BlackRock tasks Yik Ley Chan to lead SEA private credit as demand increases | FinanceAsia

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Global investment giant BlackRock has appointed Yik Ley Chan to lead the firm’s private credit team in an expanded remit for Southeast Asia (SEA). 

Chan (pictured) will be based in Singapore and will become responsible for the origination and execution of private credit investments. The appointment takes effect next month in July, according to a company media release. He will also join the firm’s Asia Pacific (Apac) private credit leadership team. 

Chan has 16 years’ experience in financial services, of which more than 13 years were spent on structuring private credit and financing solutions. He was most recently Asia head of private credit at Jefferies, where he oversaw markets in SEA including Singapore, Malaysia, Vietnam, Indonesia and the Philippines. Yik Ley previously played a senior structurer role for Credit Suisse, covering SEA and frontier markets.

BlackRock’s global private debt platform manages $85 billion across the asset class. The global private debt team has over 200 investment professionals in over 18 cities globally as of December 2023.

BlackRock’s Apac private credit platform currently invests in opportunities throughout Australasia, South Korea, Japan, Greater China, India, and SEA.

Celia Yan, head of Apac private credit, BlackRock, said in the release: “SEA is an exciting region offering promising opportunities for private credit, as corporates look for ways to finance transformation beyond traditional avenues. Yik Ley’s wealth of investment experience and local insights will be of immense value to our clients, while strengthening our investment capabilities throughout developed and emerging markets in Apac.”

Deborah Ho, country head of Singapore and head of SEA, BlackRock, added: “Client demand for private markets investments has increased dramatically – a trend we believe is here to stay.”

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AI’s rapid evolution | FinanceAsia

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Asian listed technology stocks outperformed world indices in 2023. While lingering geopolitical worries and supply chain constraints muffled the industry’s early year outlook, the sector was buoyed by the near overnight mass adoption of generative artificial intelligence (AI).

The release of user-friendly chatbots found an immediate audience. Within two months of its official launch, ChatGPT reached 100 million monthly active users, making it the fastest-growing consumer application in history, according to Similarweb data. The popularity of the OpenAI-designed chatbot spurred other notable rivals, including Google’s Bard and graphic designer Midjourney. AI systems are now capable of producing digital art designs, college-level essays and software coding – all in just a matter of seconds.

Unsure which generative AI platform will ultimately reign supreme, investors have been adopting a “picks and shovels” approach, a mining analogy favouring equipment makers. The Philadelphia Semiconductor Index returned almost 50% in 2023. Asian tech companies followed, with the MSCI AC Asia Pacific Information Technology Index rallying more than a fifth, compared to a 10% gain for the MSCI World Index.

Looking into 2024, there is little to believe tech’s outperformance will reverse, said Mazen Salhab, chief market strategist, MENA for BDSwiss, speaking to FinanceAsia. Salhab foresees the trend continuing beyond the next 12 months, considering the urgency for corporations to leverage innovative technologies capable of addressing headwinds such as tightening labour dynamics and higher costs.

Given its technological reach, experts see generative AI’s transformative properties creating significant economic value across a spectrum of industries. Bloomberg Intelligence predicts generative AI sales to reach $1.3 trillion over the next decade from a market size of $40 billion in 2022, representing a compounded annual growth rate (CAGR) of 42%, with rising demand for AI products adding $280 billion in new software revenues. 

These numbers are hard to ignore, explained Hong Kong-based Robert Zhan, director of financial risk management for KPMG China, to FA. He added that companies harnessing AI would not only establish a competitive advantage for themselves, but would also unlock substantial client and shareholder values, enriching the entire business ecosystem.

Concentrated gains

Yet, despite the broad-based optimism, generative AI value creation has been narrowly focussed with select names. The market cap of US-listed Nvidia, the graphic processing unit (GPU) chipmaker behind chatbots like ChatGPT, tripled in 2023, breaching the trillion-dollar level and quickly becoming the industry’s benchmark for AI sentiment.

The excitement surrounding AI pushed Nvidia’s current price-to-earnings (P/E) multiple to 120 times, compared to Nasdaq’s market multiple of just 25 times, with analysts justifying AI premiums due to the sector’s rising income profile and robust sales outlook. While historical productivity cycles have often inflated speculative prices, even at the current trading multiples, Salhab doesn’t believe an asset bubble exists, arguing that visible efficiency gains are set to materialise in the near future.

Timing when those AI-related gains appear is riddled with obstacles for asset allocators. Chip designer Arm Holdings, which listed on the Nasdaq in September 2023, has been trading with a P/E as much of 200 times, nearly double that of Nvidia’s, reflecting the widening gap investors are assigning to companies with AI linked revenues.

Despite the elevated valuations, fund managers see generative AI investments as just one catalyst for the tech sector. 

The outlook is particularly promising for semiconductors, said Matthew Cioppa, co-portfolio manager of Franklin Templeton’s technology fund, in a conversation with FA. Cioppa highlights ongoing drivers such as proliferating demand for electric vehicles, internet of things (IoT), and cloud computing, noting that these technologies are at the early growth stages of their innovation, offering catalysts for semiconductor stocks.

The politics of chips 

There are also many political considerations for AI investors. 

As semiconductors serve as the underlying hardware for AI, experts say the technology will inevitably always be related to political decisions that can quickly rattle markets. In October 2023, the US tightened export controls on advanced chip sales to China, hampering Beijing’s AI ambitions and fuelling US-Sino tensions ahead of the US 2024 presidential election.

The US-China trade dispute has diminished the Chinese semiconductor market for US suppliers, acknowledged Cioppa. Although he argues that export restrictions are already priced into the market, Cioppa believes that the political fallout linked to semiconductor chips and AI technology remains a volatile factor that can never be ignored, especially when the world’s two largest economies are directly involved.

Nvidia’s share price has bucked the trend. While the company has thus far overcome trading hurdles by offering alternative chips, that balancing act appears vulnerable following the group’s third-quarter earnings announcement which mentioned a more challenging operating environment ahead. That caution is now being echoed by Nvidia’s Chinese customers who are also concerned about their own generative AI aspirations.

In late November 2023, e-commerce giant Alibaba reversed its decision to spin off its Cloud Intelligence Group, citing the US export controls of advanced Nvidia chips, while China’s Tencent said it would look to domestic semiconductor manufacturers to meet its demand. Even as Nvidia coordinates with the US government on developing approved chip designs compliant with the existing rules, the outcome and timing of decisions remains unclear.

This matters for any technical development, said KPMG’s Zhan. “[Because] geopolitics impacts which AI vendor is selected, companies will be cautious to ensure they meet local regulatory requirements, particularly across data privacy and security.”

Rapid development of Chinese-produced semiconductors may test market sentiment if incumbents like Nvidia underestimate those capabilities. While supply may meet chip demand in the current market, Nvidia believes those alternatives may not provide sufficient computing power to train the next generation of AI systems, as stated in the earnings report.

Technological challenges are also occurring alongside policymaker efforts to incubate a regulatory landscape that supports AI platforms without derailing its potential. In October 2023, London initiated a summit aimed at establishing an AI oversight committee, but soon discovered that Washington had similar intentions, reflecting a lost coordination opportunity. 

What regulations are ultimately introduced is uncertain, but it’s anticipated that numerous discussions and obstacles will arise in the years ahead, said Zhan. When asked what type of regulation works best, he shared: “I would like to compare AI to a human. Right now, AI technology is still in its infancy, so it makes sense that it should get more supervision and more controls to help it learn and grow. But as AI matures and learns, such controls should adjust proportionately according to the risk.”

It is a sentiment underscored by Franklin Templeton’s Cioppa, who said that “over time a combination of sovereign regulatory frameworks and private market solutions would effectively provide AI guardrails as not to stifle innovation or make it too difficult for smaller companies to compete with the mega cap companies on any advancements.”

2024 outlook

The uncertainties facing AI investors for the year ahead are magnified by higher capital costs such as elevated interest expenses as central bankers grapple with inflation, and also the increasing need for expensive data centres.

It will be interesting to see how AI stocks’ performance compare to non-tech companies in an overall weaker investment environment. Any company looking to bring AI into their businesses will have an expensive journey which could weigh on their earnings’ outlook.

As the market undergoes tapering, venture capital and private equity firms are adjusting their expectations. Hong Kong-based Alex Wong, head of M&A advisory at FTI Capital Advisors, told FA:

“Our clients, particularly those considering Hong Kong initial public offerings (IPOs), have recalibrated their expectations. Impacted by the weaker local market, some are exploring various alternatives at reduced exit valuations. Others are studying different listing venues, or altogether, deferring IPO plans and choosing direct exit strategies like trade sales.”

For fund managers preparing for the year ahead, these factors may bode well again for Asia’s technology stocks over non-tech names, particularly innovative companies backed by reliable cash flows and visible dividend payouts to shareholders. For investors that may mean holding onto 2023’s winner in 2024.

Peter Choi, a senior analyst at Vontobel, favours firms such as Taiwan Semiconductor Manufacturing Company (TSMC), the largest constituent for MSCI AC Asia Pacific Information Technology Index which returned more than a third to investors last year, highlighting that TMSC powers AI businesses not only for Nvidia, but also for tech giants such as Google and Microsoft.

Yet, no matter which AI-related companies lead stock market returns, the generative AI attention will unlikely fade, explained Andrew Pearson, managing director of Intellligencia, an AI and analytics company in Hong Kong and Macau.  

“Fundamentally, generative AI is anything that can be imagined even if it doesn’t currently exist, making it good marketing material inside a PowerPoint presentation or even a book,” said Pearson, who recently published The Dead Chip Syndicate. Ominously, he added: “There will always be an audience for something that carries a 10% chance of destroying the human race. It is too big to disregard at this point.”

For investors, there may be a sense of irony by sticking to the same investment strategy in 2024, as arguably the most prudent approach to capture the market upside for a constantly evolving technology, is to repeat what has worked before. Will this trade work again? We will find out over the next 12 months.

This article first appeared in the print publication Volume One 2024 of Finance Asia.


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Volume One 2024 magazine out now | FinanceAsia

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We are delighted to announce that the first volume of FinanceAsia’s 2024 bi-annual magazine, is now available for your perusal. 

In this edition, we celebrate all the winners the FinanceAsia Achievement Awards 2023 and explain the rationale behind why each institution won. In addition to the Deal and House Awards for Asia and Australia and New Zealand (ANZ); this year we added a new category, the Dealmaker Poll, which recognises key individuals and companies based on market feedback. 

 

In feature format, Christopher Chu examines the potential and reach of artificial intelligence (AI) in Asia – the fast-moving technology is presenting both huge challenges and opportunities for investors. While it remains caught in the cross-hairs of geopolitics and regulation, he examines how AI could be a game-changer for productivity.

 

Ryan Li explores the proposed breakup of Chinese giant Alibaba and how the firm’s ambitions fit in with wider developments across China’s tech sector.

 

Also in the magazine, Andrew Tjaardstra reviews IPO activity across key Asian markets in 2023 and looks ahead to how public markets might perform in 2024 – while it certainly hasn’t been an easy ride for the region’s equity markets over the last 12 months, there have been some bright spots, notably India and Japan, which are set to continue their momentum this year.

 

Finally, read Ella Arwyn Jones’ exclusive interview with Rachel Huf, the new Hong Kong CEO of Barclays. Huf shares her transition from lawyer to leader, offering insights around her career path and the strategic direction of the bank in the Special Administrative Region (SAR) over months to come. 

 

Click here to read the full magazine issue online. 

 


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Asia seeks 2024 redemption for IPOs | FinanceAsia

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After a relatively poor 2022, while some Asian stock markets performed well in 2023, such as India and Japan, others including China, Hong Kong, Singapore and Australia languished as geopolitical tensions, rising interest rates and poor performing domestic economies knocked investor confidence.

There was also a downturn in mergers and acquisitions (M&A) in Asia Pacific (Apac), with 155 deals completed in 2023 with volumes down 23% compared to 200 deals in 2022, according to WTW.

Broadly, investors were spooked by a combination of higher for longer interest rates from the US Federal Reserve, a lacklustre economic performance in China post-pandemic with the property sector dragging confidence, and wider geopolitical tensions.

Will Cai, partner and head of Asia capital markets practice and co-chair of China corporate practice at law firm Cooley, told FinanceAsia: “2023 was a very challenging year for all major capital markets in Asia, with Japan as the only exception. There were several contributing factors: the slower-than-expected post-Covid-19 economic recovery in China, the current regional and global geopolitical tensions, as well as the high interest rates.”

He added: “High interest rates have a significant negative impact on capital market deals. The logic is very simple: if treasury bonds can provide 5% annual return, risk free, investors will expect a much higher return on high-risk equity deals – which unfortunately is not what many companies can deliver in a tough market. We probably need to see a moderate reduction on interest rates before equity investors return to the market.”

Amid the gloom, other avenues in the equity space beyond IPOs, performed relatively well, with banks needing to respond to changing client needs.

Kenneth Chow, co-head of Asia equity capital markets, Citi, said: “These are challenging market conditions and as a bank you need to be nimble and flexible. However, there are always opportunities in Asia, such as convertible bonds and block trades.”

Japan and India rising

There were arguably two Asian ‘star’ performers in 2023: Japan and India.

Despite a weak yen, Japan saw a breakout from years of deflation, corporate governance reform and a solid domestic economy, while India saw strong GDP growth of around 7% and a continuation of reforms.

Udhay Furtado, co-head of Asia equity capital markets, Citi, told FA: “Japan and India have recently emerged as IPO hotspots, while Indonesia has also seen positive momentum. There is an increasing interest in the energy transition story, including the makers of electric vehicles and batteries.” 

Japan, with IPO proceeds up 82% compared with 2022, was the standout Asian market last year.

Peter Guenthardt, head of Asia Pacific investment banking at Bank of America, said: “There are many opportunities in Japan with the fee pool increasing 20% in 2023, while overall fees were down by the same figure across Apac. The fee pool was twice the size of China this year. Japan could remain the largest fee pool in Apac in 2024.”

Guenthardt added: “In Japan, there has been an increase of IPOs, block trades and convertible bonds, with that trend set to continue. There has also been a rise in activist investors – for which it is the second most active market in the world.”

He continued: “Japanese companies are also looking to expand abroad for M&A opportunities, with the US being the most popular market and where sectors such as technology are particularly attractive.”  

In India, the market saw a big improvement in the second half of the year. While many companies conducted IPOs outside of India, the local stock markets saw the number of issuers increase by over 50% to 239, according to data from the London Stock Exchange Group (LSEG). With the second half of the year doing particularly well, this bodes well for 2024, with some experts tipping the world’s fifth largest economy to lead the way in IPOs globally this year. 

Citi’s Furtado said in a media release: “We hope to see a turn in the IPO markets, as we have been seeing in India in late 2023 and we also expect to see [a] continued pick up in convertible bond activity (given refinancing efficiencies), alongside a robust follow-on/ block calendar.”

2024 Hong Kong bounceback?

One of the big questions for Asia in 2024 is can Hong Kong, one of the pre-eminent financing hubs, return to something resembling its former glory after years of protest and pandemic turmoil. Any turnaround in Hong Kong should also indicate improved confidence in Chinese equities given that the majority of companies listed on the Hong Kong Stock Exchange (HKEX) are Chinese.

PwC is predicting HK$100 billion ($12.8 billion) of deals in 2024 with around 80 deals in the pipeline, and KPMG is expecting Hong Kong to return to the top five of the IPO global rankings.

While the fundamentals are still strong in the Special Administrative Region (SAR), a recent reliance on Chinese companies, which have been buffeted by domestic headwinds and rising US interest rates, has damaged the market. In addition, the potential implications of the SAR’s new national security law have rattled global investor appetite.

However, in a sign of optimism, already in 2024, two Chinese bubble tea firms have applied for listings on the HKEX suggesting that market appetite could be rebounding in China – especially for companies supplying consumer staples.

Although stock markets in mainland China are providing stiff competition to Hong Kong, foreign investors and Chinese firms are still attracted to Hong Kong’s greater flexibility. In addition, geopolitical tensions mean that Chinese and Hong Kong firms are becoming more cautious about listing in the US.

Stephen Chan, Hong Kong-based partner at Dechert, told FA: “2023 was relatively challenging for the Hong Kong IPO market, with the number of deals and proceeds raised having declined year on year. We have seen a number of potential listing applicants choose to delay their listing timetable in view of the underperforming stock price of recent new listings.”

A sluggish stock market performance, low valuations for newly listed companies and the macroeconomic environment contributed to potential listing applicants opting for the wait-and-see approach, with the SAR facing strong headwinds.

Chan added: “The US interest rates hikes saw investors opt for products with high interest rates and fixed income.” This dampened the demand for IPOs, and in turn affected the valuation of potential IPOs and hence weakened the urge for potential listing applicants, explained Chan. 

He said: “Increased borrowing costs and lower consumer spending in general – due to the high interest rate cycle – have also affected the operational and financial performance of the potential listing applicants. Improvements to both investor sentiment towards the equity market and companies’ operating and financial performance would be essential before companies could reconsider fundraising through IPO.”

Certain sectors have been performing better than others, including technology, media and telecom (TMT) and biotech and healthcare companies. These are likely to continue to lead the IPO market in terms of the deal count and deal size in Hong Kong, especially with January 1, 2024’s HKEX regulatory reform for the new Chapter 18C (known as the GEM reforms) for specialist technology companies, and an expanding market for biotech and healthcare under Chapter 18A which was launched in 2018.

Chan added: “The HKEX has taken the opportunity to introduce a number of modifications to improve the fundraising process including the new settlement platform, FINI, which will shorten the time gap between IPO pricing and trading and hence reduce the market risk and modernise and digitalise the entire IPO process.”

“The GEM listing reform aiming to enhance attractiveness for SMEs to seek listings. . . will also boost the number of deal counts for the Hong Kong IPO market and provide SMEs with development potential a viable pathway for pursuing listing in the main board in the future.”

A continuation of the return of visitors to around 65% of pre-pandemic levels to the SAR in 2023 should also help build momentum in the local economy. In addition, the SAR has been reaching out to the Middle East for investment and is increasing its trade cooperation with Asean countries.

Asia outlook

While China appears to still be struggling to turn its economy around, Asia will continue its overall growth trajectory as the middle class grows, technology evolves and connectivity improves. The relatively young populations of Asean countries such as Indonesia, Vietnam and Thailand will also continue to provide a boon for investors.

Cooley’s Cai said: “In terms of deal counts, there were still relatively more biotech deals in 2023. Part of the reason is that biotech companies must raise capital regardless of market conditions (and therefore, the price). We also see companies from the ‘new consumer’ sectors looking to IPO. We believe these two sectors likely can do well in 2024.”

He continued: “We hope 2024 will be better than 2023, but we may need to wait a bit longer for a booming market.”

There is certainly a long way to go before seeing the region’s previous robust IPO levels.

“2024 is going to be a volatile year with the upcoming elections in the likes of the US and India, but there is a strong pipeline of deals if risk appetite returns, which will partly depend on the pace of monetary loosening,” said Citi’s Furtado.

Alongside a host of elections, there are ongoing conflicts in the Middle East and Ukraine, meaning there is much uncertainty over global supply chains, oil prices and the inflation trajectory.

While investors will be hoping that inflation can be kept under control so the US Fed can start cutting rates sooner rather than later, solid economic fundamentals and growth in many large countries in the region should provide confidence in Asia’s equity markets moving forward.

This article first appeared in Volume One 2024 of the FinanceAsia print magazine which is available online here. 


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Thai standing in annual Democracy Index drops

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PUBLISHED : 18 Feb 2024 at 04:00

Thailand’s standing in the yearly Democracy Index compiled by the Economist Intelligence Unit (EIU) has plummeted by eight spots. This decline is likely attributed to the recent formation of the country’s government by unelected senators as opposed to voters.

The country ranked 63rd out of 167 countries and territories in 2023, compared with 55th in 2022, the EIU said. Its score was 6.35 points, down from 6.67 the year before.

The annual survey rates countries on a scale of zero to 10. Full democracies are those with scores above 8, and authoritarian regimes score 4 or lower. Thailand is among the large number of flawed democracies with scores between 6 and 8.

The top five countries in the index (in order) were Norway, New Zealand, Iceland, Sweden and Finland, all with scores above 9.

Country scores are based on performance in five sub-categories. Thailand was assigned a score of 7 for electoral process and pluralism, 6.07 for functioning of government, 7.78 for political participation, 5 for political culture, and 5.88 for civil liberties.

Thailand’s total score has not changed considerably since 2019. That year, when elections were held after five years of military rule, the score improved dramatically to 6.32 from 4.63 the year before, EIU figures showed.

In the 2022 index, Thailand’s score improved as opposition parties were given more latitude to compete in local and national elections, and because of an upsurge in political participation, according to the EIU.

However, in the 2023 general election, the Move Forward Party won the most votes but was unable to form a government because it could not win the support of the unelected Senate.

The court-ordered suspension of party leader Pita Limjaroenrat for several months pending a ruling on a shaky media share ownership case — ultimately decided in his favour — further illustrated the challenges.

“The rules regarding the democratic transfer of power are clearly not established or accepted in Thailand and the judiciary is not independent,” EIU analysts wrote.

The survey showed that in the 28-country Asia and Australasia region, there are only five full democracies (Japan, South Korea, Taiwan, Australia and New Zealand), compared with 13 non-democratic regimes.

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Thailand falls 8 places in Democracy Index

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Decline reflects role of non-elected bodies in government formation in ‘flawed democracy’

PUBLISHED : 17 Feb 2024 at 13:53

Thailand falls 8 places in Democracy Index
(Photo: Pattarapong Chatpattarasill)

Thailand has fallen eight places in the annual Democracy Index compiled by the Economist Intelligence Unit (EIU), as the formation of the country’s government was ultimately decided by unelected Senators rather than voters.

The country ranked 63rd out of 167 countries and territories in 2023, compared with 55th in 2022, the EIU said this week. Its score was 6.35 points, down from 6.67 the year before.

The annual survey rates countries on a scale of zero to 10. Full democracies are those with scores above 8, and authoritarian regimes score 4 or lower. Thailand is among the large number of flawed democracies with scores between 6 and 8.

The top five countries in the index (in order) were Norway, New Zealand, Iceland, Sweden and Finland, all with scores above 9.

Country scores are based on performance in five sub-categories. Thailand was assigned a score of 7.00 for electoral process and pluralism, 6.07 for functioning of government, 7.78 for political participation, 5.00 for political culture, and 5.88 for civil liberties.  

Thailand’s total score has not changed appreciably since 2019. That year, when elections were held after five years of military rule, the score improved dramatically to 6.32 from 4.63 the year before, EIU figures showed.

In the 2022 index, the EIU said, Thailand’s score improved as opposition parties were given more latitude to compete in local and national elections, and because of an upsurge in political participation.

However, in the 2023 general election, the Move Forward Party won the most votes but was unable to form a government because it could not win the support of the unelected Senate. The court-ordered suspension of party leader Pita Limjaroenrat for several months pending a ruling on a shaky media share ownership case — ultimately decided in his favour — further illustrated the challenges.

“The rules regarding the democratic transfer of power are clearly not established or accepted in Thailand and the judiciary is not independent,” EIU analysts wrote.

The survey showed that in the 28-country Asia and Australasia region, there are only five full democracies: Japan, South Korea, Taiwan, Australia and New Zealand. That compares with 13 non-democratic regimes.

“In theory this year should be a triumphant one for democracy. More people are expected to vote in national elections in 2024 than ever before,” editors of The Economist wrote in an accompanying commentary. “But many elections will be problematic. This year’s democracy index … shows that only 43 of the more than 70 elections are expected to be fully free and fair.”

The 2023 survey shows that less than 8% of the world’s population live in full democracies, and that 39.4% are under authoritarian rule — up from 36.9% in 2022.

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US pension fund’s exit may shake Hong Kong markets

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Hong Kong’s status as an international financial hub faces a new challenge as the United States’ federal pension fund has decided to exclude Hong Kong-listed shares from the benchmark indexes for its international funds.

The decision was announced by the US Federal Retirement Thrift Investment Board (FRTIB) on Tuesday before Chinese President Xi Jinping and US President Joe Biden met in San Francisco on Wednesday. In a dinner on Wednesday evening, Xi called on the US business community to boost investment in China. 

The FRTIB said it had conducted a routine review of the four benchmark indexes followed by its Thrift Savings Plan (TSP) and decided to adjust its International Stock Index Investment Fund, or I Fund, which has an asset size of US$68 billion as of the end of last month. It said it had reviewed the recommendations of its staff and Aon, its investment consultant. 

“Overall, operational complexity has increased when investing in emerging markets in recent years given a range of events such as investment restrictions on sensitive Chinese technology sectors, delisting of Chinese companies and sanctions on Russian securities due to the Russia-Ukraine conflict,” Aon said. 

“These types of unforeseen events can incur transaction costs and may cause performance and volatility swings,” it said.

It said any announcement of investment restrictions can cause the value of a stock to decline at a time where the investor is forced to sell. It said, given the asset size of the I Fund, the forced selling or restricted investments could incur higher than average market impact costs due to liquidity challenges.

It said it will work with its fund managers to implement the transition from the current index (MSCI Europe, Australasia and Far East (EAFE) Index) to the next index (MSCI All Country World (ACWI) ex USA ex China ex Hong Kong Investable Market Index (IMI)) in 2024. It said the next index is expected to outperform the current one on a risk-adjusted basis over the long term.

Assets in Hong Kong

The MSCI ACWI IMI ex USA ex China ex Hong Kong, launched in June this year, provides exposure to 5,621 large-, mid-, and small-cap stocks in 21 developed markets and 23 emerging markets. 

The MSCI EAFE Index currently provides exposure to 798 large- and mid-cap stocks in 21 developed markets. Hong Kong stocks represent about 3.3% of the index’s assets, according to the geographical breakdown of a similar MSCI index. 

If the I fund is closely tracking the MSCI EAFE Index, it should have allocated US$2.2 billion of its assets into Hong Kong markets.

Simon Lee, a US-based Hong Kong commentator, noted that the asset size of the I Fund’s assets in Hong Kong is not enormous, comparatively speaking. But he predicted the fund’s departure will still hurt the city’s stock markets. 

“In general, the US now sees China as a risk, not an opportunity, and it does not treat Hong Kong as an independent economy from mainland China,” Lee said. “As the TSP is representative, its departure from Hong Kong may make some state-level pension funds follow suit.” 

He said the TSP’s departure will fuel capital outflows in Hong Kong and hurt the city’s status as an international financial hub. 

A Shanghai-based columnist says in an article that shares of 29 Hong Kong-listed firms, including AIA Group Ltd, Hong Kong Exchanges and Clearing Ltd, CK Hutchison Holdings and Sun Hung Kai Properties Ltd, will face downward pressure when the TSP’s fund managers dispose of them next year. 

The Hang Seng Index, a benchmark of the Hong Kong stock markets, has fallen 13.4% so far this year. The Shanghai Composite Index, which tracks the A-share markets, has dropped by only 2%.

Trump’s decision

In November 2017, the FRTIB decided to let its I Fund follow the MSCI ACWI IMI ex USA, instead of MSCI EAFE Index, as a way to enter the A-share markets. 

As of July 31, 2019, China received the third-most investment on a per-nation basis within the MSCI ACWI IMI ex USA at 7.56% of the index’s assets. 

In August 2019, US Senators Marco Rubio and Jeanne Shaheen told FRTIB Chairman Michael Kennedy in a letter that some of the US federal government employees’ money mightd have been invested in Chinese firms that pose national security, human rights and financial disclosure risks. 

The FRTIB was ordered to stop investing in A-shares by the Trump administration in May 2020.

As of the end of March in 2020, the TSP had US$557 billion of assets while its I Fund had US$41 billion.

The Economic Daily, a state-owned newspaper, said in a commentary in 2020 that the negative impact on the A-share markets of the TSP’s exit was negligible. 

Citing an estimation of the Bocom Schroders Asset Management Co Ltd, it said all US pension funds totaled US$30 trillion but the US federal government only controlled US$1.9 trillion of that while the remaining was owned by state governments and the private sector. 

It added that no more than US$15 billion of US pension funds had been allocated to the Greater China region and most of it was in Hong Kong.

The Chinese Foreign Ministry in May 2020 criticized the US government for blocking American investors from entering China’s markets and politicizing the matter in the name of national security. It said such a move would hurt US investors’ interest.

‘Butterfly effect’

In the first 10 months of this year, the average daily turnover of Hong Kong’s stock market was HK$106.6 billion (US$13.7 billion). Market capitalization amounted to HK$30.8 trillion (US$3.95 trillion) at the end of last month.

Some analysts said the I Fund’s US$2.2 billion investments in Hong Kong is negligible as it is only about 16% of the market’s daily turnover and 0.06% of its market capitalization. 

However, they are worried that if more institutional investors are leaving Hong Kong, it will create a “butterfly effect” that may lead to a market crash. 

In October 2022, the Teacher Retirement System of Texas, managing a US$184 billion public pension fund, cut its China target allocation to 1.5% from 3% of its assets. 

In April this year, Ontario Teachers’ Pension Plan (OTPP), Canada’s third largest pension fund, reportedly closed down its China equity investment team based in Hong Kong.

On Wednesday, lawmakers passed a bill to lower the stamp duty for stock trading to 0.1% from 0.13%, hoping to make the bourse more competitive.

Read: BlackRock, MSCI probed for investments in China

Follow Jeff Pao on Twitter at @jeffpao3

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Impact investing on the rise: BNP Paribas survey | FinanceAsia

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In: Asia, Finance, South-East Asia

Impact investing is gaining in popularity across the globe, but a lack of harmonised environmental, social and governance (ESG) data, regulations and standards pose barriers to its development in Asia, a BNP Paribas survey suggested.

“Asia Pacific (Apac) is behind Europe, which has already integrated broader ESG topics such as inequalities and biodiversity. But it is ahead of North America which is highly fragmented over this topic,” Jules Bottlaender, Apac head of sustainable finance at BNP Paribas (securities services), told FinanceAsia.

So far 41% of global investors recognise a net zero commitment as their priority, while in Apac, 43% have set a due date to achieve net zero targets, according to the survey.

The global survey, titled Institutional investors’ progress on the path to sustainability, looked into how institutional investors across the globe are integrating their ESG commitments into implementation.

It gathered data from 420 global hedge funds, private capital firms, asset owners and asset managers between April and July 2023. Among them, 120 (28.6%) are from Asia Pacific (Apac) markets including China, Hong Kong, Singapore and Australia.

Impact investing

Impact investing, a strategy investing in companies, organisations and funds generating social and environmental benefits, in addition to financial returns, is a global trend that in the next few years, is set to overtake ESG integration as the most popular ESG strategy, the report revealed.

Globally, ESG integration dominates 70% of investors’ ESG investment strategies, but the proportion is expected to drop by 18% to 52% over the next two years. In contrast, 54% of respondents reported a plan to incorporate impact investing as their primary strategy by that time.

European investors have the greatest momentum in adopting impact investing at present, with 52% employing impact investing. While in the four markets in Apac, the proportion stood at 38%.

Negative screening took a lead as a major strategy of 62% investors surveyed in Apac. In the next two years, the figure is set to shrink to 47%, overtaken by 58% estimating to commit to impact investing.

“Impact investing is a rather new concept for most people [in Asia]. It is driven by the need to have a clear and tangible positive impact,” Bottlaender said.

An analysis from Invesco in March 2023 pointed out that while impact assessment is key to a measurable outcome of such investments, clear and consistent frameworks are required to avoid greenwashing acts.

“There is no singular standard for impact assessment,” the article noted. On the regulatory side, specific labelling or disclosure requirements dedicated to impact investing have yet to come in Asia.

Private markets, including private debt, private equity and real assets, will take up a more sizeable share of impact investing assets under management (AUM), it added.

Bottlaender echoed this view, saying that current regulatory pressure in Asia “is almost all about climate”. As a result, Asian investors’ ESG commitments are mostly around climate issues such as including net zero pledges and coal divestment. These are coming before stronger taxonomies and broader ESG regulations which are set to be finalised over the next few years.

Data shortage

A lack of ESG data is one of the greatest barriers to investors’ commitments, as respondents to the survey reported challenges from inconsistent and incomplete data. The concern is shared by 73% of respondents across Apac, slightly higher than a global average of 71%.

Bottlaender explained that although mandatory reporting of climate data is adopted in certain regulations, a majority of ESG data is submitted voluntarily.

This leads to a fragmentation and inconsistency of sources based on the various reporting standards they adhere to. Moreover, the absence of third-party verification results weighs on the accuracy and reliability of the data provided, he continued.

He shared that investors are either engaging directly with companies to encourage standardised reporting practices, or relying on data providers, or leveraging technology to carry out quality control to address the lack of ESG data.

But “significant gaps persist, especially concerning private companies and aspects like scope 3 emissions.”

“As a result, investors must be extremely cautious when advancing any ESG claim or commitment,” he warned.

¬ Haymarket Media Limited. All rights reserved.

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Impact investing on the rise: BNP survey | FinanceAsia

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In: Asia, Finance, South-East Asia

Impact investing is gaining in popularity across the globe, but a lack of harmonised environmental, social and governance (ESG) data, regulations and standards pose barriers to its development in Asia, a BNP Paribas survey suggested.

“Asia Pacific (Apac) is behind Europe, which has already integrated broader ESG topics such as inequalities and biodiversity. But it is ahead of North America which is highly fragmented over this topic,” Jules Bottlaender, Apac head of sustainable finance at BNP Paribas, told FinanceAsia.

So far 41% of global investors recognise a net zero commitment as their priority, while in Apac, 43% have set a due date to achieve net zero targets, according to the survey.

The global survey, titled Institutional investors’ progress on the path to sustainability, looked into how institutional investors across the globe are integrating their ESG commitments into implementation.

It gathered data from 420 global hedge funds, private capital firms, asset owners and asset managers between April and July 2023. Among them, 120 (28.6%) are from Asia Pacific (Apac) markets including China, Hong Kong, Singapore and Australia.

Impact investing

Impact investing, a strategy investing in companies, organisations and funds generating social and environmental benefits, in addition to financial returns, is a global trend that in the next few years, is set to overtake ESG integration as the most popular ESG strategy, the report revealed.

Globally, ESG integration dominates 70% of investors’ ESG investment strategies, but the proportion is expected to drop by 18% to 52% over the next two years. In contrast, 54% of respondents reported a plan to incorporate impact investing as their primary strategy by that time.

European investors have the greatest momentum in adopting impact investing at present, with 52% employing impact investing. While in the four markets in Apac, the proportion stood at 38%.

Negative screening took a lead as a major strategy of 62% investors surveyed in Apac. In the next two years, the figure is set to shrink to 47%, overtaken by 58% estimating to commit to impact investing.

“Impact investing is a rather new concept for most people [in Asia]. It is driven by the need to have a clear and tangible positive impact,” Bottlaender said.

An analysis from Invesco in March 2023 pointed out that while impact assessment is key to a measurable outcome of such investments, clear and consistent frameworks are required to avoid greenwashing acts.

“There is no singular standard for impact assessment,” the article noted. On the regulatory side, specific labelling or disclosure requirements dedicated to impact investing have yet to come in Asia.

Private markets, including private debt, private equity and real assets, will take up more sizeable share of impact investing asset under management (AUM), it added.

Bottlaender echoed this view, saying that current regulatory pressure in Asia “is almost all about climate”. As a result, Asian investors’ ESG commitments are mostly around climate issues such as including net zero pledges and coal divestment, before stronger taxonomies and broader ESG regulations which are set to be finalised over the next few years.

Data shortage

A lack of ESG data is one of the greatest barriers to investors’ commitments, as respondents to the survey reported challenges from inconsistent and incomplete data. The concern is shared by 73% of respondents across Apac, slightly higher than a global average of 71%.

Bottlaender explained that although mandatory reporting of climate data is adopted in certain regulations, a majority of ESG data is submitted voluntarily.

This leads to a fragmentation and inconsistency of sources based on the various reporting standards they adhere to. Moreover, the absence of third-party verification results weighs on the accuracy and reliability of the data provided, he continued.

He shared that investors are either engaging directly with companies to encourage standardised reporting practices, or relying on data providers, or leveraging technology to carry out quality control to address the lack of ESG data.

But “significant gaps persist, especially concerning private companies and aspects like scope 3 emissions.”

“As a result, investors must be extremely cautious when advancing any ESG claim or commitment,” he warned.

¬ Haymarket Media Limited. All rights reserved.

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How Moody’s new affiliate VIS Rating will boost the development of Vietnam’s local corporate bond market | FinanceAsia

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In: Asia, Finance, South-East Asia

Southeast Asia’s thriving economies, including Vietnam, will continue to fuel growth in the region’s developing domestic corporate bond markets. In particular, Vietnam’s local corporate bond market is set to get a boost with the recent launch of a new local credit rating agency (CRA) in the country by Moody’s and several leading local financial institutions.

“Moody’s has long recognised the pivotal role that domestic bond markets play in financing investments to propel growth not only in Southeast Asian economies but also the broader Asia region,” said Wendy Cheong, managing director and regional head of APAC, Moody’s Investors Service. She added, “Over the years, we have formed domestic strategic alliances in China, India, Korea and Malaysia with local CRAs that have actively contributed to the sustainable expansion and advancement of their bond markets.”

Wendy Cheong, MD and regional head of APAC, Moody’s Investors Service

More recently, Moody’s has made another bold commitment to its domestic strategy. In September, it formally launched Vietnam Investors Service And Credit Rating Agency Joint Stock Company (VIS Rating) in partnership with several leading local financial institutions in Vietnam. Moody’s is the largest minority shareholder of the domestic CRA. VIS Rating is Moody’s first investment in a greenfield CRA in a frontier market.

“VIS Rating is ready to support the development of efficient and liquid debt capital markets in Vietnam with the aim of providing independent, best-in-class rating services to corporate bond issuers in the country,” said Tran Le Minh, managing director of VIS Rating. He added, “At the same time, we will continue to draw on Moody’s global expertise and deep insights to introduce best practices to the domestic market.”

Tran Le Minh, MD, VIS Rating

Moody’s firm commitment rides on the back of the large growth potential of Southeast Asia’s (ex-Singapore) economies and domestic corporate bond markets, including Vietnam. Over 2017-2022, the region’s local bond markets collectively recorded a cumulative annual growth rate (CAGR) of 6.4% and are now almost triple the size of the cross-border market in terms of issuance volume. Domestic corporate bond issuance volumes have returned to pre-Covid levels at about $140 billion in 2022[1]. Meanwhile, on a macroeconomic level, the region’s GDP accounts for 12% of Asia’s emerging markets and grew at 4.8% CAGR over 2017-2022.

Moreover, multinationals are scouring Southeast Asia, including Vietnam, to diversify their supply chains amid elevated geopolitical tensions. Given Southeast Asia’s large consumer base and infrastructure development needs, the region’s economies are set to expand further. Vietnam is no exception. Moody’s projects the economy will grow faster than most peers[2] in Southeast Asia through 2024.

Furthermore, the country’s local bond market has large room to grow with outstanding corporate bonds consisting of just 13% of GDP as of August 2023. This level comes after brisk growth of 30% CAGR over 2017-2022. As Vietnam’s domestic corporate bond market develops, credit ratings and research will play a meaningful role by helping companies access new sources of capital, diversify their funding base, enhance market transparency, as well as maintain investor confidence during times of market stress.

“In Vietnam, VIS Rating is well placed to empower bond market participants with informed decision-making through its independent domestic credit ratings,” said Tran. He added, “Our activities such as joint events with Moody’s, foundational and market educational outreach will help deepen Vietnam’s credit culture and bring value to local market participants.”

Leveraging Moody’s global best practices and extensive capabilities, VIS Rating has built out its ratings and research function. These include developing its rating methodologies; publishing research reports; engaging in market outreach through podcasts, media interviews and industry events; as well as developing its own database and ratings platform.

VIS Rating outreach activity with market participants

“For Moody’s, VIS Rating not only broadens our network of domestic partners in Asia but also complements our cross-border coverage,” said Cheong. She added “Since we first assigned a sovereign rating to Vietnam in 1997, we have grown to become the leading global rating agency in terms of cross-border coverage in the country.”

Beyond ratings, Moody’s continues to harness its global insights and local expertise to offer timely and high-quality research on Vietnam. For example, it has been hosting its annual Inside ASEAN investor conference virtually and in-person in Hanoi and Ho Chi Minh City since 2016.

As Vietnam’s domestic bond market flourishes, Moody’s is undoubtedly there for the long haul. It remains committed to providing talent and technical support to VIS Rating as the company embarks on an exciting journey to become the country’s rating agency of choice. 

[1] Source: Moody’s, AsianBondsOnline, BIS, Securities and Exchange Board of India.

[2] Source: Moody’s sovereign report, titled, “Government of Vietnam – Ba2 stable: Update following change in economic strength score and GDP forecasts” published 13 July 2023.

 

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