The Chinese government plans to spend $120 billion annually in coming years on railway construction, mostly for high-speed railways, as millions of its citizens move to the cities, and trade routes within the country are bulked up.
"You need mass urban transportation in most of the new cities being built in China," Thomas Bucher, who manages the 200 million euro DWS Invest Global Infrastructure fund, told Reuters in a telephone interview.
"The Chinese have replicated western technology from Siemens , Bombardier and Alstom , and they are looking abroad. They will probably build a high-speed railway across Thailand and this is something likely to be done in the next four years," he said.
Companies such as Hong Kong-listed China South Locomotive and Rolling Stock Corp and China Railway Construction Corp allow investors to tap into China's expanding rail market, Bucher said.
Bucher's fund invests globally in stocks involved across the infrastructure spectrum, from companies that build and supply equipment and technology to projects to companies that run infrastructure assets, such as roads and power grids.
About 40 percent of his portfolio is in emerging markets and two-thirds is in infrastructure operators, he said. In the year to January 2011, his fund had a return of 19.2 percent, against 12.7 percent in the UBS Developed Infrastructure & Utilities index, he added.
"Unlike other themes and sectors, in infrastructure probably half of all capital expenditure takes place in emerging markets, so by the nature of the fund we have a higher weighting towards those markets," Bucher said.
<>Other Frontiers
DWS said in India inflation and the government's stance on investment in infrastructure stifled investment in it. While the government recognises the deficiencies in its infrastructure, it does not fund projects in advance and requires construction companies to pre-finance these.
"Inflation is kicking in and we have reduced some of our India exposure, from 8 percent to less than 4 percent. Construction companies in India have to pre-finance projects because the Indian government does not pay in advance," he said.
"Higher inflation leads to higher interest rates, increasing their financing costs. Bribery scams and poor government execution also weigh on the sector," he added.
Brazil's government also recognises the underinvestment in infrastructure and offers investment opportunities as it seeks to improve transportation and upgrade its power plants, as will countries such as Indonesia and the Philippines, Bucher said.
A "railway renaissance" in Europe and the United States, driven by high-speed rail and freight trains, is also boosting companies involved in their construction, such as Vinci , as well as rolling stock makers such as CAF .
"Most freight train operators in the U.S. have been outperforming the S&P index over the last ten years, even in the recent financial crisis. With higher fuel prices, you now see traffic shift from the road to the more efficient railways," Bucher said.
Replacement rather than new-build projects are driving growth in the west, Bucher said, with the exception of renewable energy and the rolling out of broadband networks and expanding telecommunications capacity to cater for smartphones.
Bucher cautioned that retaining the infrastructure investment theme meant distinguishing between companies wholly devoted to the sector, those with wider industrial activities, such as General Electric and Siemens.
"We typically have mid- and small-cap names that are unique and offer full exposure to the infrastructure themes instead of the larger names," Bucher said.
Among the largest recent investments of DWS Invest Global Infrastructure, sponsored by the unit of Germany's flagship lender Deutsche Bank , are U.S. railroad company CSX a
