In a previous article, 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-year.1 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.
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 modernize its passenger railway infrastructure by 2019. Sustainability is one of nine key themes identified as an area of focus, which includes expanding electrification across the country’s extensive rail network.2
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 realized 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 73 mile (118 kilometer) railway line stretching across London between Reading and Essex at a cost of $19.6 billion USD (£14.8 billion),3 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, 9.3lbs/CO2 is emitted for each seat. This compares to 110lbs/CO2 on an aircraft.4 Development continues apace: JR recently opened a Tokyo to Hokkaido Shinkansen route, which is likely to take passenger market share from air traffic.5
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 signaling 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 provide us with the experience and expertise to identify those well-positioned to prosper in these conditions.
For information about the Pax Global Environmental Markets Fund, which invests in companies that are developing innovative solutions to resource challenges – including water, energy, waste, and sustainable food & agriculture – visit the Fund page here.
The statements and opinions expressed are those of the author of this report. All information is historical and not indicative of future results and subject to change. This information is not a recommendation to buy or sell any security.