Global money managers are split on how far they and institutional investors can participate in the investment opportunities afforded by China's "One Belt, One Road" program.
Some see the chance to invest in long-term infrastructure deals and infrastructure-linked bonds, as well as the economic growth expected in some of the frontier markets involved. Others, however, are not yet sure how they can get involved and view the move as a power play by China.
The program, initiated in September 2013, aims to strengthen China's rail, road and maritime links with trading partners in Asia, Africa and Europe.
There are a number of potential opportunities for pension funds.
"Generally speaking, institutional investors are all looking for long-dated, high-return projects,'' said Daniel Morris, senior investment strategist at BNP Paribas Asset Management in London. "And (One Belt, One Road) should in theory increase the space where pension funds and insurance companies can conceivably make investments. It opens up the opportunity for more infrastructure investing. Even though everyone likes it, and wants to invest in infrastructure, the reality has been more constrained," Mr. Morris added.
Relieving those constraints was highlighted as a positive by Jan Dehn, head of research at emerging markets manager Ashmore Group PLC in London.
"That frees up room for countries to grow faster before they have inflationary problems," and it also makes the countries more attractive as investment destinations, Mr. Dehn said. "There are more sources for financing, (which), generally speaking, reduces risk for anybody who lends money. And … the additional investment that simply comes along with this whole initiative adds to aggregate demand. That creates more growth, makes for better economies. If they are growing faster, tax revenues are higher, company earnings are higher, default rates tend to fall. Right now, it is particularly important that China has launched this initiative, because one of the really perverse effects of (quantitative easing) is it has acted as a giant magnet for developed markets."
The C$19 billion ($15 billion) Ontario Public Service Employees Union Pension Trust, Toronto, wants to work with an emerging or developing markets country to help it develop a social security system learning from Canadian mistakes, said Hugh O'Reilly, president and CEO. The initiative would cover issues including infrastructure investment.
"We think the OBOR initiative will give rise to a lot of exciting opportunities — investment opportunities potentially, and economic development in the vast area the initiative will cover. So we're looking at the emerging and developing world as a place to be active from an investment perspective, but also from the overall perspective to help in the development of independent, well-governed institutions to help local capital to invest, and also to attract foreign investment," Mr. O'Reilly said. He added the initiative is "something we will want to be thoughtful and deliberate about."
Increased infrastructure can add directly to the GDP growth and job creation of a country, and "really helps these countries be integrated in the global supply chain, and move them up on the development scale," said Aidan Yao, Hong Kong-based senior emerging Asia economist at AXA Investment Managers. He said the initiative is "mimicking" China's growth story of the past 3½ decades, improving connectivity, trade and infrastructure.
But there are also wider impacts. "If you think a little deeper … the benefits can be much more contagious. If the infrastructure projects do take off, then clearly there (will be) demand for commodities," with resource-rich countries such as those in Latin America set to benefit from rising demand, Mr. Yao said. "Even companies in developed countries like the U.S. can participate in some of the infrastructure projects."
Craig Botham, London-based emerging markets economist at Schroders PLC, also highlighted the commodity angle. "EM commodity exporters will receive relatively stable (foreign direct investment) flows, countering a possibly slower commodities market and more volatile hot money flows. Carry trades could be more viable as a result."
Mr. Yao said another potential investment opportunity for institutions might be infrastructure-linked bonds, which he said tend to carry higher yields and longer durations. However, he said they do have higher yields for a reason, as they are seen as riskier than government bonds and standard corporate bonds.
However, the backing of One Belt, One Road infrastructure projects might help. "If these bonds are tagging on infrastructure that are engineered by sovereigns or institutions like the World Bank, you have the stamp of approval from the sovereign side, which can significantly boost the credibility of these bonds, and help make them more palatable to long-term real money investors such as pension funds and insurance companies," which need long-term assets to match liabilities, added Mr. Yao.