Every once in a while, something leaks into the American echo chamber and reminds us that there is a whole other world out there.
It also reminds us that there is a whole lot of work that needs to be done for basic services we take for granted. As investors, this is a huge, if long-term, opportunity.
Over in India, the Bharatiya Janata Party (BJP), led by Narendra Modi, just crushed the entrenched Congressional Party led by Rahul Ghandi.
Normally, Indian politics don’t have a whole lot to offer us as investors in the U.S.A. However, the party platform coupled with Modi’s track record says it all.
As Chief Minister, Modi has been very pro-business. While governor of the state of Gujarat, he cleared the way for more direct foreign investment, cut red tape, and fought graft. On the campaign trail, he promised to end the crippling retroactive corporate taxation that began in 2012.
He even renegotiated purchase agreements with private power companies, set up a police unit to stop thieving of electricity, and ended unmetered supplies to rural areas. This created the only state with a power surplus in the entire nation.
“This is really historic. It’s going to create a certain sense of stability … U.S. companies are very excited.” said Milan Vaishnav, an expert on India’s political economy at the Carnegie Endowment for International Peace.
As for where the new ruling party will focus efforts, the BJP’s manifesto says it all. It campaigned with promises of “Home, Electricity, Water, Toilets and Access.”
Break it down and it mirrors unmet and dire need around the developing world for two basic needs we can use to realize profits — water and energy.
Keeping it Clean
India has the unfortunate honor of accounting for 60% of “open defecation” in the world.
Nearly half of India’s 1.2 billion people have no toilet at home and only a tiny fraction has access to public facilities, creating a terrible lack of basic sanitation.
As of 2010, only two cities in India had a continuous water supply. In 2005, none of the 35 Indian cities with a population of more than one million distributed water for more than a few hours per day.
It is so bad that the total annual economic impact of inadequate sanitation in India is estimated at 6.4% of GDP.
India is expected to need $152 billion in total spending between 2007 to 2020 and see spending double in less than six years to make significant progress.
Plus, for each $1 invested in sanitation returns an estimated $3 to $34 depending on the region and technology, according to the World Health Organization.
No wonder Modi is targeting the issue. Sanitation spending will help keep him popular while boosting the flagging economy.
Pan out to a global scale and it gets far worse. 780 million people lack access to any clean water and 3.4 million people die annually from a water-related disease.
The problem is particularly acute for children. Every 21 seconds, a child dies from a water-related illness and 443 million school days are lost each year due to water-related illness.
The McKinsey Global Institute estimates $10 trillion is needed for water infrastructure worldwide by 2030.
A lot of this spending will inevitably flow to and through established water infrastructure companies and multinational corporations that have the resources to complete massive projects.
Investing directly in companies in India is difficult and risky, but there are a couple ETFs that use multinational companies to create a solid basket of water stocks.
Two that stand out are the First Trust ESE Water Index Fund (NYSEARCA: FIW) and the Claymore S&P Global Water Index (NYSEARCA: CGW).
Both have outperformed the Dow over the last five years and should see more inflows as the need for better living standards continues to dominate politics in developing nations.
Keeping the Lights On
India also has the unfortunate honor of experiencing the top three worst power outages in history. On January 2, 2001, 230 million lost power; on July 30, 2012, 330 million lost power: the next day, 670 million people lost power.
To put 670 million people into perspective, that is about 10% of the world population.
This situation is expected to worsen over the next several years. Economic growth is constantly outpacing new power generation. South India will suffer most because it faces a 26% shortage this year. Nationwide, the power shortage is estimated at around 9%.
India needs cheap and reliable power on an unimaginably massive scale. This is especially true as the new ruling party tries to make good on reviving stalled economic growth.
Whenever and wherever the power grid fails, farms, factories, and small businesses are forced to close. The impact on the economy is crippling and it prevents any job growth.
This dire need for more power to placate voters means one thing in particular: India needs a whole lot of cheap coal-fired power plants.
The defeated government’s five-year plan called for roughly 76 gigawatts (GW) of new power to be added by 2016-17. Roughly 63 GW would come from 46 planned coal-fired plants.
Assuming this capacity is actually added, it would take total coal-fired generation to around 175 GW, which would require about 842 million tonnes of coal a year.
We can only expect increased investment plans after the election.
In addition to coal for power generation, India plans to expand steel output, which could use as much as 300 million tonnes of coking coal by 2016-17, pushing the total coal needed per year to around 1.1 billion tonnes.
On a global scale, 1.3 billion people lack access to electricity and per capita use is skyrocketing. The only hope to meet demand is cheap coal. No wonder it will pass oil as the number one fuel by the end of this decade.
Three-quarters of the 1,600 new coal plants planned worldwide and 90% of worldwide increases in coal demand will come from just India and China.
Now, investing in the future of coal is particularly tricky right now, but not impossible.
Ideally, we could depend on U.S.-based companies with a global presence. Unfortunately, they are being slammed by the domestic market and have been shunned as they bleed money.
Pure plays like Peabody Energy Corp. (NYSE: BTU) have been improving but are still losing money and have a ways to go before they can reliably break even or make a profit.
The Market Vectors Coal ETF (NYSEARCA: KOL) at leasts spreads out some of the risk, but it will also temper returns. It has traded flat for most of the year, but offers a 2.32% yield.
Instead, here is a novel and obscure play to check out. Even with depressed coal prices, this company is up about 12% over the last year, has a P/E ratio a bit above 19 and a 3.95% dividend yield.
Consider Westshore Terminals Investment Corp. (TSE: WTE or OTCMKTS: WTSHF). The company owns and operates North America’s largest coal export terminal.
In recent years, Westshore has become increasingly popular choice for U.S. mines, particularly in the Powder River Basin in Montana and Wyoming. U.S. shipments reached a record 9.3 million tonnes in 2013. Overall, in 2013 it shipped a record 30 million tonnes.
It is in the process of replacing some aging equipment without taking on additional debt, and will be well-positioned to pull in greater export fees when coal prices recover.
Plus, with the staunch opposition to new export terminals on the U.S. west coast, they’re going to control the best way to move high volumes of coal into the Pacific.
Keeping It Simple
U.S. investors face a tough situation. We’re constantly bombarded with information about the latest tech valuations, domestic economic news, and market analysis from pundits.
Yet there is a whole world out there. One that is desperately lacking crucial basic needs to survive.
Land, food, water, and energy infrastructure and investments are in dire need of improvement today and rapid expansion in years to come.
In a domestic market testing new highs on bad economic news and central bank intervention with price to earnings ratios in dangerous territory, sometimes it is best to step back. Look at the long-term picture and play a long game.
While our editors will continue to search for companies with explosive growth potential from domestic sales, we also keep our eye out for amazing opportunities in sectors the rest of the investors in the U.S. financial echo chamber ignore.
In fact, Nick has a great play on another global power shortage that has already delivered 80% gains to his Early Advantage readers, and could easily double within the year.
Stay tuned and we’ll keep you in the loop.
