Staying on top of Asia’s evolving market structure is essential for an investor to fully capture the region’s opportunities.
Market infrastructure is continually evolving in Asia. Investors with an interest in the region need to stay up to date with changing rules relating from everything from market access to developments in trade and settlement processes. At the same time, asset managers are increasingly focused on reducing costs, increasing efficiency and integrating technology into their business.
Being able to balance the external challenges associated with a developing market environment with the internal demands for a more efficient business model will be a key factor in the success of asset managers in the future. “We have got to adapt to the change that is happening,” said John Butler, Head of Sales and Business Development, Singapore, HSBC Securities Services.
Singapore – new fund structure
“The winners will be those companies with a strong brand value that share in the same values as their investors, while offering low-risk, low-cost products,” he said. Mr Butler was speaking during a panel discussion – part of a HSBC client engagement event that covered the most important market infrastructure developments in Asia.
From a Southeast Asian perspective, one of the most important innovations is the introduction of a new corporate structure in Singapore that is designed to encourage portfolio managers to domicile their funds locally. Known as the Variable Capital Company (VCC), it applies both traditional and alternative fund strategies and is not dissimilar to structures in jurisdictions such as Ireland and Luxembourg.
Mr Butler said that there is definitely interest for VCCs, especially for alternative managers in the Cayman Islands that might considering redomiciling to Singapore. The new structure will likely exist alongside pre-existing options for managers. “UCITS, the Ireland and Luxembourg fund structures are not going away. But VCCs are providing a new avenue for managers to reach investors,” he said.
India – simplifying market access
The Indian stock market has undergone transformative growth over the last decade – both in terms of the number of companies listed and the value of local public firms. For that growth to continue, the market needs sufficient liquidity as well as product depth to satisfy the needs of an increasingly affluent local population, said Yogesh Ajinkya, Director and Head of Direct Custody and Clearing in India, HSBC Securities Services.
There could be a similar wave of development to come in the bond market, he said, as fixed income is equivalent to a much smaller proportion of the Indian economy than in other markets.
For investors looking to participate in this rapidly growing emerging market, it is necessary to complete a market access process that can be complicated and time consuming. Mr Ajinkya said that the current Foreign Portfolio Investment (FPI) scheme, introduced in 2014, is much faster than its predecessor, with the process for getting a license shortened from two to three months, to just four or five days.
The sticking point for many investors, he said, is not the application process itself; but rather the documentation that needs to be provided – especially complexities relating to the know your customer (KYC) submission. A streamlined process is in the works.
“The regulatory authorities in India are conscious of the overall impression carried by foreign investors on India being a complex market. There is a focused effort to try and simplify operational procedures that will help reduce the time taken to setup and trade in the market,” he said, pointing to a single application form that integrates all the four documents that currently need to be completed.
China – Index inclusion
The panel also discussed how China’s equity market is being included into the global indices that investors around the world use to benchmark their performance. The most notable change happened earlier this year, when MSCI implemented its decision to add China A Shares to its widely-followed Emerging Market Index. This long-anticipated move is a major step in the internationalisation of China’s financial system.
“The MSCI Inclusion went very smoothly,” said Patrick Wong, Head of China Sales and Business Development, at HSBC Securities Services. The initial weighting of China A Shares in the EM Index is small, with a focus on companies that are part of the Stock Connect programs. Mr Wong expects an increased weighting to be implemented next year.
The next index provider that is expected to include China A Shares into its benchmarks is FTSE Russell, which in September announced that it will start making the additions in June 20191. The first phase will result in China A Shares accounting for 5.5 per cent2 of the FTSE Emerging Markets Index, and the process will be complete by March 20203.
The company cited China’s market reforms and measures to improve access for foreign investors as motives for the decision. In particular, Mr Wong highlighted the availability of Delivery Versus Payment (DVP) settlement as a factor influencing the move. Like MSCI, FTSE Russell’s inclusion criteria focuses on stocks that are a part of Stock Connect. Mr Wong also highlighted how index providers will have to start catering for investors that want a broader exposure to China A Shares.
Away from equities, fixed income is also becoming part of the global indices with Chinese RMB-denominated government and policy bank securities to be added to the Bloomberg Barclays Global Aggregate Index over a 20-month period starting in April 2019.
“The direction is very clear in the bond market,” said Mr Wong. “The regulators really want to open the market to the world. And for investors, it is the world’s third largest fixed income market, so inclusion is more a matter of when it will happen, not if it will happen.”
1Based on data as at 31 August 2018, FTSE Russell Press Release
2Same as above
3Same as above