detail
in the Appendix, that incorporates demographic, fiscal and
development data, along with financial criteria, to arrive at a
ranking of infra-structure investment opportunities by geography
across Asia. It demonstrates that India, China and Indonesia
may offer the deepest and most attractive environments for
private infrastructure investments, while the Developed Asia
economies lag.8
8
CLSA special report, “Needs driven infrastructure returns to lure capital”
(August 2013).
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To reach the U.S./Japan inflection point, India will need to
manufacture more, and China will need to consume more
EXHIBIT 6: REAL GDP PER CAPITA VS. MANUFACTURING AS A
PERCENTAGE OF GDP
10
Manufacturing (% of GDP, reversed)
10
Manufacturing (% of GDP, reversed)
Not only does Developing Asia as a whole appear to us to
offer more opportunities for infrastructure investment, the
opportunities themselves are enormously varied—as varied as
the state of development across the region. Even within
national economies, investors encounter a formidable array of
needs and projects. Within the two biggest economies, India
and China, multiple development phases are simultaneously
unfolding. India has a sizable post-industrial sector providing
global information technology and services. China has a relatively well-developed infrastructure base concentrated in its
coastal manufacturing hubs. In both nations, these advanced
economies exist alongside rural provinces still in the early
stages of industrialization and urbanization.
U.S.
15
20
India
15
25
Japan
30
20
25
35
0
5
10
15
20
25
30
35
Real GDP per capita (000s)
40
30
45
50
China
35
40
China’s consumption deficit,
India’s manufacturing shortfall
45
0.0
A further comparison of the two economies points to a principal
difference between them. Historically, at early stages of development, manufacturing commands a large percentage of total
output, providing the jobs required to keep a low-skilled population employed and on the way to middle-class living standards. As a country or geography has ascended the development curve toward higher real per capita GDP, the share of
manufacturing has fallen while the proportion of output from
consumption-driven service segments catering to the growing
middle class expands (Exhibit 5).
China’s manufacturing output as a percentage of its GDP
initially reached the high rates we would expect at an early
Manufacturing (% of GDP, reversed)
10
U.S.
20
25
Japan
30
0
5
10
15
20
25
30
35
Real GDP per capita (000s)
40
45
3.0
3.5
4.0
Source: J.P. Morgan, United Nations; data as of December 31, 2013.
stage of development and has now declined to levels associated
with the earlier Japanese and U.S. spikes in real per capita
GDP. China has not yet experienced a similar step change in
real per capita GDP, however, suggesting that it has not yet
realized the growth in personal consumption and related
services required to achieve it (Exhibit 6). India finds itself at
an even lower level of real per capita GDP—and an even lower
ratio of manufacturing to GDP. This suggests, among other
things, that India’s industrial infrastructure base lags China’s.
50
Source: J.P. Morgan, United Nations, World Bank; data as of December 31, 2013.
4 | Accessing Asia: Investing in the infrastructure imperative
1.5
2.0
2.5
Real GDP per capita (000s)
Exhibit 7 (next page) diagrams the dilemma the two countries
face. China (Exhibit 7A) has invested aggressively in fixed
assets, including infrastructure, at the expense of consumption. Capital has flowed to business, particularly to stateowned enterprises (SOEs). With low returns on deposits, few
investment alternatives and poor publicly provided benefits
such as education and health care, individuals had little choice
but to save more and consume less. The chronic consumption
shortfall threatens China’s growth trajectory. India (Exhibit 7B)
has the opposite problem. It has under invested in fixed assets
and must ramp up its infrastructure spending in order to rebalance its economy toward manufacturing.9
EXHIBIT 5: REAL PER CAPITA GDP VS. MANUFACTURING AS A
PERCENTAGE OF GDP (1970–2012)
35
1.0
The contrast has two economic implications: India’s industrial
sector has a distance to travel to reach a takeoff point similar to
China’s; and China’s consumers still haven’t acquired the resources to propel that economy into the ranks of the fully developed.
Once real per capita GDP reaches the inflection point,
manufacturing as a percentage of GDP falls off
15
0.5
9
It could also conceivably support an even more aggressive push into
“developed market” services, a strategy that would require a potentially
different mix of infrastructure development.
On the path to sustaining GDP growth: China needs to increase consumption, India needs to increase investment
EXHIBIT 7A: CHINA
70
Consumption share of GDP
Investment share of GDP
80
60
70
50
60
30
Consumption share of GDP
50
Percent
40
40
30
20
10
10
0
0
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
20
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Percent
EXHIBIT 7B: INDIA
Investment share of GDP
Source: J.P. Morgan, World Bank; data as of May 31, 2014.
India and Indonesia fare well on this measure (Exhibit 8).
Roughly half of Indonesia’s population today is under the age
of 30. As the young population comes of age, it should hold
the country’s dependency ratio steady for the next few
decades. India’s dependency ratio should actually fall, according to projections, but China, with a robust dependency ratio
today, stands out for its poor dependency ratio trend, a result
of the government’s one-child policy. That may change for the
better with China’s recent relaxation of its one-child policy,
although the impact would only start to be felt late in the
2015–35 window we have studied.
The ability of the local government to fund its infrastructure
investment by itself can limit opportunities for private investors. Viewed from the perspective of their fiscal balances and
central government debt-to-GDP ratios, many Asian economies—Australia, Singapore, Korea, Indonesia, Philippines and
China—enjoy relatively good health. Only India and Malaysia
stand out dramatically on the fiscal balance measure, with
deficits of 4.0% and 4.9%, respectively.10
A second measure, computed by the Bank for International
Settlements, which gauges an economy’s credit gap (a comparison of its current debt-to-GDP ratio with its long-term
trend for the same measure), may lead to a somewhat
different conclusion for some countries (Exhibit 9).
Asset bubbles can form in an excessively positive credit gap; a
negative gap means deleveraging and a possible brake on GDP
EXHIBIT 9: TOTAL CREDIT GAP FOR SELECT DEVELOPED AND
DEVELOPING MARKET ECONOMIES
An aging labor force can imperil urbanization’s productivity gains
30
EXHIBIT 8: CHANGE IN DEPENDENCY RATIO (2015-35)
20
30
21
Higher asset bubble risk
14
14
13
10
Percent
25
20
15
5
4
4
4
0
-2
-10
10
-13
Source: J.P. Morgan, World Bank 2011 revision; compiled July 2014.
Euro area
Australia
Canada
Korea
Japan
Brazil
Thailand
Indonesia
Singapore
Singapore
Korea
Germany
China
Thailand
U.S.
France
Japan
Australia
UK
Malaysia
Indonesia
India
Philippines
-10
-22
Lower asset bubble risk
-30
-5
India
0
-8
-20
Good
Malaysia
5
-7
China
Percent
24
UK
Population growth alone does not give a full picture of an economy’s demographic prospects. A more ample view takes into
account a country’s dependency ratio: the ratio of cohorts too
old and too young to work to the total available labor force,
thus the ratio of dependents to productive workers, fills it out. A
society with a high dependency ratio and an aging labor force
may ultimately experience a less vibrant virtuous cycle.
Private capital as a remedy for credit
scarcity … and a credit glut
U.S.
Diving deeper into demographics
Source: J.P. Morgan, Institute of International Finance, Bank for International
Settlements; data as of September 30, 2013.
10
CLSA, IMF; data as of December 31, 2013.
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Economies running below their long-term trend can be facing
a capital shortage. Indeed, our own analysis found in addition
to this measure that India’s supply of capital from three major
sources—domestic stock offerings, off-shore equity offerings
and private equity—dropped 85% for the 2011–13 period compared with 2006–08. By the same token, India runs a relatively
low risk of asset bubbles. Taken together, the capital shortage
and low bubble risk make for a favorable environment for
private investment.
By contrast, an above-trend credit gap serves as a warning sign
of destabilizing conditions in economies with an excess supply
of credit. China, a country whose fiscal health appears robust,
stands out for its acute bubble risk. Its combined corporate,
household, central and local government debt jumped from
145% of GDP to 210% between 2008, the year of the financial
crisis, and 2013. The risk may be even higher than revealed by
the numbers alone because much of the growth in credit has
occurred in the opaque shadow bank network outside the relatively transparent and more regulated formal banking system.
China’s leaders have made clear their intention to reverse this
trend and aid over-extended local governments and SOEs.
The Communist Party’s latest reform plan looks to bolster the
capability of banks to do more direct lending to capitalstarved private enterprise, in part by encouraging non-public
capital to participate in public sector-led capital projects. In
fact, China’s State Council announced in April 2014 that it
would open up 80 major infrastructure projects to private
capital involvement.11
A note on return potential
The range of Developing Asia projects is varied and growing.
By further targeting the most attractive infrastructure sub-sectors within each country market, we believe that returns in the
high teens are possible (Exhibit 10). While our work has identified India, China and Indonesia as the most attractive candidates for infrastructure investing, the entire region, including
Southeast Asia, offers attractive opportunities.
11
“China opens up infrastructure to private capital,” FinanceAsia (April 25, 2014).
Infrastructure sub-sectors that provide attractive risk-adjusted returns
EXHIBIT 10: SECTORS AGGREGATED BY COUNTRY (OUT OF 26 DIFFERENT SUB-SECTORS) AND RANKED BASED ON TOTALS
South Korea
China
Waste management &
waste-to-energy
Renewable energy
Natural gas distribution
Waste/water/wastewater
Thailand
Power
Renewable energy
Logistics
Roads and railroads
Warehousing
Health care delivery
Logistics
Railroads
Forestry
Philippines
Malaysia
Power
Power
Renewable energy
Oil and gas
Roads
India
Renewable energy
Power
Oil and gas services
Ports
Roads
Health care delivery
Agri-warehousing
warehousing
Logistics/CFS/ICD
Education
Source: J.P. Morgan; data as of February 14, 2014.
6 | Accessing Asia: Investing in the infrastructure imperative
Indonesia
Power
Renewable energy
Oil and gas services
Roads
Ports
Telecom towers
Waste/water/wastewater
Mining
Mining-related logistics
Conclusion: Developing Asia’s infrastructure
moment
For the economies of Developing Asia, rapid development and
breakneck urbanization have made infrastructure investment a
priority too pressing to ignore. This reality provides the backdrop for a regional investment opportunity that, in terms of
depth and breadth, is uniquely appealing.
Investors must bear in mind, however, that “Developing Asia” is
a label, not a monolith. It applies to a wide range of economies,
cultures and, ultimately, opportunities. Participating successfully
in the region’s potential requires focus, flexibility and capability:
a well-defined focus on the most attractive markets and infrastructure sub-sectors, flexibility to adapt opportunistically to
situations that arise in an exceptionally dynamic environment,
and, finally, an on-the-ground capability to identify, analyze,
evaluate and monitor investments firsthand.
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Appendix
The market filter, shown below, identifies relatively attractive
market conditions. It considers the return potential for infrastructure sub-sectors for each of the markets listed. We have
found that attractive opportunities could well exist in most or
all of these candidate country markets. We have selected
seven quantitative market-specific factors that we feel
influence a market’s infrastructure development potential:
• Population
• Infrastructure developmental rank as determined by a
third-party study (CLSA bank)
• Percentage of the total population living in cities
• Dependency ratio
• Fiscal balance
• Debt-to-GDP ratio
The factors are normalized using z-scores and then grouped
into four weighted categories:*
• Size of opportunity (factors 1 and 2)
35%**
• Demographic support (3 and 4)
15
• Capital availability (5 and 6)
25
• Return potential (7)
25
The weighted category scores add up to a total country score,
which we used to assign the country an infrastructure opportunity ranking within the broad Asia Pacific region, shown in the
last column. Developing Asia does very well by our “top-down”
measure, with India, China and Indonesia making up the top
three, but most of the developed economies fall to the bottom. Although adjustments to category weightings or the use
of different factors could change the rank order, we believe
the need and corresponding opportunity in Developing Asia
clearly outstrip that of Developed Asia.
• A proprietary measure of sectors meeting J.P. Morgan
hurdle rates
The stars are aligned for infrastructure investors considering Developing Asia
EXHIBIT A: ASIAN MARKETS RANKED IN TERMS OF THE ATTRACTIVENESS OF THE INFRASTRUCTURE INVESTMENT OPPORTUNITY
Less attractive
Country
India
Size of opportunity
Population
Infra. dev.
(2012)
rank
Demographic support
Urbanization Dependency ratio
(#'s, 2015–35)
(chg 2015–35)
More attractive
Capital availability
Fiscal
Debt/
balance
GDP
Return potential
Sectors meeting
JPM hurdle rates Ranking
1
China
2
Indonesia
3
Philippines
4
Japan
5
Thailand
6
Malaysia
7
Australia
8
Korea
9
Singapore
10
Source: J.P. Morgan, Bloomberg, CLSA, International Monetary Fund, United Nations Department of Economic and Social Affairs (Population Division), World Bank;
data compiled July, 2014.
*A z-score is the number of standard deviations (based on the overall data set) that an observation is above or below the mean (of the overall data set). A positive
standard score represents a normalized measure of the observation’s place above the mean, whereas a negative standard score represents a normalized measure
below the mean. Using the standard deviation creates normalized units of measurement and allows the combination of various z-scores (derived from separate
data points) into a single score, as we have done here.
**We did not want population to skew the analysis, so we only gave it a 10% weighting, with the remaining 25% for the size of opportunity category attributed to
the infrastructure development rank score, a more critical measure, in our view.
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