Governments gone wild

Infrastructure investments are here to stay in government budgets worldwide and in Kevin O'Leary's portfolio.

By Kevin O'Leary
Globe Investor Online Magazine, Dec. 15, 2008

Kevin O'Leary is the chairman of Gencap Funds LP, the manager of the O'Leary Global Infrastructure Fund and the O'Leary Global Equity Fund.

It is mesmerizing to watch billions of dollars being spent by governments worldwide and it's just starting. U.S. President-elect Barack Obama has promised to create the largest series of public works projects since the highway systems were built in the United States more than 50 years ago.

The Chinese Government has already announced its half-a-trillion-dollar bailout program and not to be left out, Nicolas Sarkozy, the French President, proclaimed that France would embark on a massive rebuilding program. Almost every industrialized nation has announced some kind of government spending program designed to act as an economic stimulus program.

One fact is obvious, the world's economies are now very interlinked and they are going into a recession together. Their governments are going to try and spend their way out. Will it work? Who knows? But if you are an investor you had better wake up and smell the coffee because what is going on here is a game changer.

Never before has a fire hose of capital this large been aimed at one investment theme and turned on by so many countries all at the same time. It's called infrastructure and it is the new "it" girl on the investment fashion runways all around the world. Unlike "hot" investment themes that come and go (think hedge funds) infrastructure spending is here to stay. In fact the Organization for Economic Co-operation and Development (OECD) estimates that infrastructure spending will top $40-trillion (U.S.) between now and 2030. This is not a fad, this is a mega-trend and it's going to be very big.

Why is this happening now and so quickly? Most governments are concerned that what we are facing is not a "plain vanilla" recession; instead they fear an economic slowdown of Depression-like proportions. So each government is scrambling to start programs to build new roads, rail lines, pipelines, next generation wireless and Internet systems to keep their populations employed. Jobs, jobs, jobs is the new mantra.

China is building new hydroelectric dams, coking plants and toll roads. Mr. Obama's U.S. programs include expenditures to increase the energy efficiency of government buildings and hospitals and employ hundreds of thousands to work on new generation energy initiatives. Russia is going to spend 15 years upgrading its entire rail system and worldwide there are billions worth of nuclear energy plants being built to support the needs of new middle classes growing everywhere.

As an investor I always want a portion of my capital invested in the sectors that are growing. When governments tell me they are going to spend billions investing in infrastructure I believe them because if there is one thing governments everywhere know how to do well (and it may be the only thing) it's spend money.

If you are a deep value, yield-orientated investor like me, the infrastructure trend is spectacular. That's because billions of the dollars that all these governments are going to spend are going to be through public companies that I can invest in. Not just in their equities but their bonds as well. And never before have the yields and dividends been more succulent. How tasty? See the accompanying table for some examples that make the cut for the O'Leary Global Infrastructure Fund. Unfortunately, most of the best infrastructure investments today are not listed on Canadian exchanges. Canada's gross domestic product is less that 3 per cent of the global GDP. Very simply, most of the $2-trillion that is being spent annually is occurring elsewhere, so if you want exposure to this sector you are going to have to invest globally.

There is no question that these stocks and bonds will have volatile price fluctuations because there is no telling when this current global recession is going to end but helping you to stomach this volatility are the excellent yields these securities provide.

Are these payments sustainable? That is the beauty of investing beside governments, as they try and spend their way out of the economic downturn they are giving many private companies fixed margin contracts to do the work. They in turn use these proceeds to pay your interest and dividends.

I have never been a fan of big government programs as most of them don't work, but there are times when it does not make sense to fight city hall, this is one of them. Infrastructure investments are here to stay in government budgets worldwide and in my portfolio.

Special to The Globe and Mail