Why invest in the
The Silk Road is a diverse region, rich in history and natural resources. It’s strategic position as a link between Europe and Asia, as well as the area’s proximity to some of the world’s largest economies, has attracted billions of dollars – most significantly from China as a key focus of their Belt and Road initiative.
Sturgeon’s unparalleled 15 years of experience investing in the region enables us to identify the best opportunities and mitigate challenges traditionally associated with these markets.
Why invest in the Silk Road?
While the developed world grapples with an ageing population and significant debt, many countries along the Silk Road enjoy relatively low debt and substantial FX reserves. Financial intermediation remains low but is increasing through the adoption of recent technology, creating a positive feedback loop of increasing productivity gains and higher asset values.
The region is extraordinarily rich in natural resources. Uzbekistan has the world’s largest gold mine and produces some of the finest agricultural produce.
Due to limited foreign capital in these regions, frontier market returns are driven more by local factors, which are often relatively uncorrelated to global markets. This provides a good source of investment diversification. Moreover, frontier markets are under-covered by mainstream analysts leading to greater pricing inefficiencies. Of the 12 countries in our investment universe, only three are covered by MSCI indices and the only regional benchmark was discontinued three years ago. These challenges and idiosyncrasies create investment opportunities.
Valuations in the region tend to be heavily discounted compared to their frontier market peers, which themselves trade at a discount to developed market indices. For example, the dividend yield of the MSCI Kazakhstan index is 9.6% and the price-to-earnings ratio is 4.7x. The MSCI Frontier index trades at half that dividend yield and twice the price-to-earnings ratio (as at 12/05/2020).
The Silk Road is comprised of a network of trade routes that, prior to the dominance of maritime trade, connected leading kingdoms and empires. For much of the past two millennia this region included some of the most sophisticated centres of culture, science, wealth and arts. Modern medicine and astronomy, for example, owe a huge debt to the work of Avicenna, a Persian polymath born in present-day Uzbekistan. Romans, Greeks, Egyptians, Mongols, Indians and the Chinese all traded goods and exchanged ideas along the Silk Road. Today, the Silk Road is regaining prominence due to its extensive resources, improving infrastructure and technological upgrades. The Belt and Road Initiative is key to this resurgence.
The Silk Road heritage
More than two thousand years ago, China’s Han Dynasty launched the Silk Road, a sprawling network of commerce that linked South and Central Asia with the Middle East and Europe.
The original Silk Road came into being during the westward expansion of China’s Han Dynasty, which forged trade networks throughout what are today the Central Asian countries of Kyrgyzstan, Tajikistan, Kazakhstan, Uzbekistan, Turkmenistan, and Afghanistan, as well as modern-day Pakistan and India to the south. Those routes eventually extended over four thousand miles to Europe.
Central Asia was thus the epicentre of one of the first waves of globalisation, connecting eastern and western markets, spurring immense wealth, and intermixing cultural and religious traditions. Valuable Chinese silk, spices, jade, and other goods moved west while China received gold and other precious metals, ivory, and glass products. The route peaked during the first millennium, under the leadership of first the Roman and then Byzantine Empires, and the Tang dynasty (618–907) in China.
The ‘Silk Road’ is in fact a relatively recent term, and for the majority of its long history, these ancient roads had no particular name. In the mid-nineteenth century, the German geologist, Baron Ferdinand von Richthofen, named the trade and communication network ‘Die Seidenstraße’ (the Silk Road).
The New Silk Road: Belt and Road Initiative
China’s Belt and Road Initiative (BRI) seeks to expand maritime routes and land infrastructure networks connecting China with Asia, Africa and Europe, boosting trade and economic growth.
This modern version of the ‘Marshall Plan’ seeks to secure China’s access to raw materials, develop trade routes and open new markets. What is unfolding is the world’s largest development project, enabling local businesses to be more competitive globally. Over the coming decade it is only likely to grow in scope.
Its name was coined in 2013 by China’s President Xi Jinping. The Chinese Government is expected to invest in excess of $1tn on this initiative.
The initiative now encompasses nearly 70 countries with over 4.8 billion people, which represents more than half the planet’s population. It covers economies worth US$21 tn, accounting for 62% of the world’s GDP.
Image: A Catalan Atlas reproduction of the Silk Road.
Source: Wikimedia Commons