In a previous blog, we discussed the future of transportation and how sales of electric vehicles (EVs) are rising exponentially. In 2016, the EV market grew globally by 60% year-on-year1. However, the electrification of transportation is also opening up investment opportunities across the rail infrastructure supply chain. Rail is a particularly energy-efficient method of moving freight and large numbers of people across set distances, and demand for safe, reliable and economic rail travel is increasing in both developing and developed economies.

The on-going story in developing economies

In developing economies, new rail infrastructure must be built, or existing infrastructure significantly expanded, to service growing populations and rapidly expanding cities. China offers a clear example of how this growth can take shape. In recent years, the Chinese government has funded passenger rail infrastructure development in both the metro systems within many of the country’s major cities, and the high-speed rail networks that connect them. Government focus is now on the development of metro systems within smaller cities.

In India, the government has issued ambitious plans to modernise its passenger railway infrastructure through to 2019. Sustainability is one of nine key themes identified as an area of focus, which includes expanding electrification across the country’s extensive rail network2.

The investment case in developed markets

In developed markets, the build-out of existing railway infrastructure has been a low public sector priority for decades. In many cases, rail assets are over a hundred years old and have received little maintenance, leaving them inadequate for modern use. Governments have realised that these assets must be maintained or replaced, and are allocating large amounts of capital for investment. Although political inertia and protests from residents on or near land earmarked for use can slow down developers, the UK’s Crossrail scheme, a new 118 kilometre railway line stretching across London between Reading and Essex at a cost of £14.8 billion3, shows that large projects can succeed where political will and demand is strong.

Crumbling rail infrastructure isn’t the whole story in developed markets, however. Japan is a good example of a developed economy with a highly advanced rail system that remains a viable investment opportunity through supportive government policies. The Japanese Railways (JR) Shinkansen is highly energy efficient: on the Tokyo-Osaka route, which nearly half a million passengers travel on every day, 4.2kg/CO2 is emitted for each seat. This compares to 50kg/CO2 on an aircraft4. Development continues apace: JR recently opened a Tokyo to Hokkaido Shinkansen route, which is likely to take passenger market share from air traffic5.

Seeking investment opportunities

The growth in rail presents numerous investment opportunities. As we have done with EVs, we seek prospects across the rail sector value chain, including component manufacturers, such as the producers of semiconductors, which are used in train power management systems, and the companies that provide the propulsion and control systems for high speed trains, self-powered rail cars, and carriages. We also seek businesses that provide signalling equipment, safety apparatus, and other technologies critical for rail infrastructure upgrades or build-out. As growth continues, more opportunities and risks are likely to arise. Our two decades of investing in quality, high-growth companies provides us with the experience and expertise to identify those well-positioned to prosper in these conditions.

Sources

1http://www.hl.co.uk/news/2017/6/7/electric-car-market-goes-zero-to-2m-in-five-years
2http://www.indianrailways.gov.in/Railways%20Presentation.pdf
3http://www.crossrail.co.uk/news/crossrail-in-numbers
4http://english.jr-central.co.jp/company/ir/factsheets/_pdf/factsheets2017.pdf
5http://www.jreast.co.jp/investor/factsheet/pdf/factsheet.pdf

David Winborne

Senior Portfolio Manager

David is co-manager of the Global Opportunities, Leaders and US Environmental Leaders strategies. He has global research responsibility and specialises in Energy Efficiency and Pollution Control environmental markets sub-sectors. David researches stocks globally with a focus on the Technology and Telecommunications sectors.

David joined Impax in 2015 from the in-house asset management team at Tesco Pension Investment where he had joint responsibility for the successful development, launch and management of a new global equities investment platform for Tesco’s pension fund. Prior to this David was a fund manager at Sarasin & Partners, where he was responsible for the firm’s Asia-Pacific equity fund and for contributing investment recommendations to Sarasin’s flagship thematic Global Equity fund.

After graduating from the University of Bath, David began his career at Insight Investment on the Global Equities graduate scheme in 2003 as a global equity analyst.

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