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 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
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.
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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.
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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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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.
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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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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.
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The 800-pound gorilla in the room when Joe Biden goes toe-to-toe with Xi Jinping on November 15 will be the extreme political dysfunction in Washington that is threatening America’s last AAA credit rating.
As US President Biden angles to remind Chinese leader Xi who’s boss in San Francisco, partisan brinkmanship 3,000 miles away in Washington is reminding global markets that the world’s biggest economy is in a rather bad place.
The threat Biden faces is less from Asia’s top trading power than lawmakers on Capitol Hill in burn-it-all-down mode.
Moody’s Investors Service just reminded Biden’s White House that the stakes are rising, and fast. On November 10, the last credit rating company to grade Washington AAA warned a downgrade is coming, and perhaps soon. Moody’s cited the US debt topping US$33 trillion and political polarization throwing fiscal management into chaos.
This adds an awkward subplot to the Biden-Xi tete-a-tete on the sidelines of this week’s Asia-Pacific Economic Cooperation (APEC) summit. For all the challenges Xi faces in Beijing — slowing growth, property sector defaults, deflation, aging demographics — Biden faces his own daunting odds in stopping Moody’s from dealing his administration a humiliating blow.
And at a time when global financial markets were just warming to the idea that the US Federal Reserve might be done tightening this inflation-curbing cycle. A downgrade would take the “higher-for-longer” yield era to entirely new heights of economic damage and disorientation.
White House officials claim, somehow with straight faces, that this drama isn’t casting a pall over US-China dynamics in San Francisco. “We don’t have any changes to his schedule,” White House press secretary Karine Jean-Pierre told reporters this week. “This is something that Congress can get done very easily. This is their job, right? Their job is to keep the government open.”
But tell that to officials at Xi’s State Administration of Foreign Exchange (SAFE) managing China’s $860 billion worth of US Treasury holdings. Though this is Beijing’s lowest exposure to US political shenanigans in 14 years, it entrusts a sizable block of state savings to Washington lawmakers acting rationally.
This year’s surge in US yields to 17-year highs is disproportionately affecting China’s investment and trade-reliant economy. The 5.7% drop in the yuan this year raises the risk of more property developers defaulting on overseas debt dominated in dollars.
The US economy, meanwhile, is buckling under the weight of 11 Fed rate hikes in less than 20 months. Germany is fending off chatter that it’s the “sick man” of Europe as the rest of the continent loses economic altitude. Economists forecast that Japan’s economy shrank in the July-September period.
This global backdrop adds pressure on Xi’s team to support demand in the short run, while also stepping up structural reforms to improve the quality of China’s long-term growth. A fresh surge in US yields, particularly if Moody’s pulls the trigger, could slam global markets in the homestretch of 2023.
In this sense, political dysfunction in the US is emerging as the biggest threat to Asia’s 2024. “In Moody’s view, such political polarization is likely to continue,” the agency said. “As a result, building political consensus around a comprehensive, credible multi-year plan to arrest and reverse widening fiscal deficits through measures that would increase government revenue or reform entitlement spending appears extremely difficult.”
Analysts at Moody’s cited a number of recent standoffs that augur poorly for Republicans and Democrats coming together to address Washington’s fiscal challenges. They include a near-default earlier this year as Republicans refused, for a time, to raise the statutory debt limit.
That clash led to the ouster of Kevin McCarthy, a Republican, as speaker of the House of Representatives, the first such stunt by Congress in history. It left the House leaderless and rudderless for weeks, feeding into the negative sentiment at Moody’s on US fiscal vulnerabilities. It also upped the odds of yet another government shutdown.
The specter of lawmakers effectively shuttering Washington prompted Fitch Ratings to downgrade the US in August. Fitch cut America’s rating to AA+, 12 years after S&P Global yanked away its AAA status amid an earlier budget showdown.
The days since Moody’s fired its bow shot at Capitol Hill haven’t been promising. New House Speaker Mike Johnson has yet to outline a path forward for avoiding another shutdown. One will indeed occur if Congress fails to pass a budget or stopgap-funding bill by November 17.
Troubling, too, is the gimmicky ways in which Johnson is looking to paper over Washington’s dysfunction. One is passing a “laddered continuing resolution.” This would only extend funding for certain government agencies and programs until January 19, and for others until February 2.
Senator Chris Murphy, a Connecticut Democrat, speaks for many when he calls the strategy “extreme” and “just a recipe for more Republican chaos and more shutdowns.”
Proceeding this way, Murphy warns, means “that the House process requires you to come back and deal with half the budget on one date and half the budget on another date.” Murphy dismisses it as “a little bit of a recipe for failure.”
Nor are close observers of Washington’s fiscal mechanics impressed. “This punt delays [progress] until the first quarter of 2024, rather than resolves, the standoff over spending levels and priorities,” says Benjamin Salisbury, director of research at Height Capital Markets.
Analyst Chris Krueger at TD Cowen Washington Research calls the contours and effectiveness of such a plan a “total mystery.” What’s more, he says, credit rating companies understand that hardline Republicans have made passing 12 different funding bills to keep the government open, rather than an omnibus spending measure, a “cause celebre” this year.
As global markets hang in the balance, this “overly-complex” answer to a simple problem is likely to face strong pushback in the Senate, says Isaac Boltansky, strategist at BTIG Research.
“All said,” Boltansky notes, “the new Speaker is facing the same complicated calculus as the old Speaker and the only thing that has changed is that more than a month of the legislative calendar has been wasted.”
Xi would be wise to broach the issue with Biden. Though Japan has the biggest stockpile of US government debt at $1.1 trillion, China’s huge $860 billion exposure has to worry Communist Party bigwigs in Beijing.
Raising such concerns is also a way for Xi to remind Biden that China has unique leverage over Washington. It’s unlikely that Beijing would dump its dollars wholesale as the resulting panic in global markets would quickly boomerang back on China’s economy. Surging yields would hurt American consumers’ finances, reducing demand for Chinese goods. Still, it’s an option.
Another reason to worry: Donald Trump’s attempt to win back the White House. Should Trump win a second term in November 2024, hitting China with fresh trade sanctions would likely be a top priority. Trump and his inner circle have in the past threatened to default on US debt to hurt Beijing.
This works both ways, of course. A Moody’s downgrade might trigger Asian policymakers’ PTSD. Back in August, Fitch’s downgrade sent ripples through markets but not quite shockwaves.
At the time, Fitch said: “The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.”
The message clearly wasn’t received on Capitol Hill, where lawmakers are still playing games with America’s status as defender of the global reserve currency. Yet the specter of Moody’s piling on could shake markets. Might it also have S&P wondering if it’s time to give a second look at the AA+ rating at which it has held the US since 2011?
Additional turmoil emanating from the US is the last thing North Asia’s newish central bank leaders need. Governor Kazuo Ueda only took the helm at the Bank of Japan in April; People’s Bank of China Governor Pan Gongsheng in July. For both, 2024 is looking more precarious by the day.
Right out of the gate, Pan has had to confront a worsening economic slowdown, a slip back to deflation, a property sector in crisis, record youth unemployment and foreign capital fleeing at record speed.
Tumbling home sales are adding to already extreme pressures on developers grappling with a multi-year credit crisis. On November 13, Fitch said it was withdrawing all ratings on China’s Country Garden Services Holding. Fears of a Country Garden default in recent months have #ChinaEvergrande trending on global search engines and social media again.
Moody’s economist Madhavi Bokil warns that “we see downside risks to China’s trend growth on account of structural factors.” In the shorter run, Bokil thinks Beijing’s stimulus efforts to date could help China grow 5% this year.
“Third quarter data shows a modest improvement in economic activity that was helped by policy support, including infrastructure spending, interest rate cuts, stimulus directed at the property sector and some stabilization on the external front,” he says.
Bokil’s team sees China growing at a roughly 4% pace in both 2024 and 2025. Yet as US Treasury Secretary Janet Yellen said after discussions with APEC finance ministers, China’s troubles present a “downside risk” to the region. Yet so is the US, as Moody’s is reminding a global economy on edge.
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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.
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