A version of this feature was published in FinanceAsia's December 2021 magazine.
Gokul Laroia first moved to Hong Kong in 1997 and has held a number of senior posts across the bank since, from leading M&A and capital markets, to managing equities and wealth management. Heralded by FA as one of the region’s rising stars back in 2004, Laroia’s extensive experience in the Asian markets positions him well to serve as sole CEO for Asia Pacific (ex-Japan) from January, while he continues to steer the ship as co-head of Global Equities.
FA: How has the past year been for Morgan Stanley? What have been the highlights?
GL: As we look at the first three quarters, it has been a very strong year.
The last couple of years – with the context of Covid – have been really good from a business perspective for financial services across the board, but for Morgan Stanley in particular in Asia it’s been a point of inflection, in terms of scale. The growth we’ve achieved has been really pleasing.
What’s notable is that the bank’s achievements haven’t been concentrated in any one region or one product. Of course, China is a big part of our Asia business, but what has defined the year is diversity – across products and geographies, which makes for a healthy business. Our existing businesses and geographies that have historically contributed have grown, while some of the investments we have made in areas that either weren’t of scale or where we had market share gaps, have worked out well.
Over the past few months, certain types of business in China have been impacted by changing regulation; banking, for example, in terms of underwriting. Chinese companies listing in the US was a big part of the investment banking business – that recently, has effectively been shut down. If we had been concentrated in any one particular product or market, we’d be hurting, but we have actively diversified across equities, fixed income, wealth management and asset management.
Obviously, China is a significant market, but India is growing, Australia has had a really strong year, Korea and Taiwan have contributed, as has Southeast Asia. All of these markets may have different individual scale, but together they provide real balance to the region.
FA: What has driven the bank’s success in Asia?
GL: It’s different things for different products and regions.
It is important to bear in mind that general categorisations like ‘Asia’ and ‘emerging markets’ can be misleading. Every market and opportunity set they present, are very distinct. Where we make money in China, is very different from where we make money in India, Australia and so on. The investments we make are often very market specific.
It’s important to be able to adapt to market nuances and to emerging opportunities. China, for instance, is the world’s second largest economy, but it can only offer significant business opportunity when we are allowed to enter certain markets. As China deregulates, opportunities emerge. As an example, our equities product in China has grown exponentially and the big driver has been the regulatory change in Hong Kong to enable Stock Connect. This one regulatory change has had a dramatic impact on the business; and not just for us.
When investing, we carefully consider the opportunity that might be presented in any one market. Some markets like China are so big that we invest across the board. For markets of different scale we adopt an entirely different approach.
Southeast Asia for example has historically been mostly an equities and investment banking business. Now, we are growing the fixed income business there meaningfully. Australia meanwhile is a sophisticated market that draws comparisons with Europe and the US, so the opportunity set is broader. However, because it’s more mature, the growth potential there is less.
Asia is a complex region, and the decisions we make are a function of the market evolution over the medium to longer term.
FA: What opportunity does China offer?
GL: There’s a lot of potential in Asia both in terms of wealth and asset management. We have an onshore asset management business in China, and our research indicates that this market presents a huge opportunity for asset managers globally. But while China domestic asset management is a huge opportunity that we want to take advantage of, this is not necessarily applicable in the same way elsewhere.
As we think about our China business, the approach historically has been about distinct offshore and onshore businesses. Now we view the China opportunity in a more holistic way, especially as these markets are becoming more fungible. Client needs are evolving across the local and global markets, and not having the platform or capability that they require, is simply not an option.
We’re not only building out our China platforms – we have the full range; a bank that we are building out, a securities business that we’re upscaling, a futures business we are looking to get into, and our asset management practice – but more importantly, we’re integrating them to facilitate a ‘one China’ business.
If we have a Chinese client who wants to go public, it’s our responsibility to cater to their needs. This might mean listing in Shanghai, on the new Beijing board, in Hong Kong, or elsewhere. The same goes for asset management. If a client wants exposure to China, we need to be able to offer this through multiple pathways; Stock Connect, QFII, or buying directly onshore. We need to have the ability to do this in the market where it makes the most sense.
FA: How do you deal with China’s evolving regulatory landscape and its unpredictability?
GL: The unpredictability is the biggest issue. If we know what the regulatory framework is, we can evaluate a business, but with uncertainty, it’s hard to know what companies we are willing to underwrite, which companies do we want clients to own?
But I am optimistic about the regulatory outlook and I think we are gradually getting more clarity. Ultimately, the markets want clarity, consistency and predictability, and then these problems quickly dissipate. Regulation for tech isn’t a Chinese phenomenon – it is occurring everywhere.
FA: How do you prepare for what might be targeted next?
GL: It’s difficult to predict what might happen, but we have a good sense of the important themes: data security, cyber security, personal information protection, Common Prosperity; including healthcare, education, real estate. We have a sense for what the focus might be and where polices are likely to be supportive, such as sustainability, renewables and EV. It’s important to operate in spaces where you believe there is less regulatory risk and to reengage in places where you feel regulation is becoming clearer.
China is very focussed on attracting capital, and as regulatory clarity emerges, global capital will continue to scale. The interesting dynamic is that investors remain invested, although there’s been a rotation out of affected sectors into others that are better aligned with policy.
FA: Can you offer any examples?
GL: Take Stock Connect. Over the course of this year, there’s been $50 billion of northbound net flows into China, while a lot of capital has moved out of US ADRs and even out of Hong Kong. It shows that there continues to be interest. It’s just moving away from being heavily tech invested to focus on a broader spectrum of names, which is a healthy phenomenon. There is a breadth of ownership that we haven’t seen before and a redirection of capital onshore.
The export of the capital market out of China was an interesting occurrence but I don’t think it was necessarily that good for the local market, at least over the longer term. Look at India, where currently many local tech companies are looking to list domestically. It’s important that local investors can participate. Regardless of geopolitics, I think the phenomenon of Chinese companies listing in the US will gradually fade. Instead, I think these companies will turn to Hong Kong, and more locally to China.
FA: Can you talk me through the uptick in activity that you’re seeing in India and Southeast Asia?
GL: India presents significant opportunities. While it’s a large market, we haven’t seen many companies acquire real scale until recently. The digital economy phenomenon that we saw in China 10-15 years ago, is beginning now to occur. This creates some very exciting businesses that go public and has a virtuous cycle effect, creating market cap and names that global investors want to own.
Before, if you wanted to buy India, you bought the banks and the small number of blue-chip names. In the past few weeks alone, we have been involved in three to four deals that have created about $50 billion of market cap. I think this will continue over the next two to three years and my guess is that around $500 billion of market cap will be created in India’s internet digital economy. We are optimistic and investing there across the board.
Southeast Asia meanwhile, comprises very different markets. Like India, Indonesia is seeing the same type of tech development, and Singapore is emerging as a regional centre for important tech players such as Sea and Grab. Overall, if you add up all the countries it’s a big market.
FA: Can you offer some thoughts on the outlook of the macro economy across the next year and how it will impact activity in Asia?
GL: The global recovery has been fairly robust – especially in the US, and also in Europe – driven by massive amounts of stimulus and the reopening trade. I think that this growth will temper, which is to be expected. When you have a severe shock like Covid, there is often a period of rapid recovery stimulated by monetary and fiscal accommodation, which then normalises.
I think there will be relatively healthy levels of growth in the developed world. Asia has lagged over the past 12 months because the path out of Covid has been slower, but the region is catching up and across 2022, we think growth in Asia will be more robust than in the rest of the world.
The big concerns are around action by the Fed and the impact of inflation. The markets seem to be pricing in a more aggressive outcome than the Fed has suggested. This could be tough. However, if the Fed remains accommodative and growth remains reasonable, it’s unlikely we’d see a sharp macro slowdown, or a meaningful market correction.
I don’t see Asia entirely decoupling, but the region has a better macro position now than in the past. Current accounts are generally healthy, overall leverage levels are acceptable, inflation in not a big issue. While the so-called “taper tantrum” might happen, the macros are on a much more solid footing. India is an example of market optimism – domestic consumption and export demand is increasing.
FA: You’ve mentioned opportunity across a number of sectors and geographies, are there any other hot spots?
GL: From our perspective, one area that we’ve invested in over the last several years has been our wealth management business, which has shown robust growth. It’s an area where we think we have opportunities to scale the business and so are working to achieve that. We have a niche operation compared to our peers – our focus is Ultra High Net Worth (UHNW) and that’s where we’ll remain. I think we could look to double our revenue over the next three to five years.
Our fixed income practice has also grown. There are products and countries where we can build out local platforms and, as part of this, our commodities business has grown meaningfully. We believe Asia as a commodities hub has great opportunity.
Then there’s equities and investment banking, which are more mature businesses. These grow more organically because we already hold leading market shares, but market cap creation continues to generate new activity. It’s a real mix.
FA: Can you elaborate on your strategy for private wealth management?
GL: There has been significant wealth and value creation across the region with much of it coming from China and this continues. We decided to incorporate our private wealth management business into our institutional practice because the synergies are substantial. These clients are sophisticated and want institutional content, execution and advisory. To address these needs, we are able to leverage our capabilities across the bank.
There is a bit of a virtuous cycle here. You bank an entrepreneur and with the connectivity across the firm, we can cater to a range of their needs. Perhaps the entrepreneur’s company goes public, which generates additional wealth to manage. It’s across capital markets, or M&A, or providing treasury product to the company, and managing their personal wealth.
We recruit in this space in a calibrated fashion. The hiring dynamic is competitive, and we look for advisors who can bring real expertise and relationships. There is a lot of regulatory scrutiny across this sector – rightly so – meaning that cultural fit is also very important.
FA: What have been the highlights of your 26-year career – and counting – at Morgan Stanley?
GL: It’s been a long time! I think being in this part of the world has just been fantastic. I moved to Hong Kong in 1997 and since then, the whole region has changed dramatically. It’s been exhilarating to be here, to have witnessed the growth and to have played a small part in it.
Let’s not forget, in the past 20 years, GDP in Asia (ex-Japan) has grown by over seven times, from close to $4 trillion in 2002, to $27 trillion. In the same period, the US economy hasn’t even doubled. And the trend holds for the region’s market capitalisation growth – from $2.3 trillion to $32 trillion in two decades.
This pace of growth can be scary – look at the regulatory changes we’ve seen recently – but the opportunities and challenges it creates keep you constantly excited about the job.
I moved to Hong Kong to work across Indonesia’s capital markets, but the Asia Crisis hit and the market shut down, so I spent the next two years selling distressed businesses in Korea and Thailand. It’s been a case of planning for one thing, but then veering off into unchartered territory. This has been a thematic that I’ve certainly enjoyed.
I moved from investment banking to sales and trading, which is not typical, but it allowed me to constantly learn, which has been fulfilling.
FA: What’s your view on the changing landscape of Hong Kong?
GL: As a means to access China, there’s still no comparison. China is the biggest market in the region and will continue to be, so Hong Kong’s role as a gateway is undeniably important. I don’t think that the changes we’ve seen over the last few years will change the way we think about Hong Kong from a business perspective.
