The Belt And Road Initiative: Where Are The Opportunities For Investors?

The Belt And Road Initiative: Where Are The Opportunities For Investors?

Here we give an overview of China’s Belt and Road Initiative and speak with Lee Kai Yang, CIO of RHB Asset Management, who provides expert insights on how investors can profit from the initiative.

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If you follow the financial news, chances are you would have heard about China’s Belt and Road Initiative (BRI) – it is grabbing headlines and is a key topic in conversations among the world’s political leaders and business elite. But what exactly is this initiative? And most importantly, how can you as an investor benefit from it? In this article, we will explore the BRI and examine some opportunities for investors.

What is the Belt and Road Initiative?

The BRI was proposed by Chinese President Xi Jinping in 2013 while on a trip to Kazakhstan. This initiative aims to bolster economic growth and trade across Asia and beyond by creating modern-day trading routes consisting of two main prongs – one by land and one by sea – that traverse 69 countries across three continents as of August 2017. As for the name: “Belt” represents the Silk Road Economic Belt and “Road” refers to the Maritime Silk Road.

The geographic, political, and financial obstacles that lay ahead are great and the risk of failure is high, so why would China initiate this plan unexpectedly?

For one, China needs to transition into a more consumption-based economy. China is currently struggling to compete on the manufacturing front with ASEAN countries such as Vietnam, which has a younger and lower-income workforce. The ASEAN countries are home to more than 300 million individuals under the age of 30 years old. Investing in manufacturing in these countries is an excellent opportunity for Chinese companies to harness the power of this young workforce, while also supplying more funding and jobs for companies within these countries.

Another reason China decided to embark on the BRI is that the country has an overcapacity in a number of different manufacturing areas, and many places along the BRI are in dire need of infrastructure upgrades. To meet the needs of the region’s growing populations and increasing trade, the Asia Development Bank estimates that developing Asia will need to invest US$26 trillion in infrastructure from 2016 to 2030. China can bring expertise along with resources and financing. Furthermore, a more widely used Renminbi would benefit China immensely as they try to push it to become a truly global reserve currency and up from its current sixth place as reported by Swift.

Who is funding the BRI?

China cannot fund the entire BRI on its own, thus a large percentage needs to be co-financed with Europe and other countries along the “road”. There is also a limit on foreign reserves held by China. Many investments in overseas countries need to be made in US dollars and recent reports from Swift have actually shown a decrease in Renminbi being used outside of China. This may change though, as we see further Chinese-backed projects in the coming years through the BRI.

The bulk of the financing for BRI-related projects has come from several state-backed Chinese banks as well as an assortment of other banks, companies, and funds. Many of these institutions have committed vast sums of money and some have already deployed these funds into projects.

How does the BRI benefit Southeast Asia?

Southeast Asia is playing a large and important role in the BRI, and spearheading investment within Southeast Asia is Singapore. According to the Monetary Authority of Singapore, the city-state alone accounts for 60% of non-local lending to the region – underscoring its importance in funding the BRI.

Beyond financing, the BRI will have a profound impact on the economies of all of the ASEAN countries, enabling them to forge new links with China. Let’s look at one example: when a new project – such as a port in Indonesia – gets the green light to be built with financing from China, a Chinese contractor and a whole chain of local contractors both large and small need to be hired. Then there’s equipment that needs to be purchased and transported. Commodities such as building materials may need to be brought in. Lee Kai Yang, CIO of RHB Asset Management for Singapore and Hong Kong, says that Commodities won’t soar like in the China-boom time, but it will provide a boost.

Lee Kai Yang, CIO of RHB Asset Management for Singapore and Hong Kong

Indeed, there’s a whole chain of investments and trade that takes place between several countries within the region for one project, allowing companies to expand outside of the traditional domestic borders they’ve been operating within.

Additionally the BRI will provide a boost for intra-Asia trade, which has already seen a spike in volume since the initiative was started. Container Trade Statistics show that container trade from China was up 23.5% year-on-year in Q1 2017. Tim Wickmann, the previous CEO of MCC Transport, said earlier this year that “one in four containers that move around the world is carried in intra-Asia trade.” He added that “all the growth is coming from China and when China grows, the whole trade grows.” China is expected to see a slight uptick now in its gross domestic product (GDP) growth based on the last two-quarters of 6.9% each, although the country stated in March that it was aiming for around 6.5% growth.

Commodities won’t soar like in the China-boom
time, but it will provide a boost.

– Lee Kai Yang, CIO of RHB Asset Management

Where are the opportunities for investors?

If you are not directly involved in the BRI through your business, there are other ways to take part in this initiative. As an individual, you can invest in funds focusing on areas that are set to benefit from it.

Increasingly, many investment managers are launching targeted investment funds recently to take advantage of the opportunities arising from the BRI. During a recent conversation with Lee, we discussed RHB’s investment strategy towards ASEAN countries within the BRI.

RHB Asset Management is currently focusing on two areas: (1) companies in the ASEAN countries through their RHB ASEAN Equity Strategy and (2) companies with entrepreneurial characteristics within Asia through their RHB Asia Entrepreneur Strategy.

RHB ASEAN Equity Strategy

RHB’s ASEAN Equity Strategy is focused on investing primarily in five ASEAN countries – Singapore, Malaysia, Thailand, Indonesia, and the Philippines, which have a predominantly young demographic – according to four themes:

1. Consumption

Primarily focused on the property sector – as many individuals living in these countries still purchase property primarily as a necessity, not as a financial investment. According to Lee, “this provides a growth opportunity for investors.”

2. Infrastructure directly through the BRI

This includes investment in ports, roads, rail, and power-related infrastructure. Companies that have a niche and specialisation in this area will benefit the most. “All of the infrastructure projects mentioned are in high demand within the ASEAN region,” reveals Lee.

3. Flow of foreign direct investment

Japan was the first and one of the largest outside investors into Southeast Asia due to the country’s aging population. The Japan Bank for International Cooperation, which invests outside the BRI, has spent US$20 billion annually from 2011 to 2016 and has pledged more than US$110 billion over the next five years.

Chinese companies are also getting in on the action. In June this year, the Chinese government announced that some 50 Chinese state-owned enterprises have invested in approximately 1,700 “One Belt One Road” projects since 2013. US$14.5 billion has been made in direct investments, while last year alone saw US$126 billion worth of contracts signed and US$33 billion has been invested so far in 2017. Tightening restrictions on the outflow of money from China has made foreign investments more difficult for Chinese companies except for projects related to the BRI as stated by the State Administration of Foreign Exchange.

4. Investment following the AEC and Asian integration plans

Finally, investment following the AEC and Asian integration plans in areas such as the BRI, intra-trade, and intra-investment.

The BRI has also spurred an increase of tourism-related travel to Southeast Asia from China. Malaysia is a key market for this at the moment. And although tourism is not a direct aspect of the BRI, it is all inter-related.

“The ASEAN region is currently a bright spark in the world economy. As the US takes a more protectionist stance, as noted by its recent pull-out from the Trans Pacific Partnership, and the EU struggles with a Brexit amongst various other issues, ASEAN has remained resilient,” Lee remarks.

RHB Asia Entrepreneur Strategy

RHB’s Asia Entrepreneur Strategy has a broader geographical scope. Lee sees Asia as the key growth region in the world. The Philippines, in particular, is set for 6.8% growth this year alone, which would put the island nation just above China’s expected growth of 6.7%. Lee says that “during the growth phase, businesses especially those led by entrepreneurs are expected to do well as opportunities are in abundance.”

The approach of the RHB’s Asia Entrepreneur Strategy is to invest in listed companies that their founding families hold a significant stake in, while involved in the ongoing running of the business. Lee says “it’s important they have skin-in-the-game as this will keep the entrepreneur spirit alive and drive the business forward.”

It’s important they have skin-in-the-game as this will keep the entrepreneur spirit alive and drive the business forward.

– Lee Kai Yang, CIO of RHB Asset Management

Entrepreneur involvement within large companies within Asia can vary drastically depending on which country they operate in. Lee continues, “I’d like to quote an example of two extremes – the Philippines and Singapore. More listed companies in the Philippines are partially family owned, however, in Singapore, they tend to be government linked. In this regard, the Philippines is far more attractive than the latter. In terms of the BRI, the same can be said about Indonesia and Malaysia. The companies we look for are varied as markets have different dynamics.” The sectors also vary. For example, in the Philippines, RHB Asset Management looks for consumer-related companies in industries such as construction, infrastructure, and manufacturing.

What are the risks?

Some countries carry more risks than others and investors should be aware of this. Indonesia, for example, still has issues with infrastructure projects because land acquisition regulations can be complicated and time-consuming. Regulations pertaining to bidding for projects in certain countries may also be less developed than those seen in Singapore, which is considered to be the most established country in the region.

The bottom line

When asked for his top tip for investing in the BRI in Southeast Asia, Lee said, “when investing in Southeast Asian countries, investors should think longer term. There will be volatility, but if you believe the BRI will last then you must endure the short-term noise. There will be a risk of global events hitting the developing markets hard and people will just sell anything related to those markets. Investors who sell in a panic are likely to miss the opportunity in the longer term. The sectors we are positive in the longer term include materials, consumption, properties, and infrastructure related projects.”

There are a variety of different views on the China-led Belt and Road Initiative. Some see it as a political power play by China, while others are optimistic about the economic opportunities such a vast trade and investment plan entails and will engender. The BRI’s size and scope are larger than the post-World War II Marshall Plan and the funding are expected to come from different sources. However, if China and for that matter, the world, can succeed in implementing the BRI, these infrastructure and trade projects today will positively impact the future generations of people in the region and vastly improve their quality of life.

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