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Infrastructure: The New Growth Industry

Developing countries need building blocks, and that means opportunity, says the manager of Putnam Global Equity.

It may be that today's growth industry is staring us in the face, but we don't recognize it. No, not biotechnology or electronic commerce, but the opportunities created by the insatiable demand for new infrastructure in the rapidly growing developing countries. Shigeki Makino, portfolio manager of Putnam Global Equity, searches for these industrial "building blocks" when he analyzes stocks.

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Here's the big picture. Boston-based Makino says that, driven by a combined 8% annual growth rate in the BRIC nations (Brazil, Russia, India, China), emerging markets now generate from one-third to one-half of world output, depending on whether you use price or purchasing-power calculations. More important, more than half of net global economic growth each year is taking place in the developing world.

In countries such as China and India, hundreds of millions of agrarian workers are entering the industrial workforce. Both urbanization and industrialization demand new infrastructure -- roads, power plants, ports, airports and so forth. So Makino looks for the direct and indirect beneficiaries of this new demand for building blocks.

For example, he notes, U.S. oil refiners have indirectly benefited from the global economics of tight supply, high prices and long lead times to add refining capacity. Valero Energy (symbol VLO) is one of his top holdings. The stock closed at $72.92 on June 12, down 1.9% in a weak day for the market.

Steel is pretty much the same story. The U.S. is not a big exporter of steel, but global consolidation and enormous demand from China have led to firm world steel prices. Makino says that after decades of being a bad business, steel is today a much less cyclical industry (for a similar take on steel, see Bill Miller's Value Bets). He likes United States Steel (X). Its shares fell 3.1%, to $112.61.

Makino even sees value emerging in airlines, historically one of the worst-performing sectors of the stock market. Globalization and supply constraints -- Airbus is embarrassingly late on delivery of the double-decker A380 model -- are again the story. Makino especially likes long-haul carriers with large premium and first-class traffic. His pick here is Air France KLM. Its American Depositary Receipts, which trade under the symbol AKH, closed at $46.45, down 2.9%.

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