The New Silk Road Will Change Everything - Here's What You Need To Know

October 4, 2017

The New Silk Road Will Change Everything – Here’s What You Need To Know



  • What’s going on in Asia isn’t news that sells. But the consequence is that we are poorly informed about the groundbreaking One Belt One Road project.
  • Lack of and poor information doesn’t allow for proper capital allocation and international diversification.
  • We’ll discuss what’s going on in Asia and how you can profit from it by buying foreign but also domestic stocks.

Introduction

What we’re mostly focused on now will probably be completely irrelevant in a few years and will almost certainly be in fifteen years.

Most of the market related talk now focuses around possible tax reform or similar incentives. As these are short term factors and the economy offers no free lunch, nobody knows how those probable measures will actually impact the economy and stocks.

Given that, I prefer to focus on the slow and steady long-term trends that will definitely shape how the world will look in the next 15 years. Perhaps I’ll miss on some of the short-term action, but I won’t miss the big structural action that is going to shape the world in the decades to come.

One of the things many people don’t see in the news is the Chinese One Belt One Road (OBOR) initiative which aims to connect 70 countries and more than 66% of the global population through increased infrastructure projects. The project is sometimes also called the Belt and Road Forum (BRF).

Before digging into what’s going to happen and the revival of the ancient silk road, let’s look back at history a bit as it is an essential piece of the puzzle in understanding what’s going on.

A Bit Of History

Just 200 years ago, in 1820, almost 50% of global GDP was created in China and India.

If 200 years seems like a long time to you, perhaps the fact that China increased its share of global GDP to 20% today from just a few percentage points back in the 1980s is something to really take notice of.

Figure 1: Global GDP shares since 1700. Source: Infogram.

Such growth is staggering and it shows no indication of slowing down. Chinese GDP growth has increased in speed since the 2016 China slowdown scare.

Figure 2: Chinese GDP growth. Source: Trading Economics.



With a population of 1.3 billion and the staggering economic growth, we will have to accept that China will eventually become the most powerful economic force in the world. And what’s important about the One Belt One Road initiative is that China understands the need for openness and international connection in order to continue growing while many developed countries are moving more toward protectionism and populism.

Despite what is going on in the developed world, China is continuing to deliver and develop its plan. Connecting with 66% of the global population would make it much less dependent on current trade partners and would enforce its position on the world stage. Therefore, it’s very important to keep an eye on what is going on and perhaps even profit from it.

If you still aren’t convinced, just think of the importance of the Route 66 or the Autobahn in Germany. Now multiply that by about 50 and you get the scale of the Chinese project, market, affected population, and potential growth.

The New Silk Road

The plan of the OBOR route is to increase the connectivity between Asia, Europe, and Africa by improving the infrastructure primarily by developing railroads and ports.

The goal is of course to increase the exchange of goods and people which will lead to economic improvement over the whole area.

Figure 3: One Road One Belt infrastructure plan. Source: PWC.

The project isn’t standing still and estimates are that the Chinese government will invest more than a $1 trillion in the project over the next decade. For now, infrastructure investments are beyond the $100 billion mark.

Figure 4: Infrastructure investments in the countries related to OBOR. Source: Quartz.

Additionally, something that’s extremely important and totally under the radar is China’s investments in countries like Serbia which is on the OBOR. The $4 billion that the Chinese are investing in Serbia might not sound like much, but it will certainly cement the friendship and business relations for many years to come.

We in the western world, especially the younger generations, take infrastructure for granted. However, someone at some point in the past had to take out a big loan and build our roads. China is exactly at that stage now, building infrastructure that will support its growth for the next 50 years.

Just imagine what initiatives like the China-Pakistan Economic Corridor (CPEC) and the Bangladesh-China-India-Myanmar corridor will do to the improvement of political and economic drivers, and how these projects will stimulate trade and exports, all while internationalizing the Chinese currency and bringing goodwill to China and its neighbors.



Portfolio Strategy

I’ve only got one thing to say: be exposed to what is going on in Asia.

Don’t forget that the panic regarding China in 2016 was due to the fact that the economy slowed down from growing at 8% to growing at 6.7%. Compare that to the anemic growth in Europe, the U.S., or Japan, and you understand just how irrational the financial environment can get.

Now the question is related to exposure. There are many stocks on U.S. markets that will benefit from what’s going on. This could include U.S. companies that do lots of business in China like Starbucks or smaller foreign companies. The funny thing is that most of the foreign companies are trading at cheaper valuations than domestic companies.

If you don’t like investing in foreign stocks, then you should focus on strong global brands as in Asia, the importance of premium products is constantly on the rise.

Figure 5: Branded products perception in China. Source: McKinsey.