Where the growth is: Infrastructure

- U.S. investors have increasingly bought into the idea that they should have overseas exposure as a way to diversify their portfolios. Well, the start to 2008 has done its best to bash that thinking — the subprime debt and derivatives crisis that has wreaked so much havoc at home has also buckled the knees of international markets.

So what's a global-minded investor to do? Before answering that, allow me a few observations:

• An estimated 500 million rural Chinese are expected to migrate to cities and towns during the next few decades, and India's urban population will double.

• Saudi Arabia is no longer content to pump massive quantities of crude oil out of the ground and ship it elsewhere for processing into more lucrative products.

• The American Society of Civil Engineers estimates that the U.S. would have to lay out more than $1 trillion in the next few years to bring our nation's highways, airports, water systems and other facilities into good repair.

The common thread among these three points is that they all relate to infrastructure. The scale of spending under way or envisioned both here and abroad is enormous. That's why I believe infrastructure will be one of the best global investment opportunities for years to come.

The Organization for Economic Cooperation and Development, better known as OECD, estimates that the world will require more than $1.8 trillion per year in infrastructure investment in the coming decades — an annual tab that the public sector can't be expected to pick up in full. That's similar to a recent figure from the consulting firm Booz Allen Hamilton, which pegs the cost of modernizing urban water, electricity and transportation systems over the next 25 years at $41 trillion — a figure roughly equal to the 2006 market capitalization of all shares held in all stock markets in the world.

For emerging markets like China, India and the Middle East, the play is the massive build-out of infrastructure to support future growth ambitions. For North America, Western Europe and the rest of the developed world, there is a pressing need to repair or replace aging roads, bridges and the like.

You get a vague sense of this need when you're dodging potholes or cursing a "no service available" message on your mobile phone. But things came into clearer focus last summer when a highway bridge in Minneapolis collapsed into the Mississippi River, killing 13 people and injuring more than 100 others. "A bridge in America shouldn't just fall down," U.S. Sen. Amy Klobuchar of Minnesota said at the time, and she's right. But that's how it is with infrastructure: People really don't think much about it until something falls down.

Before the Minneapolis bridge, there was Hurricane Katrina. The worst property damage and hundreds of fatalities occurred when the swollen Mississippi River broke open sections of the levee system protecting New Orleans. On a less-tragic note, Chicago's crumbling mass transit system has been called the biggest hurdle to its bid for the 2016 Summer Olympics.

Infirm infrastructure is hardly unique to the United States. A recent study in Canada found that the country's roadways, sewer systems, wastewater treatment facilities and bridges were either at or had passed the halfway point of their useful life. A drought in London a few years back exposed a network of leak-riddled water pipes under the Thames that dated back to Queen Victoria's reign, and in Russia and Eastern Europe, the post-Communist period has been one of growth and modernization.

Among developing nations, much of the demand for infrastructure boils down to a pair of key trends: population growth and urbanization. The global population is expected to grow at an average rate of 1.6% annually, according to the United Nations. At that rate, by 2030 there will be 8.3 billion people on Earth, with six out of every 10 living in cities.

More than 80% of the planet's people live in the emerging world, the giants being China and India. In sheer numbers, China's and India's combined populations comprise 40% of humanity and their economies are growing around 10% annually.

I've already mentioned how the rural Chinese are flocking to cities in search of economic opportunities. The same phenomenon is true of India: an estimated 540 million Indians will be urban dwellers in 2025, roughly double today's levels. Like the upwardly mobile in the West, these urban dwellers will expect better transportation and communication services, so they can remain connected to the countryside.

Many of the top government and business leaders in China and India were educated at U.S. universities and have brought the "American dream" back to their homeland. China's current five-year plan, which runs through 2010, calls for spending $200 billion for airports and subways, $175 billion for railroads and $80 billion for highways, and $70 billion for water and wastewater treatment. Morgan Stanley estimates that China will need $346 billion for electricity generation and distribution between 2006 and 2010.

India, which significantly lags China in its current state of development, announced in late 2007 that it intends to spend 8% of its GDP — that is, $500 billion — on infrastructure over the next five years in order to hit its desired economic growth rate of 10%. The country is plagued by power shortages, a dearth of multilane highways, and antiquated and overwhelmed ports.

I went to India recently and found many of the same frustrations as a decade ago. The airport in New Delhi remains dirty and disorganized. In Bangalore, the country's high-tech capital, a new airport is opening this year, but the roads leading there are so congested that travelers must plan on a two- to three-hour drive to travel the 20 miles from downtown.

India's leaders can see the cost of these shortcomings by looking east to China, where the roads and airports are modern and efficient. Tens of billions of dollars in direct foreign investment pour into China annually, while India struggles to persuade potential investors to buy into the country's future.

Over the coming years, spending by the Gulf countries is expected to exceed that of India, even though their total population is just a small fraction of India's billion-plus one. Oil prices around $100 a barrel have created a mind-boggling revenue stream. Unlike during previous oil booms, Gulf nations are investing those petrodollars in their own infrastructure this time.

Of course, Dubai is the world's poster child for infrastructure, with its lavish and imaginative projects, including what is expected to be the world's tallest building, and manmade islands in the shape of the world's continents. Less well known is what is happening in Saudi Arabia: A half-dozen "economic cities" are being built from scratch as part of a government plan to attract foreign capital and to capitalize on its location between Europe and Asia.

Many companies will be involved in this work, including heavy-equipment makers, cement suppliers, steel manufacturers, utilities, and engineering firms. On a broader level, there will be continued strong demand for copper, steel and other commodities.

Governmental involvement is what separates the infrastructure build-out from regular construction activity, and I believe the political will exists to support long-term infrastructure creation worldwide, regardless of short-term economic conditions. We have spoken to many companies that agree with this outlook. They are upgrading their capacity to participate in both public-sector and private projects. Leaders of emerging nations acknowledge that future economic growth in their countries depends directly on infrastructure improvements. A similar argument can be applied to the United States and other developed markets.