The upcoming print edition of FinanceAsia will be exploring the key trends in the Year of the Horse, notably the resurgence of China equity activity and whether or not that will translate into profits for investment banks. In the meantime, here are my thoughts about what 2014 may hold in store: the first seven of 14 ideas for 2014. The second half will run on Friday.
1. China and its financial liberalisation is likely to be the key theme of 2014. But what and when? The first thing to watch out for is a possible big push by the People’s Bank of China toward renminbi convertibility, perhaps within a quota so as to avoid massive capital movements. Such steps are likely to come soon, in step with already-announced plans to radically increase quotas for Qualified Foreign Institutional Investors and Qualified Domestic Institutional Investors, and for retail investors too. More important to economic restructuring, however, will be freeing interest rates, specifically deposit rates.
This raises challenges. First it means the end to cheap capital for state-owned enterprises and their banking intermediaries. So expect some pushback. Secondly, it implies that China will see rising interest rates just as the developed world continues to keep policy rates low. Which brings us back to the potential for destabilising capital flows – not to mention the leadership’s insistence that it will maintain China's high economic growth rates. The upshot: expect reforms to be fast-paced, choppy, inconsistent, and sometimes contradictory.
2. The price of oil is widely expected to decline as new production comes online in the United States and Iraq, and as several years worth of investment in new rigs reaps greater supply – a level that is likely to continue to outpace demand, even if the developed world’s recovery is sustained. The possible rapprochement between the US and Iran also takes some geopolitical risk off the table and raises the potential of yet more supply becoming available. This is good news for oil importers. The biggest importers in the world are Japan, South Korea, India and China, but even producers such as Indonesia are net importers of petroleum. Lower energy costs should mitigate some of the balance-of-payments pain even as central bank liquidity tightens.
3. Southeast Asia, notably Indonesia, has been the most favoured consumer story in the past few years. That is going to shift to North Asia – particularly to Japan. Abenomics is meant to generate modest inflation. So far that is not yet translating into wage hikes. But if wages go up even a little bit, say by 1%, that can mean a lot for a country with an average per capita income of $37,000. The number of wealthy households in Japan is greater than the number at that same dollar level in China. Consumer spending growth in China remains far more robust, but a mild increase that raises overall Japanese household wealth can have a far bigger impact on consumer goods. This could be the year when that happens…
4. …But the biggest risk is a steep drop in the value of the yen. Abenomics can’t quite square the circle. The government’s debt is now more than twice the size of the country’s economy; one unspoken reason behind Shinzo Abe’s monetary strategy is to keep interest rates low enough to allow the government to service that debt. It depends on increased borrowing of Japanese government bonds even as inflation debases their value. Increasingly, that leaves the Bank of Japan as the only buyer of JGBs: local institutions such as the $1.3 trillion Government Pension Investment Fund are looking to allocate some of their investments away from domestic fixed income. Support for the yen will be tenuous, especially once the US Federal Reserve begins to slow its own quantitative easing programme.
5. Insurance remains a lucrative business for the top tier. The marginal growth will come from general insurance, however, not life insurance. The traditional agency model for life insurers remains potent but is in relative decline to bancassurance; in bancassurance, most of the battle lines have been drawn. The last holdout is deciding Citi’s 14-market platform as the bank concludes a deal to establish exclusive distribution relationships. Once that is settled, be it regionally or by market, the opportunities to create meaningful bancassurance relationships will be limited. On the other hand, areas such as insuring automobiles and medical care are just emerging in many countries.
6. The top 15 to 20 hedge funds domiciled in Asia will become major clients for banks’ trading floors. US hedge funds are increasingly focused on the opportunities at home while even the biggest long-only global asset managers continue to cost banks’ trading desks money to service. So the Asian hedge fund leaders will become critical to trading desk commissions. The overall size of the Asian hedge fund industry has been flat but there are now 20 or so funds that are more than $1 billion in size, and in some cases headed towards the $7 billion to $10 billion mark.
7. Managing pensions will become bigger business across Asia. Australia’s superannuation fund size has reached $1.6 trillion; contribution rates are now 9.25% of salaries, a level that will rise to 12% by 2020. In Japan, a new tax-sheltered savings account, the Nippon Investment Savings Account, is creating a new vehicle for Japan’s households to access as Abenomics transforms holding deposits into a losing proposition. Mandatory schemes in Hong Kong and South Korea’s growing corporate pension programme will provide asset managers with additional inflows. China remains the wild card: its patchwork of pension schemes has yet to gain real traction, and unfortunately pension reform has not been a highlight from the November leadership plenum. But together, these moves suggest that for asset managers wishing to develop accretive businesses, pensions are the place to be.
