In a bit of a surprise move, our northerly neighbor, Canada, has joined the Asian Infrastructure Investment Bank (AIIB).
The AIIB has garnered a bit of controversy, with naysayers arguing that the bank is just a way for China to gain more influence in the world. The United States has not signed on to the bank... But it's only one of two G8 members to not do so, now that Canada has thrown its hat into the ring.
In fact, Canada's membership will bring the total number of members to 58.
As the name suggests, the AIIB will invest in infrastructure in Asia. And in late June the bank announced $509 million in loans for four projects (via New York Times):
• Spread electric power in rural Bangladesh,
• Improve living conditions in slums in Indonesia,
• Repair and build roads in Pakistan, and
• Improve roads in Tajikistan.
The bank is partnering with other institutions like the World Bank in order to fast-track some of these projects. What's interesting is that the AIIB is focused on projects that will lead to better economic development across Asia.
Institutions like the World Bank are more focused on alleviating poverty.
The difference between the two could make for some meaningful changes in Asian countries. This, in turn, could help boost trade to the AIIB members.
Indeed, that's one of the reasons cited for Canada to join the bank.
The New York Times reports:
Canada said on Wednesday that it had applied to join China's version of the World Bank, breaking with previous leaders who had shared United States officials' skepticism of the new Beijing-led lender.
The move came during a five-day trip to China by the prime minister of Canada, Justin Trudeau, who is seeking to burnish trade, business and political ties with Beijing. China's relationship with the previous Canadian government had been lukewarm.
In a press release, Canada's Finance Minister Bill Morneau said, "Succeeding in the global economy of tomorrow will require strategic partnerships and openness to the world. Canada is always looking for ways to create hope and opportunity for people around the world, and membership in the AIIB is an opportunity to do just that."
But what does this mean for boots-on-the-ground investors? Will Canadian stocks get a pop? Should we be looking at emerging markets?
These are long-term moves that are seeking to make a big impression with smaller projects.
The Pakistan road improvement project, for example, will construct 64km of the national motorway, M-4, connecting Shorkot and Khanewal in Punjab province. The project is expected to cost $273 million, with the AIIB loaning $100 million of that sum.
While the amount of money is not that substantial -- at least when compared to major infrastructure projects -- the four-lane highway will make it easier to move goods across Pakistan, and make the road safer for drivers.
The transportation sector accounts for about 10% of the country's GDP, and much of the country's roadways were constructed before 1950. This section of the M-4 is part of a major trading route, the north-south corridor, which connects 56% of the country's population.
In other words, it's a big deal for Pakistan.
But these types of deals are difficult to invest in. And if there is an opportunity, it is likely to be more risky than many investors can stomach.
So perhaps it's the member countries that benefit most over time...
And this new member may be an easy way for investors to dip a toe into global trade ties.
Canada has a number of companies listed on U.S. exchanges, and many brokers make it fairly cheap and easy to invest on Canadian exchanges, too. You could cherry-pick key stocks based on news of trade deals between Canada and Asia...
Or you can play the slow burn of investment trends like this with a simple ETF such as the iShares MSCI Canada (NYSE: ECW).
Without a news story or deal announcement, the weight of the fact that Canada is the sixth member of the Group of Eight to join the AIIB gets dispersed over a long period of time.
But it's a significant connection in global trade and investment.
Risks To Consider: As with many ETFs, ECW is a basket of stocks that's designed to limit risk by offering exposure to multiple industries. While this is exactly what attracts risk-averse investors, it also lessens the impact of big stock moves of individual companies.
This trend is perfect for the slow, diversified country-based ETFs, though. The AIIB is playing the long game, and slow and steady always wins that race.
Action To Take: Consider adding EWC to your portfolio as trade ties increase and the Canadian economy benefits from growing emerging markets. The past five years has seen the EWC drop by about 10%, but since the beginning of 2016 this ETF has climbed 18.5% -- a significant rebound.
If the EWC climbs back to its 2014 high of $33.11, that's another 74% in the bank.
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