I N V E S T M E N T S T R AT E G Y G R O U P

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1 MARK LUSCHINI Chief Investment Strategist Janney Montgomery Scott LLC MICHAEL HALLORAN, CFA Strategy Analyst Janney Montgomery Scott LLC I N V E S T M E N T S T R AT E G Y G R O U P

2 As part of our Outlook 2013, we are highlighting several themes that are impacting the U.S. and global economy: Global Infrastructure; The U.S. Energy Renaissance; and Feed The World. These themes have major investment implications and should play a key role in future market returns. In this piece, we are focusing on global infrastructure. Infrastructure plays a critical role in society. Infrastructures promote prosperity and growth and contribute to quality of life, including the social well being, health and safety of citizens, and the quality of the environment. Infrastructure investment is not a luxury but a necessity for economic growth, productivity, competitiveness, social development and the elimination of poverty. Through to 2030, annual infrastructure investment requirements for electricity, road and rail transport, telecommunications and water are likely to average around 3.5% of world gross domestic product (GDP). A large share of investments will be undertaken in the developing world, where countries such as China, India and Brazil will be spending billions of dollars on infrastructures to underpin their growing economies and satisfy the increasing aspirations of their populations. However, despite their significantly lower economic growth rates over the next few decades, developed countries too will be required to invest heavily to maintain, upgrade or replace existing (and often aging) infrastructures, and to preserve their international competitiveness. We hope you find this report useful and informative for your investment needs. I N V E S T M E N T S T R AT E G Y G R O U P 1

3 Prosperity and success of various societies throughout history have depended on their infrastructure services. Bridges, highways and ports have been built to facilitate the pace of human progress. Access to information and communication technologies is opening up a range of new opportunities which have the power to transform societies. Positive Correlation Between Estimated Infrastructure Investments and the Level of Development World Bank Data on 104 Countries The most recent World Economic Forum Global Competitiveness Report lists a well developed infrastructure as a key pillar for a country s competitiveness importance of it is magnified for the developing world. Access to infrastructure services is strongly correlated with developing world average income. Upper-middle income countries have the highest infrastructure services access rates and are very close to meeting the needs of 90% of their population. The low income countries are very far from meeting infrastructure needs, particularly for electricity. Source: World Bank I N V E S T M E N T S T R AT E G Y G R O U P 2

4 Analysis suggests that an increase in infrastructure investment equivalent to 1% of GDP could translate into an additional 3.4 million direct and indirect jobs in India, 1.5 million in the U.S., 1.3 million in Brazil, and 700,000 in Indonesia. Source: McKinsey Infrastructure investment can also lead to improved health, education, and social outcomes, a number of studies have found. The presence of infrastructure can also reduce income inequality a one standard deviation increase in the quality and quantity of infrastructure can reduce a country s Gini coefficient (a basic measure of inequality) by Access to Infrastructure Services is Strongly Correlated with Developing World Average Income Access to Utilities Services and Communication Technologies, by Income Group. Low-income Countries Lower-middleincome Countries (percentage of population with access to) Networked Electricity Improved Water Sources Sanitation (number of) Mobile Phone Subscribers per 1,000 people Upper-middleincome Countries Upper-middle income countries have the highest infrastructure services access rates (in the developing world) and are very close to meeting the needs of 90% of their population. The low income countries are very far from meeting infrastructure needs, particularly for electricity. Source: Janney ISG; World Bank I N V E S T M E N T S T R AT E G Y G R O U P 3

5 Historically, 3.8% of global GDP has been invested in roads, rail, ports, airports, power, water, and telecommunications infrastructure. Total Value of Infrastructure Stock As a % of GDP (Average is 70% of GDP) China ($503 billion in 2010) has overtaken the U.S. ($374 billion) and the EU ($403 billion) to become the world s largest investor in infrastructure. Many large lower- and middle-income countries are expected to rapidly increase their infrastructure investment over the coming years. Despite lower growth rates, developed countries must upgrade or replace existing infrastructure. Investment requirements in electricity transmission and distribution are expected to more than double through to 2025/30, in road construction almost to double, and to increase by almost 50% in the water supply and treatment sector. Source: Janney ISG, ITF, GWI, HIS Global Insight, McKinsey China has Overtaken U.S. and EU to become the World s Largest Investor in Infrastructure. (Amount spent on infrastructure, ) Source: Janney ISG, IHS Global Insight, GWI, IEA, ITF, McKinsey I N V E S T M E N T S T R AT E G Y G R O U P 4

6 The McKinsey Global Institute (MGI) estimates $57 trillion ($3.2 trillion per year and 3.5% of anticipated global GDP) in infrastructure investment will be required between 2013 and 2030 simply to keep up with projected global GDP growth of about 3.3%. Projections of Global Demand by Infrastructure Segment ($ trillion, constant 2010 dollars) Figure includes required investment for transport (road, rail, ports, and airports), power, water, and telecommunications. Roads and power account for almost half of the need. The $57 trillion required investment is more than the estimated value of today s worldwide infrastructure and nearly 60% more than the $36 trillion spent globally on infrastructure over the past 18 years. Given the scale of infrastructure need and considerable funding constraints, the world must boost infrastructure productivity $1 trillion a year in savings could be realized by utilizing best practices that optimize planning, delivery, and operations of future and existing infrastructure. Source: Janney ISG, OECD, IHS Global Insight, GWI, IEA, MGI I N V E S T M E N T S T R AT E G Y G R O U P 5

7 Population growth, rapid urbanization and per capita income growth of the developing world has created new demands on infrastructure By 2030, 95% of the population growth from developing countries will be living in cities. Across the world, more than 1 billion people lack access to roads, 1.2 billion do not have safe drinking water, 2.3 billion have no reliable source of energy, 2.4 billion lack sanitation facilities and 4 billion are without modern communication services. Source: World Economic Forum Over the past 18 years, advanced economies have been responsible for more than 70% of global infrastructure investment. Over the next 18 years, emerging economies are likely to account for 40 50% of all infrastructure spending. Expansion of large developing economies such as China and India has already led to sharp increases in demand for steel and other raw materials. By 2030, estimates show that the demand for commodities is likely to rise between 30 and 80% depending on the commodity. Population Growth, Urbanization and Income Growth are Helping to Drive Infrastructure Demand People - Population Trends 6.9 Billion 7.7 Billion Cities - Urbanization 51% 54% Income GDP Per Capita $7,329 $9,388 Source: Janney ISG, United Nations I N V E S T M E N T S T R AT E G Y G R O U P 6

8 Once every four years, America s civil engineers provide a comprehensive assessment of the nation s major infrastructure categories in ASCE s Report Card for America s Infrastructure (Report Card). We know that investing in infrastructure is essential to support healthy, vibrant communities. Infrastructure is also critical for long-term economic growth, increasing GDP, employment, household income, and exports. The reverse is also true without prioritizing our nation s infrastructure needs, deteriorating conditions can become a drag on the economy Comment from ASCE Report. Using a simple A to F school report card format, the Report Card looks at current infrastructure conditions and needs, both assigning grades and making recommendations for how to raise the grades. Overall cumulative GPA inched up just slightly to a D+ from a D four years ago. $101 billion annual cost (0.67% of GDP) in excess fuel costs and time of road congestion in the United States. Water & Environment Aviation Summary Findings of ASCE s Report Card $1 trillion needed over the coming decades for drinking water infrastructure replacement. Over $167 billion needed for aging dams, ports, levees, and inland waterways. Federal Aviation Administration (FAA) estimates that the national cost of airport congestion and delays was almost $22 billion in Bridges $76 billion needed for deficient bridges across the United States. C+ Roads Public Transit Rail Energy 42% of America s major urban highways remain congested, costing the economy an estimated $101 billion in wasted time and fuel annually. Federal Highway Administration estimates that $170 billion in capital investment would be needed on an annual basis to significantly improve conditions and performance. Deficient and deteriorating transit systems cost the U.S. economy $90 billion in Since 2009, capital investment from both freight and passenger railroads has exceeded $75 billion. America relies on an aging electrical grid and pipeline distribution systems, some of which originated in the 1880s. About 17,000 miles of additional high-voltage transmission lines and significant oil and gas pipelines are planned over the next five years. D D D D C+ D+ I N V E S T M E N T S T R AT E G Y G R O U P 7

9 Company Name Ticker Forward P/E Earnings Growth Dividend Yield Credit Rating Notes Coverage Energy % of S&P 500 Energy plays a key role in powering all aspects of global infrastructure development. Exploration & Production companies find oil & gas with the help of service companies. Pipeline Master Limited Partnership (MLPs) firms transport the oil & gas to refiners and utilities. The U.S. energy renaissance has created a major opportunity for the MLPs to develop the needed energy infrastructure. HALLIBURTON CO HAL A Helping develop worldwide energy infrastructure. S&P / CS SCHLUMBERGER LTD SLB A+ Bellwether of oil services group, and hence, premium valuation. S&P / CS NATIONAL OILWELL VARCO INC NOV A Major provider of energy infrastructure equipment and services. S&P / CS ENTERPRISE PRODUCTS PARTNERS EPD BBB+ Large, well capitalized MLP operating in virtually all shale basins. J / S&P / CS ACCESS MIDSTREAM PARTNERS LP ACMP BB- Quality MLP focuses on gas gathering/processing with favorable long term contracts. J / CS ETRACS ALERIAN INFRASTRUCTUR MLPI ETN provides broad exposure to energy infrastructure MLPs. ISHARES DJ US OIL EQUIP & SV IEZ Cap-weighted basket of 47 oil & gas equipment and services companies. Industrials % of S&P 500 Construction & Engineering firms are providing the technical expertise for clients worldwide. Machinery firms manufacture construction and mining equipment, engines and turbines for industrial and transportation use. Railroads, Air Freight & Logistics are playing a key role in increasing infrastructure efficiency. AEGION CORP AEGN Provides technologies for improving sewer, water, and energy piping systems. J BOEING CO/THE BA A Large demand for aircraft as emerging markets develop. S&P / CS CATERPILLAR INC CAT A Enables much of the heavy infrastructure lifting across the globe. S&P / CS EXPEDITORS INTL WASH INC EXPD Plays major role in increasing efficient use (optimization) of global infrastructure. S&P / CS GENERAL ELECTRIC CO GE AA+ Leader in Power & Water, Oil & Gas, Aviation, Transportation and Energy Management. S&P / CS CHICAGO BRIDGE & IRON CO NV CBI Well positioned engineering and construction firm. S&P / CS KBR INC KBR Well positioned engineering and construction firm. CS QUANTA SERVICES INC PWR NR Designs, installs and maintains electric, gas and telecom infrastructure. S&P / CS UNION PACIFIC CORP UNP A- Largest U.S. railroad. Rails are playing major role in many aspects of infrastructure. S&P / CS INDUSTRIAL SELECT SECT SPDR XLI Broad exposure to 62 U.S. based industrials. GE is largest holding. I N V E S T M E N T S T R AT E G Y G R O U P 8

10 Forward P/E Earnings Growth Dividend Yield Credit Rating Notes Coverage Company Name Ticker Materials - 3.5% of S&P 500 Infrastructure requires lots of materials. Diversified Metals & Mining firms are finding, mining and processing the metals and minerals needed to create infrastructure. KOPPERS HOLDINGS INC KOP BB- Provides materials to aluminum, railroad, and utility industries. J MARTIN MARIETTA MATERIALS MLM BBB Second largest U.S. producer of construction aggregates. S&P RIO TINTO PLC-SPON ADR RIO A- One of world's largest miners of iron ore, industrial minerals, aluminum and copper. S&P ISHARES MSCI GLBL MTLS & MNR PICK ETF provides broad exposure to global metal & mining companies. Information Technology % of S&P 500 Technology firms are enabling advanced infrastructure development and playing a key role in improving efficiency of existing infrastructure. They are also developing the advanced wireless and wireline communications networks for business and consumers across the world. APPLE INC AAPL NR Providing leading edge wireless solutions for consumers and business. J / S&P / CS ARUBA NETWORKS INC ARUN Providing next generation wireless communication technology for business. J ITRON INC ITRI BB Provides energy and water management solutions for nearly 8,000 utilities worldwide. J / S&P / CS TRIMBLE NAVIGATION LTD TRMB Provides advanced technology positioning and communication devices for E&C firms. J / S&P ISHARES S&P NA TEC-MUL N IF IGN Broad exposure to telecom equipment, data networking and wireless equipment stocks. Telecom - 2.9% of S&P 500 Wireless telecommunications firms are playing a major role in transforming global communications. Tower companies are providing the backbone for the wireless network. AMERICAN TOWER CORP AMT BB+ Largest independent N.A. tower operator, also in South America and India. S&P VODAFONE GROUP PLC-SP ADR VOD A- Leading global provider of international wireless telecommunications services. S&P / CS ISHARES S&P GLBL TELECOMM SE IXP Broad exposure to global telecom with a solid dividend yield. Utilities - 3.3% of S&P 500 These firms generate electricity and provide transmission and distribution services for electricity and gas. AMERICAN WATER WORKS CO INC AWK BBB+ Largest investor owned water utility provides service to 5% of U.S. population. J / CS AES CORP AES BB- World's largest independent power producer operates in 27 countries. S&P NATIONAL GRID PLC-SP ADR NGG A- Focused on regulated gas and electricity networks in U.K. and U.S. S&P ISHARES S&P GLOBAL UTILITIES JXI Broad exposure to global utilities. Definitions: Forward P/E - Current stock price divided by EPS consensus estimate for the next four quarters. Earnings Growth Estimate - Mean broker estimate of the compounded annual growth rate of the operating eps over the company's next full business cycle (typically 3-5 years). Dividend Yield - Trailing 12 month dividend per share divided by share price Credit Rating - Rating assigned by Standard & Poor's to the long term obligations of the issuer if repaid in the local currency of the issuer. I N V E S T M E N T S T R AT E G Y G R O U P 9

11 Fund Symbol Description DWS RREEF Global Infrastructure Fund TOLLX Invests in a diversified range of 45 global infrastructure stocks including: Oil & gas storage/transmission, communications, electric power transmission and distribution, water, toll roads, ports, and airports. Majority of exposure is to the United States, Canada, and the United Kingdom. Also heavily weighted toward oil & gas storage/transmission. Cohen & Steers CSUAX Holds 82 global companies that provide exposure to toll roads, gas pipelines & distribution, electric utilities, towers, rails, satellites, airports, and marine ports. Majority of exposure is to the United States and other developed economies. ishares S&P Global Infrastructure IGF Holds 75 global firms that manage, own, or construct highways, railroad tracks, airports, marine ports, oil and gas storage facilities, oil and gas transportation assets, and electric, gas, and water utilities. It cuts a broad swath across the industrials, utilities, and energy sectors. PowerShares Emerging Markets Infrastructure PXR Holds 83 companies involved in infrastructure development in emerging market countries. Industries include construction and engineering, construction machinery, construction materials, diversified metals and mining, heavy electrical equipment, industrial machinery and steel. I N V E S T M E N T S T R AT E G Y G R O U P 10

12 The Janney Outlook is being provided solely for informational and illustrative purposes, is not an offer to sell or a solicitation of an offer to buy the securities highlighted in the Stocks that are participating in the energy renaissance list, and does not constitute investment advice by Janney Montgomery Scott LLC or its affiliates. Decisions to buy or sell a stock should be based on an investor s investment objectives and risk tolerance and this material should not be relied upon in substitution of independent judgment. This material does not take into account individual client circumstances, objectives or needs and is not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The information provided in the list has been obtained or derived from sources believed by Janney Montgomery Scott LLC to be reliable. Janney Montgomery Scott LLC, however, does not represent that this information is accurate or complete. Any opinions or estimates contained in this report represent the judgment of the Investment Strategy Group of Janney Montgomery Scott LLC at this time and are subject to change without notice. The opinions and estimates do not necessarily represent the viewpoint of Janney Montgomery Scott LLC, its Research Department or any other group or employee associated with Janney Montgomery Scott LLC or its affiliates, and may differ from opinions or estimates of Janney Montgomery Scott LLC, including its Research Department, and its affiliates. Janney Montgomery Scott LLC or its affiliates may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this material. Janney Montgomery Scott LLC, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. This list includes only companies that receive research analyst coverage from either Janney Montgomery Scott LLC s Research Department or a research provider whose research is available to Janney Montgomery Scott LLC Financial Advisors and that also currently pay a dividend to shareholders. Thus, the universe of potential companies that could be included in this representative list is narrower than the total universe of public companies. Dividend information is as of 3/1/2013 P/E Forward refers to the stock price as of 3/1/2013 divided by the earnings per share consensus estimate for the next four quarters. Growth Rate % is an estimate of the compounded annual growth rate of the operating earnings per share over the company s next full business cycle (typically 3 to 5 years). Dividend Yield refers to the trailing 12 month dividend per share divided by share price. Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment. A company may also decide to decrease or cancel a dividend payment at any time without notice. For additional information or questions, please consult with your Financial Advisor. I N V E S T M E N T S T R AT E G Y G R O U P 11