Making sense of Belt and Road – The private bank CIO: Credit Suisse
To John Woods, chief investment officer for Credit Suisse Private Bank in Asia, Belt and Road is a megatrend: one of those overarching themes that play out over many decades. His job is to translate that into an investable form for high net-worth clients.
“The direct benefits will obviously come to China in the form of trade flows, enhanced economic ties with a number of trading partners,” he says. “All of this is supportive of underlying economic growth and makes China a more diverse investment location.” There will be indirect benefits as well, he says, including greater legal transparency and policy coordination. “These are very important from a private investment perspective, and this will all lead to greater comfort by investors in China risk.”
That is the macro outlook. But which sectors benefit and when? “There’s essentially a sequence,” Woods says. “It impacts commodity-related sectors first, then more value-added areas. So, construction, goods and services, transport, building materials, capital goods will come first.
“After that, investors will be looking for implications on the consumer side, benefiting from this huge inflow of trade, pushing down prices, improving choices.”
There are consequences for the currency too, which will have implications for investors. “Belt and Road does accelerate the globalization of the renminbi and that opens up investable choices for clients,” says Woods. He sees Belt and Road as assisting with the process of internationalization of bonds and shares in China, and improving access.
“It’s a very, very fascinating experiment the Chinese are carrying out,” Woods adds. “Essentially what they are doing is internationalizing the renminbi first and converting it second – which is unheard of. This journey will not be without its pitfalls and challenges. But I think we will get a better pallet of investable opportunities due to internationalization.”
Groups like Credit Suisse are advising people with sufficient capital that they can likely meet the ticket size to invest directly in infrastructure, or at least into private investment vehicles targeted at infrastructure, potentially including Belt and Road. “It’s almost inconceivable that this will all be done with public funds; inevitably we will need to see some private investment,” Woods says.
|John Woods, Credit
Suisse Private Bank
“A valid criticism of the infrastructure investment theme is that intuitively everyone realizes it makes sense, but practically it is difficult to invest in, mainly because it is so closely held by multilateral or public bodies.
“So, will private capital be involved? Yes, absolutely. Will it commence immediately in the first wave of liquidity? I suspect not.”
Only when the whole initiative gains traction will private funds follow.
What sort of time frame do investors need to be thinking of for Belt and Road?
“Multi-decade. Such is the scale of the projects and the investment size being talked about, it has to be a multi-decade investment theme,” Wood says.
“You could probably start working on these projects and retire and still not see it completed.”
Another potential investment opportunity will be through the large amount of bond issuance that is likely to be needed for these projects. “As a consequence, China’s US dollar-denominated credit universe, which is already huge within Asia, will become huge globally,” Woods says.
“Debt finance is the only natural way these types of projects can be funded effectively. With this initiative, China’s US dollar debt market explodes in size.”
And will that be an attractive asset class? “If it’s priced accurately, absolutely.”