One Belt, One Road

Listed infrastructure opportunities

One Belt, One Road

The Chinese Government’s ‘One Belt, One Road’ initiative is a foreign trade policy and economic strategy to develop the historic Silk Road trade route from China to Europe. RARE assesses the opportunities for investors in global listed infrastructure.

This long-term initiative was first proposed by China’s President Xi Jinping in 2013 when he introduced the concept of the ‘Silk Road Economic Belt’ and the ‘21st Century Maritime Silk Road’ as a multi-country infrastructure-building collaborative program to open and diversify China’s sources of trading. Its projects include railways, roads, ports and energy infrastructure.

Investments in nations along the Road are expected to grow at an annual pace of 14% between 2018 and 2020 with the total spending on the project forecasted to reach US$1.3 trillion by 2027.¹ 

 

The RARE view

While the One Belt, One Road (OBOR) initiative does not have a material impact on how RARE views opportunities in China today, it does help underpin the economic growth projections over the medium to long-term. In fact, given the size of the investment, the economic benefit from OBOR-related investments may be relatively more material to other developing countries in South-East Asia than China. A risk factor worth bearing in mind is the potential political resistance from other economies.

The key economic objective in the medium to long-term is to diversify China’s current export markets. A near-term collateral benefit is the creation of the ability to absorb any overcapacity in the commodity sector, specifically steel and cement. In addition, the engineering and construction sector, such as producers of rail equipment and machinery, could gain meaningfully with new overseas orders.

Development in OBOR was relatively slow in 2015-16, but the pace has picked up recently with the financial support of Asian Infrastructure Investment Bank and other banks.

 

Bridging the Infrastructure Gap

While OBOR has a limited impact on global listed infrastructure in the medium term, there are long-term investment opportunities within the broader emerging market space. Infrastructure assets could be one of the greatest beneficiaries of all the long-term trends driving emerging markets (EM). They give direct access to EM domestic demand and drivers, while creating underlying revenues that are more defensive due to their contracted/regulated nature, with explicit inflation linkage.

The growth of EM infrastructure assets have been forecasted to outpace that of developed market infrastructure. To keep pace with projected GDP growth, there is an estimated need for an average investment of $3.7 trillion in infrastructure assets every year through to 2035¹. Once the United Nation’s Sustainable Development goals² are factored into the equation, this investment could increase by up to $1 trillion.

The graphs below show a comparison between the historical infrastructure spending between (2000 to 2015) and the projected investment required from 2017 to 2035. Investment is likely to continue to shift to EMs as:

•  Nearly two-thirds of global infrastructure investment in the period to 2035 is required in emerging economies, specifically from China and India.

•  Within EMs, the required infrastructure spending has increased by an estimated 198%.

This presents opportunities to identify undervalued companies that are well positioned to benefit from this growth.

 

Source: McKinsey Global Institute discussion paper 'Bridging Infrastructure Gaps - Has the World Made Progress'. October 2017. 'Needed infrastructure' is that required to replace ailing infrastructure assets, to meet the increased demands of rising populations, and to meet the corresponding demands of economic development.

 

Global Infrastructure Spending Needs — Historical Infrastructure Spending (2000–2015) vs Needed Infrastructure Spending (2017–2035) 

USD at constant 2017 prices
 

 Historical Infrastructure Spending 2000-2015Needed Infrastructure Spending 2017-2035% Change
Developed Markets15 trillion25 trillion+68%
Emerging Markets15 trillion 44 trillion+198%
Total30 trillion69 trillion+133%

Source: McKinsey Global Institute discussion paper 'Bridging Infrastructure Gaps - Has the World Made Progress' October 2017. 'Needed infrastructure' is that required to replace ailing infrastructure assets, to meet the increased demands of rising populations, and to meet the corresponding demands of economic development.

¹ Source: Morgan Stanley.

² United Nations https://www.un.org/sustainabledevelopment/sustainable-development-goals/

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