Solactive, a Germany-based index provider, has unveiled a new index that will track the performance of companies that are best placed to gain from China’s Belt and Road Initiative (BRI).
The Solactive Belt and Road Index Concept has been created in order to capture the benefits from the BRI, with its constituents being companies that are in an advantageous position to benefit from their “relatively large degree of revenue exposure to the Belt and Road Initiative’s corridor economies”.
The Belt and Road Initiative corridor economies are among the fastest growing countries in the world and are expected to have a constant price purchasing-power-parity (PPP) GDP growth rate that is 3% higher than the rest of the world between 2019 and 2024. The Index will include companies that will benefit the most from the first- and second-order effects of the initiative across the 71 corridor economies and must be among the top-100 companies relative to their geographic revenue diversification (measured by the Herfindahl-Hirschman Index).
In terms of the primary listing of its constituents, Japan (27.0%), the United States (18.4%) and Singapore (13.5%) make up almost 60% of the Index as of the latest rebalance in October 2019. Emerging Markets – such as Saudi Arabia (5.5%) and Russia (4.9%) – also feature in the Top 10. Note the lack of presence of China’s A-shares, which is excluded from the Index. The largest companies are Philip Morris Intl (8.6%), AIA Group Ltd (8.2%) and Saudi Basic Industries (5.3%), and the Top 10 companies make up 43.1% of the Index’s weight. Sector exposure is heavily steered towards Industrials (30.4%), with Technology (19.0%), Finance (17.9%) and Consumer Non-Durables (11.1%) comprising of weightings over 10%.
Based on a historical simulation from October 2014 to November 2019, the index would have posted a total return of 33% (a 6% return on an annualised basis), outperforming broad emerging markets stocks in the same time period.
In October 2013 Chinese President Xi Jinping announced plans to launch the Belt and Road Intiative a bid to form land links from China to Europe, Southeast Asia, the Middle East and parts of Africa. It is estimated that Chinese foreign direct investment (FDI) on the project will amass to $1 trillion over the next 10 years, larger than the annual combined annual gross domestic product of Thailand, Malaysia and Vietnam. China is currently backing numerous sustainable and renewable energy projects along the Belt and Road Initiative in an attempt to dominate the global renewable energy sector in terms of finance, technology and manufacturing.
The introduction of a new Belt and Road Index will be a welcome addition to the market. Unlike the MSCI Global China Infrastructure Exposure Index, which also tracks the performance of companies exposed to the potential benefits of the BRI, Solactive’s Belt and Road Index will not have any Chinese listed stocks, allowing investors to control the level of exposure to Chinese companies in their portfolios. The launch of the Index may also spur exchange traded fund (ETF) providers to create additional products to allow investors to gain access to companies in the BRI, such as Kraneshares’ MSCI One Belt One Road ETF (OBOR), which tracks the aforementioned MSCI Global China Infrastructure Exposure Index.