Stewart Aldcroft, Hong Kong resident, veteran of the Asian asset management industry and member of the FBC Advisory Council.
Well, that was a different summer!
Baking hot in Southern Europe, the US, Canada and most of Asia, pouring with rain in the UK. Forest fires in Canada and Greece.
Tropical storms in California and flooding in Nevada. “Global warming” is trying to tell us something, the only trouble is that we really don’t know what that is yet. Are we ruining the planet, as some would have us believe, or is this part of a cycle that has not turned round yet? All the possibilities are still on the table.
China recently started to impose lower fees on mutual funds, in effect aiming to reduce the costs for end-investors and potentially improve returns. This is applicable to all retail, widely distributed funds, but given the fairly generous level of fees previously applicable, it is not likely to impinge too much on the substantial income already being earned by fund management companies in China.
One of the possible consequences of this is that it might encourage Chinese fund managers to buy or build businesses overseas, in markets where they perceive opportunities exist. However, when taking a closer look at this, there are some similarities to the position of US fund managers in the 1980s and 1990s when they started to become more global. Can they really build businesses in new locations overseas, or are there locations “at home” where they might do better?
Many Chinese fund managers are partially or wholly state or municipal owned. These firms tend to not be risk takers and are unlikely to seek to expand. Another group are joint venture fund companies with foreign shareholders. They too are unlikely to have the need to seek global expansion. The most likely group of fund managers to try to grow outside China are those that are privately owned, or have not fallen into the two earlier groupings. And there are not so many of these.
With assets under management by mutual fund companies in China now around US$3.9trn+, of which at least one-third is in money market funds, the appeal for foreign markets should be substantial. Anecdotal information is that the majority of the foreign securities access schemes, such as QDII, are now “full” and there have not been many new allocations from the regulators in recent months.
Merger & Acquisition (M&A) in Asia in the financial services industry has often been a difficult topic, mainly because so many of the major, and successful fund managers are themselves globally owned rather than local. Any examination of the Hong Kong or Singapore markets reveals few locally owned firms in the top 50 firms offering traditional funds to retail investors. There are however, many non-traditional fund managers, offering hedge and alternatives funds. Australia on the other hand, has more than 130 fund managers operating, and few of the major global firms, thus possibly offering better pickings.
Since the beginning of 2023, there has been an interesting development, led from China’s President Xi Jinping, to attract businesses in the Middle East, mainly Saudi Arabia, to set up in China and Asia, to increase their activities in the region and especially China. The Chief Executive of Hong Kong, and an entourage of senior politicians and business people have followed up, with the aim to get Saudi companies to list on the Hong Kong Stock Exchange, and to increase use of Hong Kong shipping companies or create family offices in Hong Kong.
There is talk of China wanting to create a “Connect” scheme with Saudi Arabia, to allow cross-sale of securities and ETFs on each-others’ stock exchanges. There are ambitious plans for much closer cooperation between China and the Middle East over the next few years. It will be interesting to watch and see how this develops.
Wealth management and private banking especially, has enjoyed a stellar few years, as wealth creation in Asia has continued unabated despite the pandemic. All major, and many minor, private banks have set up in Hong Kong, Singapore or both. Often, the competition among private banks is on hiring staff rather than winning clients. The recent acquisition of Credit Suisse by UBS has enabled many CS staff to move on to competitors, who have welcomed them with open arms.
Asian and Chinese wealthy individuals and families prefer to maintain multiple banking relationships. They may have their “day-to-day” bank, through which the daily necessities of banking life get transacted. Separately, they may have a couple of banks for provision of investment ideas and advice. One they may regard as conservative, the other as more aggressive. In doing so, they can cross-check the advice received. When it comes to opening a family office, this doesn’t end the private bank relationship. Quite the opposite, they use their private banking relationships for ideas, for transactions, and might then use the family office as a mid-point between what they see as the two extremes of their private banking advisers.
I’m often asked whether exchange traded funds (ETF) will ever be successful with retail investors in Hong Kong and Singapore. ETFs have been highly successful in Japan, Korea, China, Taiwan and Australia, although looking at why, each location has slightly different reasons for their local success. For Hong Kong and Singapore, the “bottom line” is probably that the commission paid to distributors by mutual funds, and thus the lack of a commission-ban will restrict growth of the retail sector for ETFs. Will this change anytime soon? Most unlikely, but if it did, then you can be sure ETFs will take off strongly.
Whilst writing, I should mention some of the economic struggles going on in China currently. An unwelcome “world record” is the level of indebtedness of the top two property companies in China. Between them their debt mountain exceeds US$150bn, and their abilities to repay seem to be almost exhausted. There is a clear shift away from property investment. With millions of empty or incomplete properties, with property prices declining, and economic growth falling, the market has changed, leaving the biggest developers “high and dry”. The market is getting quite close to experiencing some deflation. There is the potential for some contagion in the Asian region, which has become very dependent on China.
A key issue here is that the People’s Bank of China (PBoC) has little or no previous experience of the current economic circumstances it is facing, so is very uncertain on what measures to take, how much support to provide the market, and has reluctance to cut interest rates, which would provide some market stimulus, when globally rates remain high. Should it demand that the banks provide support to the property market, which would inevitably lead to a serious loss of profitability for the banks, or should the PBoC allow some property companies to become bankrupt?
Solutions requested on a postcard please!! This issue still has a long way to go before getting resolved.
Finally, as we come towards the end of our blazing hot and humid summer in Hong Kong, I might remind readers that the Autumn period is usually noted for the best weather of the year and is a good time to visit. Hong Kong is now seeing monthly tourist visitor arrivals, especially from China, almost back to the levels prior to covid. But these are different tourists. No longer are they being bussed to jewelry warehouses and cheap restaurants by tourist guides earning a commission from sales. These new visitors are getting out and about, in the vast countryside, seeing the sights, enjoying the scenery, culture and altogether enjoying a more “up-market” experience and being far more selective on their spending.
Stewart Aldcroft
