Market Watch

- We believe Infrastructure will be one of the key investment themes in 2009 and beyond for several reasons: (i) Governments in the U.S., Canada and several other countries around the world have announced economic stimulus programs, with infrastructure occupying a central role. In the U.S., the economic stimulus program is worth approximately US$790 billion, (with infrastructure, including energy infrastructure, totaling approximately US$200 billion) and in Canada, it is in excess of $30 billion; (ii) The systematic underspending in infrastructure assets over the last three decades in the U.S. and Canada has resulted in massive "infrastructure deficits" reaching crisis proportions (in the U.S. it is estimated at US$1.6 trillion and in Canada at C$123 billion), making infrastructure spending imperative; (iii) The historically low correlation of infrastructure securities to other asset classes, offers the opportunity for portfolio diversification during a period of heightened stock market volatility; (iv) Greater participation of the private sector in the ownership, operation and maintenance of infrastructure assets (P3 or public-private partnership) offers greater potential to bridge the infrastructure deficit and spur growth in the infrastructure space; and (v) The potential for steady income and inflation protection from certain types of infrastructure stocks (e.g., pipelines, power generation etc). - Key beneficiaries of the infrastructure spending in the US and Canada include companies in the civil construction, engineering services, electrical and alternative energy, water infrastructure services and industrial products sectors. In anticipation of the impending infrastructure spend, stocks leveraged to infrastructure have seen price appreciation with large capitalization infrastructure related stocks in Canada rebounding from the market lows seen last fall and outperforming the TSX. - However, several small cap infrastructure related stocks have underperformed the TSX over the same time frame and trade at steep discounts to their historical trading ranges. We believe the overall weak market sentiment to the broader small cap space is the key reason for the weak relative performance of small cap infrastructure stocks. When market sentiment for this asset class (small cap stocks) improves, we expect small cap infrastructure stocks could rebound and for investors with a medium-term horizon (> 1 year), and the capacity to withstand volatility, small cap infrastructure stocks could provide solid returns over this time frame. Download our Infrastructure Report.pdf