Developed Markets, Emerging Markets, Globalization

The Industrials Evolution

By, 04/04/2008

Story Highlights:

  • Industrials are the driving force behind much of today's global economic activity.
  • Healthy economic growth continues to underpin demand for Industrials in both developed and developing countries.
  • Demand for Industrials is evident in surging capital expenditures in several areas of the global economy.
  • Industrials play a large role in globalization and raising standards of living.

(Editor's Note: MarketMinder does NOT recommend individual securities; the below is simply an example of a broader theme we wish to highlight.)

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The 18th century's Industrial Revolution ushered in an explosion of social change and improvements in technology, communication, transportation, and manufacturing. The Industrials sector today echoes the Industrial Revolution's spirit, though less dramatic and more evolutionary than revolutionary.

The Industrials sector is still comprised of sub-industries facilitating communication, transportation, and distribution. We rarely "see" Industrials in action—Industrials products aren't generally on store shelves—but they're the driving force behind much of today's global economic activity. In the US, trains move 70% of all domestically produced automobiles, 40% of freight transportation, 30% of the nation's grain harvest, and 65% of coal (producing half of the nation's energy)! Domestic freight hauled by trucks was 10.7 billion tons in 2006.* The first freight ships carried only 59 containers, stacked two-high on the deck. Today's mega-carrier container ships are a quarter mile long and can transport 14 million cubic feet of cargo. Over the past 40 years, US maritime, railroad, and trucking industries have pursued advancements in intermodal transportation and in the movement of goods domestically and abroad.

The US and other developed nations are moving away from heavy industry to service-oriented sectors, but the rest of the world is still concentrated in Industrials. Evolving from its European- and US-centric "revolutionary" roots, Industrials are both driven by and help drive globalization by enabling the sharing of information, goods, and people across borders and across transport modes. Arguably more important, Industrials continue to create social change, raising the standards of living by continuously improving roadways, construction, energy and electricity, environmental protection, health care, pollution and waste management, even office and employment services. Imagine how much more efficient and cheap cars are today, not to mention the wide availability of hybrid vehicles!

Today's healthy economies will likely continue globalization's course and to raise living standards—underpinning demand for Industrials in both developed and developing countries. Global demand for Industrials is evident in strong capital expenditures in all areas, including national infrastructure development and expansion, alternative energy investments, power and electricity generation, non-residential construction, health care equipment, defense spending, and transportation channels. China is investing $125 billion in power plants over the next five years. Worldwide demand for electricity is forecasted to almost double by 2030.**

Infrastructure development alone is estimated to have a projected cumulative expenditure of $41 trillion between 2005 through 2030.*** In robust economic times, governments seek to replace outmoded infrastructure or establish new infrastructure. Currently, Scottish Water is investing heavily to repair Edinburgh's crumbling Victorian-era network of water pipes. The leaks are calculated to cost taxpayers roughly $120,000 per day. An estimated 40% of Mexico City's water leaks through turn-of-the-century built pipes. In 2004, the US federal, state and local governments spent a combined $147.5 billion on highway construction, with $36.4 billion spent on resurfacing or reconstructing existing highway lanes and bridges. Cities continue to draw migrants from rural areas, increasing demand for building construction, highways, machinery, and sewage systems. In 1991, India had 23 cities with at least a million people, and by 2001, it had 35 cities. India's ninth largest city, Surat, doubled its population to 3.5 million in 15 years because of rural migrants drawn to the city's diamonds and textiles industries. It is estimated by 2030, the Americas and Europe will see more than 80% of their population living in urban areas and Asia will see 54% living in urban areas.

Although Industrials currently have strong demand prospects, the sector will likely be impacted if the global economy severely slows and as a result, governments decide to focus on social programs rather than infrastructure (though some economists may argue they are one and the same) and business spending declines. Industrials could also face a setback if emerging markets' demand fell dramatically. Despite the potential concerns, we see Industrials facing strong demand from both developed and developing nations. Emerging markets will only stoke demand with their focus on increasing infrastructure and raising living standards in efforts to join developed nations.

Industrials have silently evolved from more dramatic beginnings, but they're no less important today in how we share knowledge, receive our food, travel domestically and globally, and do business. In many ways, Industrials have helped our lives become easier and more leisurely while more productive. And even more amazing is the conduit they provide for globalization and the evolution of the world.


Notes:
*American Trucking Association
** Renewable Energy Conference, 2007, Berlin
*** U.S. Global Investors Report (Data sources: Booz Allen Hamilton, Global Infrastructure Partners, World Energy Outlook, Organisation for Economic Co-operation and Development (OECD), Boeing, Drewry Shipping Consultants, U.S. Department of Transportation)


*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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