Geopolitical

Investing to benefit from the dawn of Eurasia

One of the excellent books I am reading at the moment is Dawn of Eurasia by Bruno Maçães, a former Portuguese minister and current political scientist*. The main premise of the book is essentially that the idea of Europe as a distinct entity from Asia is merely a historical construct, and that the new world order that is coming about – aided by the fall of the wall and the opening up of China – is essentially a Eurasian one.

* note this is not a sponsored post in any way shape or form!

While many of us tend to think of “Americanisation” when we think of “globalisation”, Maçães instead views the future of globalisation as being defined by developments on the landmass that spawned almost all of the world’s great civilizations. In that new world order, the balance between Russia, China, India, the European Union and Middle East will shape much of the world affairs in the future.

Meanwhile, the preeminent power of today, the United States, is increasingly redefining itself as being somewhere in the middle of both sides. Maçães views events like the election of Donald Trump, Europe’s refugee crisis and Brexit through this lens.

Russia, with its Eurasian Commonwealth of Independent States, and China with its Belt and Road initiative have been somewhat faster than many Europeans to see the bigger picture. Particularly the latter, functioning as “new Silk Road” is a project that spans 68 nations that are home to some 62% of the world population and aims to invest in infrastructure, roads, railways, ports and so on, thereby enhancing Eurasian economic cooperation.

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If this all plays out, investors can obviously profit from increasing trade and prosperity throughout the wider region.

Infrastructure projects that are part of China’s Belt and Road initiative will bring direct benefits to places in China and Central Asia like Kazakhstan, Kyrgyzstan and Uzbekistan as they become more linked together and economies start integrating closer. Not only will the European Union be integrated internally, it in itself will start seeking closer integration with other powers.

While there are plenty of flash points and geopolitical issues that remain unsolved (Ukraine, Taiwan, Kashmir, the South China Sea to name just a few), potentially that integration will create a truly win-win situation where all countries involved can prosper.

Portfolio construction: Eurasian stocks and infrastructure

  • The constructed portfolio consists for 70% of stocks from China, Europe, Russia, Pakistan, Kazakhstan (through Depository Receipts listed in London) and ASEAN, coupled with some Indian infrastructure
  • The remaining 30% is filled with the KraneShares One Belt One Road ETF which invests in the primary countries and sectors involved with the initiative: mainly energy, utilities, industrials, materials and financials
CategoryNameIDTERAlloc %
One Belt One RoadKraneShares MSCI One Belt One Road ETFOBOR0.79%30.0%
RussiaVaneck Vectors Russia ETFRSX0.62%15.0%
ChinaiShares China Large Cap ETFFXI0.73%10.0%
EuropeiShares Core MSCI Europe ETFIEUR0.10%5.0%
India infrastructureColumbia India Infrastructure ETFINXX0.85%10.0%
PakistanGlobal X MSCI Pakistan ETFPAK0.91%10.0%
ASEANCIMB FTSE ASEAN40 ETFASEAN0.80%10.0%
KazakhstanHalyk Savings Bank of Kazakhstan GDRHSBK2.5%
KazakhstanKcell JSC GDRKC1A2.5%
KazakhstanKazMunaiGas GDRKMG2.5%
Central AsiaCentral Asia MetalsCAML2.5%

Risk level: high / diversification: low

  • Dividend yield: 2.5%
  • Ex-ante predicted volatility: 11.2%
  • 1 year 95% Value-at-Risk: –15.6%
  • Scenario 2008 Lehman Brothers default period: -18.6%
  • Scenario Interest rates +100bps: +1.8%
  • Scenario 2008-2009: -23.3%
  • Scenario 2010 onwards: +88%

Categories: Geopolitical, Themes, Trade

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