With 400 million more people set to get on the grid in India alone, smart investors will profit from new demand for all kinds of energy.
In this interview with The Energy Report, Frank Holmes and Brian Hicks of U.S. Global Investors share some of their favorite ways to build a diversified portfolio that takes advantage of opportunities large and small, domestic and international.
The Energy Report: India's new prime minister, Narendra Modi, has pledged to bring electricity to the 400 million Indians currently without power. How is he going to do this, and how can investors get exposure to this massive infrastructure investment?
Brian Hicks: One of our investing tenets is to follow government policy, because that is a precursor to change. Infrastructure investment in India is a long-term theme, and is going to require a lot of raw materials and fuel sources. The power could come from coal and nuclear. It's one thing to generate power; it's another thing to actually distribute that power and get it out to the rural areas. That means a lot of copper to build out the infrastructure grid.
In the end, this will be a massive investment, and there will be a number of ways to play it. I would consider investing in the engineering and construction firms like Fluor Corp. (NYSE:FLR), which could win infrastructure contracts.
TER: China is in the midst of a similar infrastructure build-out. Is that a coal and nuclear approach as well?
BH: Absolutely, and the Chinese are further along than India. China has invested heavily in the power grid. That has resulted in a tremendous ramp-up in production of steel, cement and iron ore, as well as an upswing in copper usage. All go into generating power. Obviously, coal has been fueling much of China's power generation, and will probably continue to do so. The government is trying to pull back on the margin because of pollution concerns, but it will probably be part of the equation for many years to come.
Frank Holmes: The global real gross domestic product annual growth rate has declined from a peak 5.4% in 2010 to 3% last year. With the U.S. economy turning up, constructive news out of China and new leadership in India, the global GDP could rise to 3.5%. This is very positive for commodities from energy to copper to gold. Modi's goal of 400 million people having access to electricity would mean a lot of copper demand and energy consumption.
TER: Aside from China and India, what energy resource areas are poised to do better in the second half of 2014?
BH: We are very constructive across the spectrum for energy. Oil prices are moving above $100/barrel, whether it's West Texas Intermediate (NYMEX:CLN14) or Brent crude (NYMEX:SCN14), and that's going to be very positive for North American energy companies. We are seeing more signs of instability in key producing areas in the Middle East, including Libya and Iraq. That is going to weigh on global supply and keep oil prices well supported. Companies with production in geopolitically safe areas should do quite well in this environment.
We are very positive on natural gas. There has been some complacency about refilling storage after the extremely cold winter, and that should support natural gas prices for the near future. As we get into the summer months, cooling demand could strengthen gas prices again.