Yesterday I wrote about how the establishment of the Asian Infrastructure Investment Bank (AIIB) may affect monetary policy in the U.S.
Now that the number of founding member countries is beginning to become clearer and will be announced officially later this month, this is a good time to consider the investment opportunities that may result from a major expansion in infrastructure development in Asia.
Although AIIB may facilitate infrastructure investments globally and for purposes other than infrastructure, I will limit the discussion to Asian infrastructure opportunities.
The AIIB is likely to be a conduit between China and the rest of Asia, and will likely use procedures that are in line with the practices of Chinese state-run banks.
Infrastructure development in China has been accelerating at a pace never before experienced in human history, and that pace is why the U.S. and Japan are worried about whether the AIIB will operate in a prudent and safe manner. The AIIB is likely to replicate the rate of Chinese domestic infrastructure development of the past 20 years, using the same lending and due-diligence protocols that Chinese banks have. That may result in substantial investment opportunities.
The three sectors that stand to benefit the most are energy, commodities and building equipment manufacturers.
The easiest and safest way to play the energy side is to go long oil as a commodity, or to invest in individual companies or an exchange-traded fund. If the Chinese are going to replicate the rate of domestic development in the rest of Asia, it is going to take a lot of energy, especially oil, to do so.
The safest oil plays as individual companies are large multinationals BP Plc (BP), Chevron (CVX), ConocoPhillips (COP), Exxon Mobil (XOM) and Total (TOT). The plunge in oil prices since last summer has caused these stocks to decline by between 15% and 22%, making this a great time to put on long-term positions.
A more aggressive play would be the two times leveraged ETF, ProShares Ultra Bloomberg Crude Oil (UCO), which is down 80% since the middle of last summer and which is trading near an all-time low.
On the commodities side, a good ETF to consider is the industrial-metals fund PowerShares DB Base Metals ETF (DBB).
One reason the Chinese may be launching the bank is so that they can put their existing industrial infrastructure industry to work outside of China. I would be wary of investing in U.S.-based companies such as Caterpillar (CAT) and would instead opt for Morgan Stanley China A Share Fund (CAF), Deutsche X-trackers Harvest CSI300 CHN A (ASHR) or iShares China Large-Cap (FXI).
As for individual equities, some Chinese companies with American depositary receipts provide opportunities, including Aluminum Corporation of China (ACH), Cnooc (CEO), China Petroleum & Chemical (SNP) and PetroChina (PTR).
The broadest way to play an infrastructure boom in Asia is through the global infrastructure ETFs iShares Global Infrastructure (IGF) and SPDR S&P Global Infrastructure ETF (GII).
There are obviously many other ramifications of an imminent increase in Asian infrastructure development, and I will address some of the risks in future columns.
Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline on this article.