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Investing in infrastructure

CIBC World Markets economist Benjamin Tal says the global economy will see as much as $30-trillion in fresh infrastructure investment in the next 20 years.

FERNANDO MORALES/THE GLOBE AND MAIL

STRATEGIES

Investing in infrastructure

Can new bridges and roads help move your portfolio?

Darcy Keith

Governments are counting on massive infrastructure spending to pave the way to better economic times. All those billions of dollars earmarked for new bridges, roads and transit systems also present an opportunity to help stimulate the returns of your RRSP.

Construction, engineering, water and other companies that are involved in infrastructure projects appear poised to get a lot busier. It makes logical sense, therefore, to start building more exposure to them in your portfolio. The problem is, the choices are not as clear-cut as they seem.

There's no arguing the money flowing into the sector is huge, thanks to the economic rescue packages in Canada, the United States, and in places such as western Europe and China.

According to CIBC World Markets economist Benjamin Tal in Toronto, the global economy is going to see as much as $30-trillion of fresh infrastructure investment in the next 20 years. In the near term, Mr. Tal says $136-billion (U.S.) worth of shovel-ready projects are likely to start within the next two years in the United States, while in Canada, municipalities are targeting about $14-billion worth of infrastructure work in 2009 alone.

Stocks gain momentum

Not surprisingly, global infrastructure stocks are already gaining ground. Many have already risen about 50 per cent since mid-November. Mr. Tal thinks that, over all, they may be jumping the gun, but when broken down geographically, the Canadian and European stocks have been laggards.

Other than engineering stocks, which are up roughly 40 per cent, Toronto-listed companies involved in industries such as equipment distribution, water purification and construction still appear to have a lot of upside, Mr. Tal says.

"The opportunities are so significant, and demand and supply is so much there, that I think it's a good long-term investment," he says. As a bonus, many infrastructure stocks also have reliable good-sized dividend payouts, he notes.

Some experts skeptical

Because RRSP investments are usually plotted for the long haul, infrastructure holdings would therefore seem like a good fit. But not everybody is ready to jump onto this bandwagon. Michael Ryan, chief investment strategist at UBS Wealth Management in New York, argues that infrastructure spending will only partially offset the sharp deceleration in business activity many of these companies have experienced because of the recession.

Industrial and material stocks will continue to suffer from deteriorating earnings and won't recover to levels seen during the global economic boom earlier this decade, Mr. Ryan said in a recent note to clients.

The U.S. government stimulus package falls far short of the private sector infrastructure spending that was made earlier this decade and most of its effects will be felt over an extended period of time, starting after 2009, he said.

Despite these risks, many financial advisers say they are bullish on the sector. They caution, however, against rushing into these investments, or making them a core holding of your portfolio.

"Infrastructure is part of overall portfolios that I'm designing for clients," says Adrian Mastracci, portfolio manager and president of KCM Wealth Management Inc. in Vancouver.

"But I don't think there's any real hurry to get into these things tomorrow or, say, next month," he says. "I'm perfectly happy buying over a period of time."

A sector that's the latest rage today doesn't necessarily mean it's a wise investment, Mr. Mastracci insists. "Do I buy the headline du jour? No, I try to buy it once the excitement has died down somewhat."

The starting point, he says, is for RRSP investors to determine how infrastructure fits into their overall asset mix and investment objectives. "I would not want to just highlight one area saying, 'That's going to be my saviour, that's the one I'm going to bet the farm on' - I wouldn't do that. As part of an overall, diversified portfolio, yes, it makes a lot of sense."

John DeGoey, of Burgeonvest Securities Ltd. in Toronto, says investors probably would be wise to allocate 10 to 15 per cent of their equity portfolio toward infrastructure, depending on their individual circumstances.

"I personally think it's a good time to buy virtually anything," he says, adding that companies or funds involved in tangible assets, such as steel or other commodities, offer good "buying low" opportunities right now.

Special to The Globe and Mail

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