Posted by Tim Williamson on Thu, Jan 16 2014

All Posts by Tim Williamson

Five themes to watch in APAC in 2014

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APAC is an exciting financial services marketplace. It is no coincidence that so many of our clients are committing more resources to capture the opportunity in this diverse and dynamic region.

At the same time Asia’s unbridled growth through the financial crisis is not without some challenges and there are five key themes we’ve called out in the region which we think financial services companies need to be aware of at the beginning of 2014.

1. Continued Asian growth

It has become fashionable to be bearish about Asia in recent months and there are some legitimate concerns about the growing pains that lie ahead for the region, but it pays to have a sense of perspective. Asia has been the driver of global growth in recent years and looks set to continue on a strong growth trajectory in 2014. The IMF forecasts that this year, GDP in the region will grow by 5.3%, up from 5.1% last year. That estimate is at the conservative end of the spectrum as consensus according to Bloomberg is nearer 6.3%.

The growth is not limited to China. Here in Singapore our near neighbour Indonesia – which has a young and growing population of 230 million - is expected to grow at 5.5%, Myanmar by 6.9%, India by 5.1%. The developed markets of Australia, Singapore and Hong Kong are forecast to grow at rates western developed economies regard with envy and even Japan is showing signs of modest growth.

In fact there is a major economic shift underway from West to East. Danny Quah, a Malaysian born economist at London School of Economics, has mapped the shift of the financial centre of gravity from somewhere around the mid-Atlantic in the 1980s to somewhere over Turkey today. By 2040 as productivity in our region continues to improve and populations grow, it should reach China.

2. Market volatility

There will be speed bumps on the way. Unconventional monetary policies in developed markets have created stresses in Asian markets – particularly markets with large current account deficits such as India and Indonesia. The Taper Tantrum in 2013 saw headlines about significant fund flows from emerging markets amid concerns the Fed would wind back its asset purchasing programme early and that impacted asset prices. The MSCI APAC index fell 9% in the three months to August 2013 and several emerging market currencies not least the Indian Rupee and Indonesian Rupiah experienced significant volatility and pressure.

There is no doubt that investors in Asia, and globally, will watch closely for an orderly exit from QE in 2014.

3. Geopolitical change

2014 will see two of the world’s biggest democracies go to the polls. In April, some 800 million Indians will vote in a general election, an estimated 150 million for the first time. In July, 175 million Indonesians will vote in the presidential elections, with 67 million first time voters (a testimony to the demographics in both those regions). Both Indian Prime Minister Manmohan Singh and Indonesian President Susilo Bambang Yudhoyono will be stepping down and there are pushes for further economic reforms from the challengers which will have implications for their future growth paths.

More recently, Thai Prime Minister Yingluck Shinawatra has called February elections following weeks of opposition street protests.

2014 will be a significant year for the leaders of the region’s two economic power houses – Japanese Prime Minister Shinzo Abe and Chinese President Xi Jinping with significant market reforms in both markets underway. The results of Japan’s unprecedented Abenomics stimulus programme will certainly be watched closely this year after the Nikkei’s 57% rise in 2013, the Japanese indexes best performance since 1972.

4. China

2014 is the Year of the Horse in the Chinese zodiac. Traditionally those born in the year of the horse are gregarious and enjoy the good things in life and that is somewhat fitting as China seeks to continue its transition from a low-cost manufacturing economy to a more consumer-focused economy. Already today Chinese consumers account for 25% of the $27bn global luxury goods market.

At the same time the Chinese leadership is pushing through major curbs to the shadow banking system, the multi-trillion dollar informal lending system which has helped bank-roll so much of the infrastructure investment in China, but which now raises concerns about high levels of debt. This has far reaching implications for financial markets generally and potential direct implications for western financial services providers in the region.

At a trade level, RMB internationalisation continues at a fast pace. Recent SWIFT data shows that the RMB has overtaken the Euro to be the 2nd most used currency in trade finance.

With official GDP growth targets for 2014 yet to be released, 2013 growth was expected to have been around 7.5%. This is comparatively slow for China but as Jim O’Neill, the ex-Goldman Sachs economist credited with creating the BRIC concept points out, China continues to create the equivalent of an economy the size of Greece every three months and Spain every year and a half.

5. APAC leaders on the world stage

And Asian leaders are continuing to find their voice on the world stage.

This year will see several milestones; The G20 conference will be held in Brisbane, Australia, in November and Myanmar will, for the first time, host and chair the ASEAN summit of South-East Asian leaders in May and October.

In the financial industry, 23 Asian regulators sent a rare joint letter to Michel Barnier, the European Commissioner for internal markets, warning that the one-size-fits-all tests for clearing houses will hamper business and liquidity in Asia.

The opportunity in APAC

In 2014 the Asian region will only grow in importance on a global scale. The Asian growth story is not just a story, it is a fundamental shift. Today we are seeing more inter-Asian commerce and increasingly the emergence of local providers and expertise. The next generation of competitors in the financial services and financial tech sectors may well be coming out of the Asia Pacific region.

Amid that backdrop now is the time for financial services companies to look to their Asian strategies or risk being left behind.

Asia, China, Singapore,
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