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Map overview
Silk Road

The Silk Road is a unique investment region, rich in history and natural resources. Its strategic position as a link between Europe and Asia, as well as its proximity to the world’s largest emerging economies, makes it a key beneficiary of the Chinese Belt and Road initiative. This drives its integration into global financial markets.

Additionally, countries in the region have engaged in significant reforms, paving the way for foreign capital inflow, local entrepreneurship and technology adoption.

Georgia Armenia Turkey Caspian Sea Iran Uzbekistan Turkmenistan Tajikistan Kyrgyzstan Mongolia Pakistan India China Azerbaijan Kazakhstan

Focus

Frontier Market

“Common stereotypes lead to a divergence between reality and perception. Sturgeon Capital seeks to capitalise on this gap”

Nowhere is this gap larger than in frontier markets. We are a team of investors who go off the beaten track to identify and analyse opportunities with superior investment potential.

Over the course of a decade, we have shown that frontier markets can be the source of attractive returns and effective diversification. Technology and globalisation are just some of the secular trends underpinning a new generation of companies that leverage appealing demographics, limited debt, and high growth at modest valuations.

Why invest in the silk road?

1. Demographics and Finance

While the developed world grapples with an ageing population and overindebted economies, this region enjoys widespread low debt, while some countries enjoy 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.

2. Abundant Natural Resources

The region is very rich in minerals, oil and gas, agriculture, water and rare earths. Kazakhstan for example, ranks in the top 5 globally for reserves of Tungsten, Uranium, Chrome, Manganese, Silver and Lead. Meanwhile, Uzbekistan has the world's largest gold mine. The Oyu Tolgoi project in Mongolia and the Kashagan field in Kazakhstan are expected to provide  between 1.5% and 2% of the global supply of copper and oil, respectively.

3. Uncorrelated returns

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 and so have greater inefficiencies regarding price discovery. Of the 12 countries in our investment universe, only three are covered by MSCI indices and the only regional benchmark was discontinued three yers ago. These challenges and idiosyncrasies create investment opportunities.

4. Valuations

Valuations in the region tend to be heavily discounted compared to their frontier market peers, which in turn trade at a discount to developed market indices. For example, the dividend yield of the MSCI Kazakhstan index is 6.35% and the price-to-earnings ratio is 5.65x consensus earnings estimates for 2019; but MSCI Frontier trades on half that dividend yield and twice the price-to-earnings ratio(as per Bloomberg, 28/9/2018). 

5. Cultural Heritage

The Silk Road comprised 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, 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.

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 the four thousand miles to Europe.

Central Asia was thus the epicentre of one of the first waves of globalization, 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.

‘Silk Road’ is in fact a relatively recent term, and for the majority of their 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 Belt and Road Initiative is vast encompassing countries that account for 29% of global GDP “By linking countries and regions that account for about 60% of the world’s population and 30% of global GDP, the (Silk Road) is ‘a project of the century’”

- President Xi Jinping

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 supply of raw materials, secure 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 $1tr 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 a total sum US$ 21 trillion, accounting for 62 per cent of the world’s GDP and about 65 percent and 30 percent of global land- and maritime-based economic production respectively.

Image: A Catalan Atlas reproduction of the Silk Road. 
Source: Wikimedia Commons

External resources:

Financial Times, One Belt One Road, Sep 2016:
https://ig.ft.com/sites/special-reports/one-belt-one-road/
Merics, Interactive Belt and Road Map:
https://www.merics.org/en/bri-tracker/interactive-map
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