Asia-Pacific (APAC) – as an asset management centre – still lags behind that of North America and Europe, but AuM (assets under management) and investable assets is rising at a truly exponential rate. We take a look at some of the big opportunities and challenges facing the APAC asset management industry.
A gigantic pool of assets
APAC wealth has been growing for a long time, and if the Capgemini World Wealth Report 2017 is to be believed, there are now more high net worth individuals (HNWIs) residing in APAC than in the entirety of North America. Capgemini data found there to be 3.37 million HNWIs in APAC versus 3.35 million in North America. The same study shows APAC has also pipped North America in terms of HNWI assets, with $18.8 trillion sloshing around in the region, compared to $18 trillion in North America. Given the low interest rates being paid out by banks, this money needs to be invested if it is to accumulate.
It is not just HNWIs that have experienced monumental growth in the region but ordinary middle-class savers. This demographic is likely to inject huge sums of capital into global asset managers moving forward. The emergence of China’s middle class will likely prove to be a huge source of capital for fund managers in particular moving forward. Figures from consultancy McKinsey & Co estimated that 76% of China’s urban population will be considered middle class by 2022, and a lot of these households are debt-free. This will create an excellent source of revenues for asset managers.
The UCITS directives over the last few years have helped streamline the rules inside the EU making for a very simple cross-border distribution process for fund managers. Of course, UCITS has its weaknesses with managers often deriding the lack of standardised regulatory reporting in the EU, and arbitraging taxation rules in different markets, but the brand is certainly an influencer for passporting schemes worldwide. A handful of APAC markets are testing the waters with their own passporting schemes, namely the ASEAN CIS and ARFP. Meanwhile, Hong Kong and China have created the Mutual Recognition of Funds (MRF) allowing two-way fund distribution into each other’s markets.
ASEAN CIS has not been successful and expectations are low for ARFP. The reasons for regional passporting schemes’ underwhelming progress is that APAC markets are too different – in terms of economic development, monetary policy and regulation – that creating a fund passporting regime is a very difficult undertaking. Even MRF – which many thought would be a resounding success and opportunity for China and Hong Kong’s asset managers– has been lacklustre, mainly because of the former’s imposition of capital controls and slow regulatory authorisation processes.
All eyes on China
China’s equity and fixed income markets present exciting opportunities for foreign asset managers. Beginning with Stock Connect almost four years ago, China has been making significant steps in opening up its capital markets to foreign investors. After Stock Connect came direct CIBM (China Interbank Bond Market) access giving investors the ability to trade fixed income instruments, by simplifying the registration process and eliminating the quota requirements, which are a feature of other access channels such as the Qualified Foreign Institutional Investor (QFII) scheme and the Renminbi Qualified Foreign Institutional Investor Scheme (RQFII). The most recent opening was Bond Connect, which lets investors open up custody accounts in Hong Kong but attain CIBM access. So far, the scheme has proven to be popular, and it is expected more investors will start participating this year.
Other Connect initiatives will come to the fore in 2018, including ETF Connect and IPO Connect, and possibly even UK-China Connect. Irrespective, the biggest development to impact China in 2018 will be the swell in trading volumes as a result of passive funds investing in the market. MSCI’s inclusion of China into its emerging market index and the incorporation of Chinese bonds onto a number of mainstream bond indices is going to result in passive products adding China into their portfolios in what will bring much needed liquidity into the market, and potentially help mitigate the damaging effect of capital outflows that have bedevilled the country since its equity market volatility several years prior. As such, the smart managers will at least be exploring what China has to offer in 2018.