Society

The city is rising: how to invest in global urbanisation

Urbanisation is an unstoppable trend. More than half of the world’s population currently already lives in cities, and by 2050 (when the world population could be as high as 9 billion) an additional 2.5 billion of the world will live in them. That will raise the total figure to two-thirds. Some 90% of that growth is taking place in developing countries, most notably in Africa, South America and Asia. But the pull of the city still exists in the West as well.

Better paid jobs and higher living standards drive people to the city

The causes of urbanisation are quite clear. As a country becomes more industrialised, an increasing number of people move from rural areas to the cities as that’s where the factories and thus the jobs tend to be. In the cities they can not only expect better paid jobs, but also a higher standard of living, better medical conditions, housing, transportation and so on.

The developed world is already highly urbanised, with the US urbanisation rate above 80% and developed Europe’s rate similarly fluctuation around those levels (Germany is at 75%, France at 80% and the Netherlands at 90%). Meanwhile, the rate is still significantly lower in developing countries with China likely to reach 60% in the years ahead, but places like India not exceeding 35% as of yet. The trend in the developed world has some space to run, but clearly the developing world will face explosive urban growth yet.

But rapid urbanisation has negative side effects

Urbanisation can over the longer run have a positive impact on a population’s economic well-being, but in the short-run there are several negative side effects. These are mostly felt in the case of rapid urbanisation.

  • Unemployment. One of the primary issues with urbanisation is that as rural people move into the cities to chase jobs, the supply of jobs actually cannot keep up with the demand. That leads to unemployment.
  • Slums. Limited supply of housing leads to the formation of slums. In many developing countries that creates very poor living conditions where people cluster together without proper sanitation, sewage, lack of water and electricity.
  • Social anger and crime. The combination of the prior two points, unemployment and poor living conditions feeds into social anger and potentially crime.
  • Environmental impact. Negative impact on the environment of sprawling urban areas, notably including air and water pollution, forests being cut down, animals moving away, and so on

Opportunities for investors who want to benefit from this trend

Investors who want to benefit from this ongoing and explosive trend have plenty of opportunity for doing so. For instance by investing in:

  • Real estate. Benefit from the increasing demand for (economical) urban housing, offices, shopping malls and so on. Pick existing units to benefit from gentrification, or select new projects in the right cities globally and over the longer run you should see healthy returns.
  • Infrastructure. While in many new cities in the developed world infrastructure is still non-existent or will need to be built, in many developed countries infrastructure will need to be renewed. This can range from roads to public transport, to electricity and water or digital infrastructure.
  • Construction materials. Naturally, as new real estate projects are undertaken, the demand for source materials like metals will go up.
  • Shipping. As megacities pop-up, increasingly they will directly trade with one another, increasing global shipping flows.

Portfolio construction: real estate, infrastructure, materials and shipping

  • I constructed a portfolio consisting of 4 ETFs that cover all of the previously mentioned industries. Their expense ratios range from 35 to 65bps and each gets an allocation of 25%.
  • This portfolio gives you highly diversified exposure to 4 sectors that are likely to directly benefit from the trend of urbanisation over the next decades
CategoryNameIDTERAlloc %
Metals and miningSPDR S&P Metals and Mining ETFXME0.35%25.0%
Global infrastructureiShares Global Infrastructure ETFIGF0.47%25.0%
ShippingGuggenheim Shipping ETFSEA0.65%25.0%
Real EstateSPDR Global Real Estate ETFRWO0.50%25.0%

Risk, Diversification And Allocation

  • Risk level: high 
  • Diversification: low
  • For risk and total return since initiation see Portfolios
  • Probability of this theme playing out in the next 3-10 years: 25%-50%

Portfolio Characteristics (Full Look-Through, From USD Perspective)

  • Dividend yield: 3.37%
  • Ex-ante predicted volatility: 12.6%
  • 1 year 95% Value-at-Risk: -18.8%
  • Scenario: 2008 Lehman Brothers default period: -31.6%
  • Scenario: Interest rates +100bps: +3.6%
  • Scenario: 2008-2009: -12.2%
  • Scenario: 2010 onwards: +133%

 

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Categories: Society, Themes, Trade

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