Why global uncertainty won’t undermine transition goals | FinanceAsia

By:
On:
In: Asia, Finance, South-East Asia

When FinanceAsia editorial board member, Sunil Veetil, took on his Singapore-based leadership role as head of Commercial Banking Sustainability for Apac at HSBC back in summer 2022, Asia was in the throes of pandemic uncertainty. Market to market, the approach of each governing authority proved to be heavily nuanced: Singapore had not long lifted restrictions to social gatherings and would soon abandon the mask mandate; while Hong Kong’s decision makers would deliberate for a further seven months before considering any such easing.

Yet, with hindsight being 20/20 (some may recoil at reference to the fateful numerical sequence), there was a sense of steadiness – albeit slow – in the unravelling of pandemic protocol which sits in stark contrast to today’s atmosphere of fast-paced-but-frequently-wavering global political and socioeconomic uncertainty. With over half of the world going to the polls this year – and a lot riding on upcoming election outcomes including France’s hung parliament and the final months of campaigning in the US; geopolitical complexities and tensions are pervading all market developments, not least the macroeconomic and inflationary outlook.

Reassuringly, however, Veetil is resolute in his resolve that global climate aspirations will forge ahead in spite of current conditions. “When you talk climate, you have to look long term,” he told FA. “Whilst there are short-term disruptions and changes – some of which have been positive; for example, the supply chain dispersion that has been taking place across the Asian region – it’s important to view climate from a longer perspective.”

He pointed to the outcomes of last November’s COP28 UN Climate Change Conference in Dubai, which served as a global stocktake of progress achieved by key economies towards the goals of the Paris Agreement, at the halfway point to their ultimate delivery by 2030. While the event publicly affirmed failure in capacity to limit global warming to 1.5 degrees Celsius by the end of this century; for the first time, it achieved consensus among all 196 heads of state and government officials to sanction the “beginning of the end” of the fossil fuel era, with efforts to eradicate their use by 2050. The conference laid the ground for a “swift, just and equitable transition, underpinned by deep emissions cuts and scaled-up finance”, a strategy which complements HSBC’s own ambitions to align its financing portfolio to net zero by 2050, as announced by the bank in 2020.

Climate management, Veetil explained, involves tackling a “perfect triangle” of challenges: politics, climate and the overall socio-economic picture. “The socio-economic impact of climate upon people is becoming all the more evident as we proceed… and to bring this all together, is the flow of capital.” He noted that while a lot of climate policy frameworks and trendsetting comes from Europe, the impact – “where the rubber hits the road” – is in Asia “and this is where the complexity is.”

Expanding on his comments for FA’s analysis of Asia’s debt capital market (DCM) activity, in which sustainable transactions were highlighted as playing an increasingly significant role within regional DCM dealmaking, Veetil said that typically, it continues to be the larger regional entities who lead the way in terms of raising significant capital to support sustainability aims. “The large tickets will always be driven by the sovereigns; and then it’s usually state-owned-enterprises (SOEs) or those large-cap private operators active in oil and gas or power and utilities, who are signing the big-ticket transactions.”

This seems to have been the case in 2024 so far, with Asia’s main players pioneering innovative climate transactions. In February, Japan followed up on its 2021 introduction of a transition finance framework by auctioning the world’s first sovereign climate transition bonds as a financing tool to support market growth alongside industry decarbonisation; while during the same month, HSBC participated in the first global multi-currency digital green bond offering, issued in Hong Kong.

“However, we are seeing green loans and sustainability-linked loans (SLLs) pick up at the mid-level and below this, in response to sustainable supply chain requirements. Of course, Asia is a supplier to the world.”

Veetil noted how European and North American buyers have become accustomed to outsourcing their emissions to Asia and that this had contributed some positive social and economic repercussions across the region, including an overall rise in income levels. With increasing pressure to report on and regulate sustainability, he explained that Asia-based manufacturers are not only on top of scope 3 metrics, but are pushing for capital expenditure (capex) to contribute to longer-term sustainability: to counteract those emissions that extend beyond the products themselves such as packaging, as well as manufacturing machinery. 

“Take a textile manufacturer that supplies to one of the big fashion brands. It’s not just that they want a sustainable supply chain and a robust working capital requirement; they’re also looking at how to install a wastewater treatment plant or rooftop solar. They are actively seeking capex investment plus working capital that is sustainable.”

Additionally, he highlighted the emergence of a circular economy to facilitate long-term sustainability, as being a growing trend: “Look at the battery ecosystem for example, a huge industry is developing around the recycling of batteries – additionally the recycling of solar panels, turbines and so forth is being considered. The recycling industry is becoming larger as ultimately, unless there is a circular economy around it, resources will be wasted. New action is being taken to develop a fully circular product lifecycle.”

The role of tech

Veetil emphasised various strides made across the field of technology, as being key to the future direction of the sustainability market. He commended Japan’s move to funnel over 55% of the proceeds from its recent climate transition issuance into research and development (R&D). “The future impact of investment going into research is set to be significant,” he said, noting the market’s action to invest in and develop domestic hydrogen production.

“Hydrogen has real potential to drive transition across hard-to-abate sectors such as steel, construction and aviation. But currently the market is ‘grey’ as it requires coal power to extract it from H2O.” He added that China and India are also investing heavily in the development of hydrogen. “It’s a space to watch.”

Climate-related research and technology is one of the areas which HSBC’s New Economy initiative aims to support. Since June last year, the bank has launched two fundraising strategies in Asia to invest in early-stage high-growth and tech-focussed businesses, to promote regional innovation. The first strategy, a $3 billion New Economy Fund (NEF) targets opportunities in Hong Kong and the surrounding Greater Bay Area (GBA), while a more recently launched $200 million vehicle targets investment across Singapore and Southeast Asia. Last month, the latter signed its first dedicated social loan to support Vietnamese venture-backed biotech start-up, Gene Solutions, which aims to enhance the accessibility and affordability of essential healthcare services across Southeast Asia. Another recent contribution included a $30 million green and social loan to Indonesia’s acquaculture and intelligence start-up, eFishery, which works to empower smallholder fish and shrimp farmers through tech, by increasing feed efficiency and reducing waste.

Veetil agreed that there is a strong socio-economic angle to sustainability developments in Southeast Asia, offering the example of electronic vehicle (EV) two-wheelers: “In certain areas in Southeast Asia (such as Vietnam and Indonesia) – as well as India, the majority of the population can’t afford to buy cars. We are going to see EV two-wheelers becoming more prevalent, popular and impactful… In fact, this is already happening and will continue to do so in the short- to medium-term.”

He added that the technologies emerging around carbon capture also offer real potential, but they “haven’t yet reached a sweet spot for mass adoption.”

Regulatory developments

But perhaps the most influential factor set to shape the sustainability landscape to come, is regulatory development and with it, clarity around how to deliver and enact a shared vision.

“What I am monitoring most closely on the regulatory side of things, is progress around the development of a country taxonomy,” Veetil disclosed.

“Reporting requirements are evolving quickly. Markets such as Hong Kong and Singapore have been very much at the forefront of this, but huge strides are also being made in geographies such as China and India, with new reporting requirements being introduced for listed companies.”

Singapore’s Accounting and Corporate Authority (Acra) together with Singapore Exchange Regulation (SGX RegCo) have mandated that listed companies start disclosing their climate impact in a phased manner, from financial year 2025.

“Over the next three years, most companies based in Singapore will report their climate data, which will certainly have an impact on the corporate mindset operating in the region,” Veetil said.

“Similarly, regulation being introduced elsewhere, such as in Europe, is taking effect globally. Take for example the new European deforestation regulation that has been published; as well as the carbon border adjustment mechanism (CBAM), which will soon take effect.”

“This is where we need a unified body to monitor and manage the direction of shared sustainability efforts. Currently this is something that is missing.”

Veetil suggested that various international entities are exploring options; and he proposed that efficacy could be found through a consortium of international central banks; or an governmental body such as the United Nations (UN) forming a platform involving corporates and financial institutions.

“We live in a very seamless economy, regulations in one country will definitely have an impact on the other.”

 


¬ Haymarket Media Limited. All rights reserved.

Continue Reading

Sustainable transformation: making transition finance stick | FinanceAsia

By:
On:
In: Asia, Finance, South-East Asia

The Asia Pacific region is currently facing a significant gap in the race to fund decarbonisation – estimated at $US1.1 trillion by the International Monetary Fund (IMF).

However, this is not the only problem for a region whose coal-fired economies represent around half of global emissions, according to the International Energy Agency.

China alone accounts for 35% of global CO2 emissions, the agency says.

Speakers at the Sustainable Finance Asia Forum 2024 said that regulators will need to rebalance sustainable investment priorities – placing more emphasis on adaptation rather than mitigation – if the region’s most heavily polluting emerging economies are to meet their carbon zero targets.

Debanik Basu, the head of responsible investment and stewardship APAC at APG Asset Management, told a panel on harnessing transition finance for sustainable transformation that investment in mitigation (reducing greenhouse emissions at source) now represented the majority of transition funding.

He said the often more complicated task of climate adaptation – the need to change systems, behaviours and whole economies – was receiving scant attention.

“Currently the region is getting around $300 billion in transition finance so there’s a massive gap that needs to be addressed,” he told the conference. “Even within the small portion of finance that we are getting, more than 80 per cent of the funds are moving towards mitigation.

“Consensus estimates suggest that ideally it should be 50/50 between mitigation and adaptation.”

He said the other critical problem was that aspects of climate finance were not well understood and appreciated by the market overall, in particular within the agriculture and forestry segment.

“When you look at the NDCs (Nationally Determined Contribution) put out by a lot of countries, there are specific targets around climate change, but there aren’t explicit targets around forestry and agriculture,” he said.

“And even when there are targets, there is no clear roadmap. What all this means is that the institutional capacity is lacking. There are gaps in infrastructure and there are gaps in knowledge.

“As an investor, conversations with companies around biodiversity are at a very nascent stage.”

A question of taxonomies

Kristina Anguelova, senior advisor and consultant on green finance strategy APAC at the World Wildlife Fund, told the conference that regulation was moving in the right direction, guided by hubs such as Singapore and Hong Kong.

She added that the unofficial rivalry between Hong Kong and Singapore in terms of developing regulatory taxonomies was having a positive effect on the transition finance landscape in the region.

“I think the competition between Singapore and Hong Kong in this case is a good thing because it’s advancing regulation in the region quite a bit,” she said. “The Singapore Asia Taxonomy lays out transition taxonomy criteria across eight sectors.”

While the regulation is tailored to Singapore, she said she believed it would lay foundations for others to follow.

“It’s so important as a regulatory piece because it can serve as an incentive for investors to start to scale transition finance comfortably and confidently without the loopholes and the risks of potentially being accused of greenwashing,” she said.

In terms of biodiversity, she highlighted the nascent stage of biodiversity finance compared to climate finance, discussing the need for capacity building, regulatory clarity, and financial instruments to support nature-based solutions.

A case in point, she said, is the International Sustainability Standards Board (ISSB) which is developing standards aimed at developing a high-quality, comprehensive global baseline of sustainability disclosures focussed on the needs of investors and the financial markets.

“On biodiversity, I think we’re moving a bit slowly, but we’re getting there. Obviously coming from a science-based NGO, efforts can never be fast enough,” she said. “But the good news is that the ISSB will also be integrating the TNFD or the Task Force for Nature-related Financial Disclosures soon.

“Those jurisdictions that have adopted or committed to the ISSB will also be adopting those nature regulations.”

The challenge as always, she added, was that regulators had to strike a balance between mitigating financial risk and overregulating such that it slowed economic development.

Blended solutions

Building capacity, both speakers argued, would be critical to transition finance solutions to climate change and that new instruments, particularly in blended finance, were likely to be leading the charge.

“We are seeing beyond transition bonds to different types of instruments that are designed to go into blended finance structures such as transition credits which are based on the assumption that we can get carbon savings out of early retirement of coal-fired power plants,” Anguelova said.

One avenue that was currently being explored in a number of jurisdictions was concessionary capital: i.e. loans, grants, or equity investments provided on more favourable terms than those available in the market.

These terms could include lower interest rates, longer repayment periods, grace periods, or partial guarantees.

Of these instruments, Basu said, guarantees were evolving as one of the methods currently being pursued in several markets.

“What we are also seeing is that, apart from concessionary capital, a lot of public institutions are more comfortable with providing guarantees instead of direct capital because that then keeps the overall cost of capital down,” Basu said.

“It might be at a very nascent stage – and it is difficult to say if this is going to be the future – but it is developing,” he said.


¬ Haymarket Media Limited. All rights reserved.

Continue Reading

Deals ramp up in Asia’s healthcare space with cancer focus | FinanceAsia

By:
On:
In: Asia, Finance, South-East Asia

Over the past few weeks, there have been numerous new offers and advances in Asia’s tumor treatment.

This includes a $1.5 billion investment from UK-Swedish pharmaceutical giant AstraZeneca in Singapore, a listing on the Hong Kong Stock Exchange (HKEX) by a Chinese biopharmaceutical firm and an acquisition in Hong Kong by the New Frontier Group of the Hong Kong Integrated Oncology Center, a leading comprehensive private oncology medical platform. 

AstraZeneca‘s investment was made in partnership with the Economic Development Board of Singapore, which is a department of trade and industry official, demonstrating that other institutions are discovering the potential for investment in this area.

Sunho Biologics ( China ), which is focused on the development and commercialization of biologics for the treatment of cancer and autoimmune diseases, was listed on the HKEX on May 24. The company’s shares, which had a last offer price of HK$ 13.5, increased 10 % on the day of the list, which is also a part of a wider pattern of more businesses looking to raise money via an IPO on the HKSE as the city’s market recovers from some very tough times.

The Nanjing City- based company, founded in 2018, offered 34.1518 million securities worldwide, with the Hong Kong government offering budgeting for 10 %, it was 10 times overstretched. CICC was the only sponsor, only general goordinator, only international coordinator, combined bookrunner and joint lead manager on the deal. The partnership between lovers Ke Geng and Ke Zhu was led by international laws company O’Melveny. It was O’Melveny’s sixteenth Hong Kong Investor completed for Chapter 18A biotechnology companies. &nbsp,

The offering size was approximately HK$ 460 million ( approximately$ 60 million ).

Garri Zmudze, public companion at venture capital firm LongeVC, told FinanceAsia:” Asia is a growing opportunity for life research businesses and investors equally, because the place presents a unique set of circumstances for development”.

Zmudze added:” The region’s potential is reflected in a&nbsp, flurry of deals in the cancer space in recent weeks”.

Next- generation cancer treatment

In recent years, cancer drugs have been quickly developing.

SunHo Biologics makes use of its understanding of immunology to create immunotherapies, including immunocytokines, to treat cancers and autoimmune diseases. It is in the middle of several trials, including Phase II of clinical trials for biliary tract carcinoma &nbsp, and colorectal cancer, and has three products it has developed in-house.

In order to increase the global supply of its ADC portfolio, AstraZeneca is building a manufacturing facility in Singapore for antibody drug conjugates ( ADCs ). In 2029, the manufacturing facility is expected to be operational.

ADCs&nbsp are the newest treatments that use targeted antibodies to deliver cancer-killing agents directly to cancer cells. The manufacturing of ADCs includes: antibody production, the synthesis of chemotherapy drug and linker, the conjugation of drug- linker to the antibody, and the filling of the completed ADC substance. &nbsp,

Unfortunately, one of the factors influencing the investment in Asia Pacific is that there has been a significant rise in cancer incidences overall.

Over 35 million new cancer cases are expected to occur in 2050, an increase from the 20 million expected in 2022, according to the World Health Organization. With 2.5 million new cases accounted for 12.4 % of the total new cases, lung cancer was the most prevalent cancer worldwide.

The most prevalent cancer in Asia is likely to be caused by persistent tobacco use, which is now known as lung cancer.

GBA

Greater Bay Area ( GBA ) is one of the areas where cancer investments are projected to increase.

The Hong Kong Integrated Oncology Center ( HKIOC ) was recently purchased by the healthcare company New Frontier Group. The HKIOC provies cancer treatment services, early diagnosis, radiotherapy, systemic treatments, mental health and other rehabilitation services.

The company New Frontier owns the HEAL Medical Group, the Guangzhou United Familty Hospital, and the New Frontier Shenzhen United Family Hospital, and it also sees a” sizeable and growing patient population in the Greater Bay Area.” Collectively, they are referred to as the New Frontier Greater Bay Area Healthcare.

Life and health technology will be a part of the Shenzhenh- Hong Kong Science and Technology Innovation Co-operation Zone, according to Hong Kong CEO John Lee at the Asia Summit on Global Health held in Hong Kong in May.

Lee stated that the government of Hong Kong SAR is also strengthening I&T support in the upstream, midstream, and downstream sectors to spur the development of life and health science. The 16 life and health- related R&amp, D ( research and development ) centres established in our InnoHK research clusters are yielding impressive research outcomes”.

He added that Hong Kong’s government has committed to investing an additional$ 1.3 billion to further advance life and health technology and welcomed international talent to the country to work in the field. &nbsp, &nbsp,

Other investors&nbsp, on the hunt

Private equity firms Carlyle and EQT recently closed large funds in Asia, which are, among other things, targeting Asian healthcare companies. Carlyle specifically targets Japanese companies after closing its most recent record buyout fund in the country.

In addition to Pureos BioVentures, there are a number of specialist, smaller investors in the industry who are looking to enter the market. LongeVC also looks at the wider “longevity” market and is backing “visionary biotech” in the US and markets like Japan. &nbsp,

Expect more money to be made in this area, which will hopefully result in many lives being saved. &nbsp,

¬ Haymarket Media Limited. All rights reserved.

Continue Reading

Singapore Airlines posts record annual profit, flags challenging macro

By:
On:
In: South-East Asia

Singapore Airlines reported a record-breaking year-over-year profit and increased its dividend on Wednesday ( 15 May ), reflecting strong travel demand in North Asia, but the industry faced challenges from its supply chain issues, such as geopolitical difficulties and fierce competitors. Singapore’s flag carrier also noted the increase in goodsContinue Reading

Singapore Airlines posts record annual profit, flags challenging global conditions

By:
On:
In: South-East Asia

Singapore Airlines reported a record-breaking year-over-year profit and increased its dividend on Wednesday ( 15 May ), reflecting strong travel demand in North Asia, but the industry faced challenges from supply chain snags, geopolitical issues, and fierce competitors. Singapore’s flag carrier also noted the strength of cargo need toward theContinue Reading

Asian central banks to continue gold purchasing | FinanceAsia

By:
On:
In: Asia, Finance, South-East Asia

Annual demand of gold in 2023 fell by 5 %, compared to that in 2022, to 4, 448 tonnes, excluding over the counter ( OTC ) transactions. According to data from the World Gold Council ( WGC), central banks contributed to 1, 037 tonnes of the gold demand last year, which is the second-highest on record.

In the first fourth of 2024, world gold demand, including OTC, was off 3 % year- on- year to accomplish 1, 238 tonnes, marking the strongest second quarter since 2016. Excluding OTC, first quarter’s demand fell by 5 % to 1, 102 tonnes.

China, India and Singapore were among the Asian markets that added the most to their golden getting during the first quarter, with an increase of 27.06, 18.51 and 6.57 kilograms both. These include both key banks and financial transactions.

The story is also about the skyrocketing metal price, which rose by as much as$ 2,300 per ounce in April and remained at its all-time high despite a minor decline at the beginning of May.

One of the main causes of a rising interest rate in gold is Shaokai Fan, mind of central bankers at WGC, who quoted Shaokai Fan as saying, is because of the confidence in the US Fed’s future rate cuts.

” Gold has reached a new all-time higher thanks to a number of different things. Although interest rate reduction anticipation are most definitely raising interest, he said there is a solid real demand for silver underlying this.

Fan claimed that the central banks that have purchased “historic levels” of silver over the past two centuries have remained significant customers this time. For instance, the curiosity in China is related to the landscape of investors ‘ attempts to expand in response to weak performance in other asset classes.

Retail traders now have greater access to the business. Using distributed ledger technology ( DLT), HSBC in Hong Kong has created the first bank-issued tokenized gold. It is supported by vaults in London that are owned by HSBC.

Flee for surety

At the end of next year, market was first expecting nearly six 25- basis- point cuts within a 12- month timeframe. Christian Scherrmann, US economist at DWS, expects two rate cuts by the US Fed by the end of the year. Curbing inflation in the world’s largest economy has proved to be slower than expected, with the consumer price index ( CPI ) for March seeing a 0.4 % month- over- month core inflation increase.

Lower interest rates generally benefit the gold market because they lower the opportunity cost of holding gold, according to Fan. In a more volatile environment, the team anticipates inflows into gold exchange-traded funds ( ETFs ).

In Q1 2024, the global gold ETF holdings dropped by 114 tonnes, primarily as a result of an outflow from European and North American funds.

Asian gold ETFs, on contrast, witnessed an increase in assets under management by 16 % to$ 11 billion, mainly generated by participants in China, due to a weakening yuan and other domestic assets.

Meanwhile, global geopolitical risks are rising: tensions between China and the US are stillrounding, and global supply chains and general market sentiment are being affected by ongoing conflicts in Ukraine and the Middle East. Gold, as a’ safe have n’, has therefore attracted wide interest.

The People’s Bank of China purchased more gold from the central bank in Asia in 2023, according to Fan. The PBOC currently has 2, 262.45 tonnes of gold reserves, followed by Japan and India, which have each over 800 tonnes.

The PBOC has added gold for the first 18 months in a row, but the price increase has slowed as the price rises have slowed.

The Reserve Bank of India’s ( RBI ) gold reserves, as of March this year, saw a 34 % increase compared to that in March 2019, reaching a total holding of 822 tonnes of gold. In addition, the Monetary Authority of Singapore’s ( MAS ) gold reserves increased by 2 tons in the first quarter.

The shift in geopolitical attitudes following the Russian’s attempted invasion of Ukraine and the subsequent sanctions placed on Russia’s foreign exchange reserves have resulted in a significant increase in central bank gold buying, according to Fan.

” We anticipate that central banks will continue to be gold’s main sources of income this year,” he continued. The US Fed’s rate cuts decisions, however, will still have the biggest immediate impact on the price of gold.

¬ Haymarket Media Limited. All rights reserved.

Continue Reading

Herbert Smith Freehills hires partner in Thailand; six make counsel in Asia | FinanceAsia

By:
On:
In: Asia, Finance, South-East Asia

Law firm Herbert Smith Freehills (HSF) has appointed Pariyapol Kamolsilp as a partner in Bangkok. Kamolsilp (pictured) will join the firm on May 2, according to a company announcement. 

In Thailand, HSF is led by managing partner Warathorn Wongsawangsiri. The practice handles large litigation, class actions and arbitration matters for Thai, regional and international clients.

Kamolsilp has over 16 years of experience in domestic and international arbitration, with expertise in construction disputes and insolvency and bankruptcy matters. He began his legal career in 2007, focussing on commercial disputes, including securities matters and M&A.

“Thailand’s economy is growing and Bangkok is also a business hub for Cambodia, Laos and Vietnam investment, so client demand for our services is rising,” said Wongsawangsiri in the announcement. “Pariyapol’s skills will help us meet that demand, particularly in construction, energy, consumer goods and TMT disputes.”
 
Asia managing partner Graeme Preston added: “Bangkok is essential to the growth of our Southeast Asia business, as it attracts investors across sectors and is a hub for onward investment.” 

Six promotions 
 
HSF has also promoted six of their team to counsel in Asia as part of a global promotion of 34 new counsel at the law firm, according to another company announcement. 

The six lawyers are: capital markets lawyer Maisie Ko, who is based in Hong Kong; commercial litigation laywer Saornnarin Kongkasem in Bangkok; Chee Hian Kwah, a specialist in financial services regulation at HSF’s network partner Prolegis in Singapore; Junyeon Park, who is a corporate crime and investigations lawyer based in Tokyo; Hong Kong-based Marcus Wong, who works in debt capital markets; and Yida Xu, also based in Hong Kong, who works in energy. 

They will all be promoted from May 1 and the move follows the promotion of six HSF lawyers in Asia to partners, also from the beginning of May. 


¬ Haymarket Media Limited. All rights reserved.

Continue Reading

AI’s rapid evolution | FinanceAsia

By:
On:
In: Asia, Finance, South-East Asia

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.


¬ Haymarket Media Limited. All rights reserved.

Continue Reading

Volume One 2024 magazine out now | FinanceAsia

By:
On:
In: Asia, Finance, South-East Asia

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. 

 


¬ Haymarket Media Limited. All rights reserved.

Continue Reading