The Investment Institute 2016 Singapore Forum, hosted by Investec Asset Management, focussed on discussing the unique and significant roles that China, India and South-East Asia play in the new age. Current global economic and political realities are prompting investors, regulators and policymakers to ask profound questions about how they can structure and allocate capital to meet their long-term objectives and promote financial stability.
The Singapore Forum provided a platform for key financial stakeholders to discuss how the economic and political transitions throughout the wider Asian region will shape intraregional and global investment decisions.
On 22 September 2016, the Investment Institute held its Singapore Investment Forum. This summary is the outcome of an interesting day of events including a discussion with the Deputy Prime Minister of Singapore, Tharman Shanmugaratnam and Bloomberg anchor, Haslinda Amin. The Deputy PM shared his views on current affairs such as the US elections, UK politics, the outlook for South-East Asia and Singapore. Michael Power, Investec’s chief strategist presented on the impact of China’s rebalancing on India and South-East Asia. The investment panel discussion followed and this was hosted by Andre Roux, co-head of emerging market fixed income. Mark Matthews, head of research at Julius Baer; Mark Breedon, co-head of 4FactorTM equity and Wilfred Wee, emerging market fixed income portfolio manager provided their views on the investment outlook for the region. The overall theme was that China, despite its challenges, is definitely presenting new opportunities for investors in the region.
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2016 has turned out to be a tumultuous year, and unusually the causes have been more political than economic. Yes, economic growth has been slowing in key regions and this has weighed on markets. But what has really surprised has been the politics of the unexpected, from Britain to Italy, from Brazil to Turkey. Even in the normally tranquil United States, the totally unexpected has happened: an upstart real estate developer has captured the Republican Party Presidential nomination and may yet capture the White House. As a result, 2016’s markets have swung between Drake Passage-like turbulence and, over the summer, Sargasso Sea-like calmness.
These uncertain times present particular challenges for investors, especially in the fixed income space where yields are ultra-low or even negative. But they also represent a cornucopia of opportunities, especially in the New World arising in China, India and South-East Asia. Acting now for the long term: Harnessing the potential of China, India and South-East Asia
Britain’s exit from the European Union
Without doubt, the biggest upset of 2016 has been the vote for Britain to leave the European Union. The shock of this pivotal vote is now subsiding, even as its reality sinks in. It is still unclear as to what comes next as the details of Brexit are yet to be defined and decided. For instance, how will current trade agreements be affected? What will the parameters governing the movement of capital and labour? What are the implications for UK monetary policy going forward? These fundamental issues will need to be addressed before the departure can take place.
While many believe that Britain will not be able to avoid a period of slow growth, or possibly even recession, a growing minority have expressed renewed optimism over Britain’s future. After a time of adjustment, it is in the nature of Britain to discover new comparative advantages that it can leverage. Yes, the implications of Brexit for London’s status as a global financial hub still remain uncertain. But again, some are seeing upside here too suggesting that London may yet become Europe’s Singapore, free of the meddling of the well-meaning bureaucrats of Brussels.
Britain’s exit is unlikely to impact Asia in the long term, at least not in the same way as it will Western economies. Most of the immediate repercussions have been related to currencies and stock markets, which have already absorbed the post-Brexit shocks. In the long run, the remaining effects of Brexit on the Asian region will largely depend on the consequences it will have on the economies and markets in the EU.
The uncertainty surrounding the US elections
Across the Atlantic from the UK, the deep uncertainty surrounding the upcoming US elections echoes the sentiment evident in the lead-up to the Brexit vote. Regardless of who is voted into office, the US elections will have implications on trade and economic policy here in Asia. Both presidential candidates have openly expressed their opposition to the game-changing Trans-Pacific Partnership, which is yet to be ratified. That being said, Asia is still relatively sheltered from the outcome of the US elections, at least when compared to Latin America, Europe and Africa.
China, and its rebalancing strategies
Closer to home, China’s growing debt levels raise serious concerns that cannot be ignored, even though the state’s deep pockets do provide a measure of protection. The narrative here is that China’s balance sheet and reserves can hold off a full blown crisis until other cylinders in the economic engine start firing. However, there is a limit to how many hits the national balance sheet can take from write downs of debts incurred by provincial governments.
Despite the challenges, there is much to laud in the Middle Kingdom’s progress. China’s rebalancing strategies have necessarily resulted in slowing GDP growth, particularly from the production side of the economy. This has partially been offset by a healthy growth in consumption. As the nation grapples with the multiple aspects of its mammoth and complicated reform task, there will inevitably be missteps, growing pains and some backtracking. But over time, China’s new growth model should prove to be resilient and sustainable.
Aside from seizing the exciting opportunities present in the Chinese bond market, investors should be selective when it comes to the companies they choose to work with and invest in during this time. There are a number of advanced and innovative ideas coming out of China waiting to be capitalised upon, including those in the renewable energy and electric vehicle spaces.
So what does this period of transition mean for the rest of Asia?
On a macro level, there has been a shift in growth momentum from China towards the South-East Asian and Indian Ocean region. This is hardly unsurprising, given the sharp rise of wages and production costs in China as its economy continues to grow.
In fact, experts have predicted that India and Indonesia will join China as power economies by 2030. This view is underpinned by the lower manufacturing costs, healthier demographic data and better relative productivity growth of these regions. These factors have resulted in companies, including domestically-owned ones, shifting production away from China.
South Korean tech giant Samsung, for instance, has recently invested in two mobile phone plants in Vietnam and plans to expand on that investment in the near future. Japanese companies are also moving from China to parts of South-East Asia and India, the latter having recently overtaken China in terms of its GDP growth rate and, by 2026, set to overtake China in the size of its population.
This paints a rosy picture for investors in the South-East Asian region. Singapore, with its strong and stable dollar as well as its strategic location, is especially advantaged. Furthermore, valuation-wise, Asian investing is comparatively more attractive than investing in the West. However, this is not to suggest that harnessing this region’s potential is without its complications.
The quantum of economic growth, whilst important, needs to be underpinned by both higher quality and better composition of growth in order for it to be sustainable over the long run. In the case of India, domestic reforms are starting to trickle through and are slowly raising investor confidence. But issues like corruption and poor corporate transparency remain. Before diving into the market, investors should be confident they engage with local companies directly, have all the information they require and analyse their target investments from first principles.
These issues do not detract from the fact that there is vast unfulfilled potential in the Asian region. When evaluating regional investments, it is crucial to look beyond numerical growth into domestic policies and structural reforms. Clear and transparent regulations, sound fiscal policy and efforts being made to support sustainable growth are all contributors to a robust and ebullient economy.
Singapore and the next decade of opportunity
Within South-East Asia, Singapore stands out as an economy that is primed for long term success. The nation is committed to and prioritises infrastructure development as well as regularly skilling and reskilling of workers across every level of every industry. Events like Slush Singapore, designed to bring together young entrepreneurs and investors from around the world, demonstrate the willingness of the government to create a supportive and encouraging environment for entrepreneurship.
That is not to say Singapore does not face its fair share of challenges. Issues such as over-regulation, complacency and risk avoidance need to be addressed and overcome in order to encourage further development of one of Asia’s key entrepreneurial centres. Only then can the Lion City’s economic future be secured.Return to Investment Institute