Invesco Fixed Income Investment Insights

Improving regional connectivity

China’s Belt and Road Initiative (BRI), which aims to improve China’s connectivity with Africa and Europe along the former land and maritime silk roads, is expected to generate high levels of infrastructure spending, improve regional integration and promote economic growth. Chinese State Owned Enterprises (SOE), construction and building material companies, and commodity producers will likely be the primary beneficiaries of increased capital expenditure. We believe regional energy and metal and mining companies that take advantage of increased traffic and fixed asset investment will likely outperform their global peers. There is some potential for maritime supply route disruption for coal and bauxite, as increased continental freight capacity may present more efficient alternatives.

Potential opportunities created in infrastructure and energy related sectors

China’s BRI encompasses 84 countries, around 67% of the world’s population, over 36% of global gross domestic product and 38% of world trade.1 Invesco Fixed Income expects China to invest between USD150 to USD200 billion per year in major infrastructure projects to improve communication channels across countries ranging from rail, roads, bridges, ports and pipelines to telecommunication equipment, including fiber optic cables. These major investments are expected to initially benefit the metals and mining and building material sectors but will also likely spur increased energy consumption as regional trade expands. They may also disrupt existing commodity supply routes as alternative freight capacity becomes more economically viable.

In addition to infrastructure development, the BRI comprises strategic energy supply routes for major oil producers, including Saudi Arabia (10% of global supply), Iraq (5%), Iran (3%), Kuwait (3%), Emirates (3%) and Russia (10%), and natural gas producers, including Russia (17% of global production), Iran (6%) and Qatar (5%).2 The protection of regional energy supplies via China’s developing military presence along Middle East and South Asian routes may support Asian regional growth potential in the coming years. According to the International Monetary Fund, Asia is estimated to account for around two thirds of global growth in 2018, representing the world’s most dynamic region.3

The BRI may also further the development of existing supply routes. For example, while China currently imports thermal coal primarily from Australia, Indonesia, Russia and Mongolia, the development of rail infrastructure may reduce bottlenecks in continental freight capacity. This could favour coal production from Mongolia and Russia at the expense of supplies from Indonesia and Australia.