Download The importance of high growth markets

The importance of high growth markets
Alan Naughton, Head of Securities Services, Corporate Agency and Trust
Alan Naughton, Head of Securities Services, Corporate Agency and Trust at Standard Chartered
explains why his bank prefers the term ‘high growth markets’.
How would you define ‘high growth markets’?
Where are these markets?
In 2003, the four BRIC countries of Brazil, Russia, India and
China had been identified as the key growing economies
1
and their markets had performed extremely well . South
Africa gained entry to BRIC group in 2010, now called
2
BRICS . At the end of 2011, the MIST group of countries
comprising Mexico, Indonesia, South Korea and Turkey – all
members of the Next Eleven (N11) group of countries
which, along with BRICS, have been identified as having the
potential to be the world’s largest economies in the
3
21st century – had grown considerably to comprise three
quarters of the N11’s GDP. Meanwhile, the “MINT” nations
of Mexico, Indonesia, Nigeria and Turkey and all members
of N11, are also another group to watch, with their GDP
4
standing at nearly 30% of BRIC GDP .
In recent times, however, with emerging markets falling out
of favour with foreign investors and currency depreciation
against the dollar, BRICS and N11 market indices and the
volume of foreign investment have fallen versus more
developed markets reversing the previous growth trends.
But what these measures of market growth may fail to
capture are those markets where local savings pools
in mutual funds, insurance products or pension schemes,
are growing and where outbound investment is happening.
Examples of such markets in our footprint include
South Korea, Vietnam, Indonesia, China and India.
1
2
3
4
What is causing these markets to increase
in size?
It would essentially be the maturing of financial services,
growing discretionary or mandatory investment pools,
liberalising of cross-border investment restrictions, alternatives
to real estate investment and lower interest rates on cash
products. As the proportion of local wealth in savings or
insurance products continues to increase as a percentage of
GDP, workforces mature and government sponsored
initiatives to reduce the pension burden on the state gain
traction, local investment pools are expected to swell.
However, the rate of increase will vary by market depending
upon the incentive policies adopted. We are already seeing
significant pick up in insurance-related long term savings
plans in several emerging economies driven through direct
sales or intermediary channels.
Comment on regulatory driven initiatives to
liberalise the investment rules in these
markets, thus allowing domestic investors to
invest abroad?
In many emerging economies where there are no deep
stock and bond markets, and also some developed ones,
the local investment alternatives are becoming limited or
www.statista.com/topics/1393/bric-countries/
www.theguardian.com/world/2011/apr/19/south-africa-joins-bric-club
www.bloomberg.com/news/articles/2012-08-07/goldman-sachs-s-mist-topping-brics-as-smaller-markets-outperform
www.waspada.co.id/index.php?option=com_content&view=article&id=256538:indonesia-negara-jagoan-masa-depan&catid=77:fokusutama&Itemid=131
looking less attractive. Take Australia for example, where
there is a degree of overseas investment by local
superannuation and unit trust funds but historically, the
majority of assets have been invested in domestic stocks
and bonds. With the fall in global commodity prices that
underpin a large part of the Australian market, the hunt for
returns is expected to shift further offshore. South Africa is
likely to be a similar story.
Comment on moves to make these markets
less nationalistic in terms of regulation
governing investment and encouraging more
pan regional and cross-border investment
initiatives
The various fund passport schemes being promoted across
Asia – the ASEAN Fund Passport that is already live, the
Asian Regional Funds Passport scheme scheduled to be
launched in September 2016, and the Mutual Fund
Recognition initiative across mainland China and Hong Kong
– are intended to provide for ease of investment in fund
products across national boundaries, though these are
presently at different stages of development. We would
expect Mutual Fund Recognition to be in the vanguard of
these initiatives though recent market turmoil in China could
see the take off being a little slower than many
commentators had previously expected. The other two
Asian schemes still have local registration, authorisation and
taxation hurdles to fully overcome similar to those taxation
hurdles to fully overcome similar to those encountered in
Europe during the early years of the UCITS regime.
What do these developments mean for the
strategies of custodians?
There are several implications for securities services
providers of these changing investment strategies and
distribution arrangements. For those operating in local
markets supporting outbound investment through domestic
vehicles, comprehensive access to a wide range of markets
coupled with an understanding of local rules and practices
will be key. And within regions, the ability to link the different
fund distribution markets through common platforms will
also play a part in service provider selection. Some
providers without an existing country presence may look to
establish local, regional or fully international strategic
partnerships to avoid prohibitively high market entry costs
and equally local players could look to tap into the existing
infrastructure of the global firms. Either way, the traditional
local or global lines are starting to blur and operating models
and costs re-examined by securities services firms who are
determining how best to add value to their current and
prospective clients.
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Sep 2015
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