Bankable Insights – The Custodian Edition_March 2021 – Emerging Markets, Emerging Opportunities
Bankable Insights – The Custodian Edition: A collection of the latest insights and perspectives on topics of relevance to the Securities Services industry
*Bankable Insights* The Custodian Edition
Emerging Markets,
Emerging Opportunities
March 2021
Greetings and welcome to the first Custodian Edition of 2021. Our theme for this edition is Emerging Markets, Emerging Opportunities.
In February, many across the world, and especially in Asia, celebrated the Lunar New Year, welcoming the year of the Metal Ox. The Ox is an animal known for its hard work, duty and discipline – essential qualities we bring to our work with you to help you explore and embrace emerging opportunities in Asia, Africa and the Middle East.
The year of the Metal Ox is predicted to be a transitional period, and with news of vaccines we have an increased sense of hope that 2021 will bring a change in circumstance.
We are committed to partnering with you through the transition. Partnership, collaboration and innovation have been core to the two-year multi-market implementation journey we recently completed with RBC IT&S (RBC Investor & Treasury Services). But as our first feature explains, this is just the beginning. In it, their CEO and I discuss how solutions created through collaboration can redesign the client model when you have the right partner to work with.
As a bank, we are proud to be making commitments to reduce our carbon footprint and to direct investments where they are needed most. The conversation around the role that Securities Lending can play in implementing ESG strategies is an interesting and evolving one – and we look at how individualised Securities Lending programmes can help asset holders to push their ESG goals in Balancing sustainability with profitability: ESG and Securities Lending.
Having the right partners is an equally important consideration for those with a growing ESG agenda.
From a market perspective, Asia is emerging as an investment spotlight with China increasingly looked to as a relatively attractive opportunity. As Access all areas summarises, our investor survey of 2020 showed that China is a long-term strategy for international investors and a good proportion are set to increase their allocations to Chinese assets in the next 12 months while another 12% say they will invest in China for the first time.
While Africa and the Middle East have been relatively quiet compared to Asia, the lifting of sanctions in some Middle Eastern markets create opportunities for foreign investors to enter. The conversation across Africa is a continuation of the digitisation journey and accelerated connectivity that the pandemic has brought to markets, as explored in The promise of innovation for Sub-Saharan Africa’s post-trade industry. This fits well into the broader digitisation conversation we are having with clients globally.
The connectivity, resilience and relationships made stronger in 2020 allow us to continue to support you in this year of transition, despite travel restrictions.
I look forward to conversations in the coming year on how we can leverage these emerging opportunities.
With China leading the global economic recovery, we will be keeping a close eye on the changes that its regulators are making to ease foreign access and how we can help clients to leverage these.
Margaret Harwood-Jones
Co-head, Financing and Securities Services
The end of the beginning: Strategic partnerships that deliver the best to clients
The end of the beginning: Strategic partnerships that deliver the best to clients
RBC Investor & Treasury Services (RBC I&TS) believed that its network of agency banks could bring considerable value beyond traditional custodial activities. Tighter integration with its network would be a foundation for deepening collaboration to enable problem-solving and innovation, delivering a network effect that RBC I&TS would extend to its end clients.
The firm, a specialist provider of asset services, custody, payments and treasury services for institutional investors worldwide, sought to transform its sub-custodial relationships from providers, tactically focused on transaction processing, to strategic partners, an initiative it calls Network 2.0.
Reimagining the network model is the bold vision of Francis Jackson, Chief Executive Officer for RBC I&TS. Doing things differently, Jackson believes, is essential in a competitive environment, and the network is key to differentiating the client experience and enabling business growth.
Two years later, RBC I&TS has reduced its providers from 23 to 11 and transitioned $3.5 trillion in assets across 88 markets in a compressed timeline amidst the unexpected challenges of the COVID-19 pandemic. However, this is only the end of the beginning. How has RBC I&TS set the path for strategic partnership, starting with its RFP selection process and transition, and where will Network 2.0 go next?
Not a run-of-the-mill RFP process
Early on, RBC I&TS challenged its agency banks to think about new ways to combine intellect, resources, and ideas to create a better network solution. Innovation workshops were integral to the RFP assessment. Participants were asked to consider how they would innovate if given a blank canvas. “Some firms thought carefully about the problems and the opportunities,” says Jackson. “Others had an entrenched mentality about what could not be done. Standard Chartered came to the table with great ideas, which differentiated them in the RFP process.”
Discussions around innovation prompted a greater level of understanding of how RBC I&TS serves its underlying clients. “The RFP process forged cultural alignment, the conviction that we’re in this together, and shared expectations, which established the proximity that underlies a strong relationship,” says Margaret Harwood-Jones, Co-Head, Financing & Securities Services, Standard Chartered Bank. Jackson says the whiteboarding exercise put banks like Standard Chartered in an advisory role, laying a foundation for strong collaboration.
The measure of a good relationship
Dialogue was also critical to a successful transition, given the inherent complexity of transitioning trillions in assets spread across individual markets, including depository positions, within a compressed timeline.
Following the decision to engage with Standard Chartered, the bank’s professionalism quickly came through. We stopped being too polite. We became real people getting to work.
Francis Jackson,
Chief Executive Officer for RBC I&TS
This proved vital when the COVID-19 pandemic caused unforeseen challenges and pivots. For example, Standard Chartered worked with in-country central securities depositories to gain acceptance for digital forms with electronic signatures, where paper and ink were normally required, in order to open accounts and move assets during the pandemic lockdown.
Jackson sees open, frank and transparent communication as the measure of a good relationship, which enables an agile response to unforeseen challenges.
The ability to be flexible must be based on a clear purpose and objectives, set forth by senior leadership, so that working groups can adapt while staying the course.
Francis Jackson,
Chief Executive Officer for RBC I&TS
Strategic partnerships should bring mutual benefit.
The opportunity is to stop thinking of ourselves as individual units and think of ourselves instead as two parts of a whole. This is not a conversation you have with anyone. Because of what we’ve done, we’ve earned the right to enter into a partnership mode and work out where we go next.
Margaret Harwood-Jones,
Co-Head, Financing & Securities Services,
Standard Chartered
The immediate next step is to identify common areas of collaboration to drive different outcomes that would not be possible working alone. Priorities include:
- Digitisation
The first shift will be from moving paper to moving data. Digitisation will allow the partners to reimagine everything, from documentation and signatures, to account openings and sharing market insights. RBC I&TS and Standard Chartered envision being able to match data and discern patterns as the basis for value-added services.
Pandemic learning can accelerate best practices in digitisation, says Harwood Jones. For example, sub-custodians should work with local markets to encourage temporary behavioral shifts towards digitisation during the pandemic, such as wet signatures, to become permanent.
- Seamless end-to-end client experience
Network 2.0 will provide a much tighter front-and-back-office integration, process standardisaton STP automation, and rationalisation across markets. This will reduce intermediation lags in the securities services chain. For example, as a proof of concept in emerging markets, Standard Chartered analysed queries of MT 599 free-form messages in one market and reduced queries by 60% by changing one data field. Longer-term, Jackson envisions the application of technology leading to endless capacity. As a result, investors and issuers will be able to connect seamlessly to markets at a fractional cost.
- Ease of doing business
A simplified infrastructure will enable investors to connect to issuers in emerging and frontier markets where RBC I&TS lacks the expertise to deliver on its own.
Banks like Standard Chartered with boots on the ground are best placed to support this vision. This requires an extensive network that the biggest global custodians do not have.
Francis Jackson,
Chief Executive Officer for RBC I&TS
In forging strategic partnerships, advises Jackson, be clear on your purpose from the beginning. Make sure that your selected partners understand your North Star to focus not only on current needs but also on future needs and on discovering as yet unimagined possibilities. “Choose a partner carefully,” advises Jackson. “It’s a marriage, not a date.”
Balancing sustainability with profitability: ESG and Securities Lending
Balancing sustainability with profitability: ESG and Securities Lending
Environmental, social and governance (ESG) issues are fast-emerging as important priorities for institutional investors. Research published in November 2020 covering 600 investors in 6 key markets reveals that 87%I already actively invest in companies that have reduced their near-term return on capital (such as reduced dividends, share buybacks etc.) in order to reallocate capital to ESG initiatives. Ninety-one percent (91%) expect their firms to rank ESG more highly post-COVID, and 88%II believe that the companies in which they invest will do so. While investors’ ESG motivations will vary, 91%III believe that companies with strong ESG performance are more resilient in a crisis.
From a securities lending perspective, the increased institutional focus on ESG is an extremely positive development, and reflects strongly Standard Chartered’s own values and strategic priorities. The challenge is therefore how to support clients’ specific ESG priorities into our client solutions, whilst also supporting their wider investment objectives.
i Slide 7 ii Slide 12 iii Slide 11
ESG obstacles in securities lending
Despite the trend towards principle-based investing, there remain some challenges in translating ESG objectives into securities lending. For example, some asset managersIV have claimed that securities lending programmes for exchange-traded funds (ETFs) that track ESG indices are not financially viable, given that restrictive collateral parameters and regular recalls erode the potential revenue from lending. These issues are worth exploring in more detail:
Collateral
It is reasonable that lenders would apply the same ESG criteria to their collateral as they would to stock selection. Where cash or some fixed income securities are posted as collateral, this may not be a significant issue. However, where equities are used for collateral, it has been difficult in the past to assess compliance with a lender’s ESG requirements in a consistent way, or to monitor this over time.
Recalls
Given that an investor cannot participate in shareholder votes (typically via proxy), when they have lent a security, they may decide to recall a security to allow them to do so. This issue resonates specifically for ESG-driven investment, where institutional shareholders may play an important role in defining a company’s ESG strategy. Stock lenders take different approaches to this: some instruct the custodian to remove all securities to enable proxy voting, irrespective of the issues on which voting is taking place. Some do so opportunistically, according to the market or the materiality or topic of the vote, and some remove particular names or maintain “buffers” i.e. hold back a portion of the holding for voting purposes.
There are three challenges here, particularly when working with traditional pooled securities lending programmes:
i) Recording and automating compliance with the specific terms of an investor’s ESG strategy without compromising operational efficiency;
ii) Limiting the period for which a stock is removed from a lending programme to minimise the financial impact;
iii) Providing meaningful data to lenders to enable them to make informed decisions on whether the materiality and potential impact of the vote compensates for the loss of income.
To address these issues requires an operationally efficient way to balance ESG compliance and financial performance, and a consistent way of measuring and comparing fund performance at an industry level. By resolving these challenges, bringing together securities lending and ESG becomes more achievable.
A variety of ways to overcome these issues are emerging, both at an individual securities lending programme level, and at a wider industry level.
Defining industry-wide ESG principles
One of the challenges of sustainable finance today is that the definitions can be vague, and are not consistently applied across the industry, particularly in more niche but vital areas such as securities lending. Secondly, as global agendas evolve, these definitions, and the measures that support them, need to be co-created and adaptable.
Dr Radek Stech,
Founder and CEO of the Global Principles for Sustainable Securities Lending (Global PSSLV)
V More information on Global PSSL, including forthcoming events and mentoring programme can be found at https://gpssl.org
This was the background behind Dr Stech’s proposal at a 2018 European Securities Lending Forum, that a set of industry-wide environmental, social and governance (ESG) principles for securities lending could be drafted and universally adopted based on consultation with key stakeholders, including investment banks, beneficial owners, regulators and legislators in key countries. The Global PSSL is the realisation of this ambition, with the aim of creating a global ESG market standard for owners, lenders, borrowers and impact creators, such as Standard Chartered.
The draft principles are now in the final stages of consultation, but broadly cover nine key areas:
- Sustainable finance alignment
- Inclusion and diversity
- Transparency
- Collateral
- Short Selling
- Tax
- Voting
- Innovation and digitisation
- Feedback
These principles are supported through a programme of events and a mentoring programme to maintain industry engagement, dialogue and co-operation on an ongoing basis.
Balancing operations, principles and financial returns
One of the reasons that balancing financial returns with ESG priorities has been so difficult in the past is the lack of reliable and consistent data to trigger automated processes, enable informed decision-making and reduce financial impact. For example, the record date of AGMs – and particularly EGMs - at which key issues may be voted on – are not necessarily known in advance. Therefore, lenders have traditionally been obliged to track AGM dates themselves, which is prone to error without detailed historic data. As an alternative, many simply recall securities from lending programmes as a matter of course across a ‘window’ of time that often includes a wide margin for error. This creates significant opportunity cost through lost income.
Through Standard Chartered’s agency securities lending partnership with eSecLending, this challenge no longer applies. Our highly configurable, automated share recall service is becoming increasingly important as a tool to help support clients’ ESG and financial objectives. This solution uses rich data provided by ISS, to predict record dates with a high degree of confidence. It then combines this with economic data to enable clients to make informed decisions on whether to recall securities or leave them on loan. Consequently, the opportunity cost is reduced by limiting the frequency of recall, and the time period for which securities are removed from the lending programme. Furthermore, the ISS data set includes detailed ancillary data, such as on M&A or proxy contests, which is extremely valuable to drive informed decisions on stock recalls, but difficult for the lender to track independently.
Likewise, our collateral filtering and ongoing monitoring service gives lenders the assurance that their ESG priorities are reflected from end to end through the securities lending process.
Our clients are now raising ESG in almost every conversation, but their ESG agendas vary considerably, and continue to evolve over time. At Standard Chartered, we are highly supportive of initiatives such as Global PSSL that aim to develop standards that build industry confidence and consensus, resolve fragmentation and improve transparency at an industry level. This industry-wide collaboration will become increasingly important as industry stakeholders develop their ESG policies. For example, clients are starting to ask more questions around climate or employment controversies, which then need to be built into ESG parameters, and reflected in global monitoring standards.
Aligned with this, we see enormous opportunities for a highly differentiated agency securities lending service across both traditional and emerging markets. Our partnership with eSecLending means we can deliver securities lending solutions that are entirely segregated by client, and tailored to individual ESG priorities, whilst achieving higher risk-adjusted returns and greater transparency than traditional, pool-based lending programmes.
<BR>The promise of innovation for Sub-Saharan Africa’s post-trade industry
The promise of innovation for Sub-Saharan Africa’s post-trade industry
Economies in Sub-Saharan Africa (SSA) are developing digital financial services. In the larger markets, regulators have taken policy and regulatory measures to support financial institutions' digital transformation. While emphasising the importance of robust cybersecurity and consumer protection measures, the global pandemic has generated a strong appreciation for the digital economy. With it comes the expectation that the digital economy will bring growth. Of the emerging and new technological developments, there are a few we consider most likely to bring growth to SSA capital markets.
CBDC
Central Bank Digital Currencies (CBDCs) have grabbed the attention of financial authorities worldwide, with governments weighing its feasibility and inherent risks against the potential economic value. Five of the 40 countries that the International Monetary Foundation has approved to issue digital currencies are in Africa. Notably, the South African Reserve Bank (SARB) began CBDC experimentation in 2016, and the Bank of Ghana aims to publish the findings of its work on CBDCs in 2021. African nations' progress in CBDC research and implementation lays the groundwork for successful adoption in the future. Moreover, it signals SSA’s ability to participate meaningfully in the emerging universal digital payments network.
In 2020, blockchain data analytics firm Chainanalytics published their ‘Global Cryptocurrency Adoption Index’ citing Kenya, South Africa, and Nigeria among the top 10 crypto adopting nations in the world.
These countries are also the region's leading economies. Cryptocurrency is attractive to African consumers as a mechanism for managing currency devaluation and avoiding high transaction costs.
The regulatory status of cryptocurrency is uncertain and varies from country to country in the region1. While this forces institutional portfolios to stay on the side-lines of cryptocurrency investment, it doesn’t stop local corporates from making proprietary investments in cryptocurrency. Cryptocurrency is an essential building block of the digital economy; its growing adoption and use by consumers and corporates in SSA evidences the direction of change. Also, it provides the impetus for financial service providers to add crypto capabilities to their technology infrastructure and offer crypto products and services.
1 Financial Sector Conduct Authority Notice http://www.fsca.co.za/Regulatory Frameworks/Documents for Consultation/Notice of publication - Draft Declaration of crypto assets as a financial product.zip;
Global Blockchain Business Council – 1 Global Standards Mapping Initiatives 2020 https://gbbcouncil.org/wp-content/uploads/2020/10/GSMI-Legal-Regulatory-Report.pdf
IMF CBDC Blog post. Retrieved from: https://blogs.imf.org/2021/01/14/legally-speaking-is-digital-money-really-money/
The Nigerian Securities and Exchange Commission has stated that they will recognise digital assets as securities, pledging to formulate regulations and policies that will help encourage innovation and adoption in the market.
The recognition extends to Digital Asset Token Offerings, Security Token ICOs and "other blockchain-based offers of digital assets". This position is congruent with the Financial Sector Conduct Authority's definition. The progressive development of regulation will promote growth in illiquid real-world assets' tokenisation and allow fractional ownership. Tokenisation holds specific promise in SSA, where the strength of local investors is still growing.
Accelerators, fintech venture capital firms and business incubators, have spawned many start-ups with innovative, robust, financial products and services. In step with this development, the concept of open banking has challenged large financial institutions' monopoly over customer financial data and become mainstream. Open banking in SSA is nascent; the environment continues to evolve rapidly. In December 2020, SARB published a consultation paper on an open-banking policy for the national payment system. In Nigeria the Open Technology Foundation known as Open Banking Nigeria, was formed in 2017 to coordinate open API standards for the financial services industry. Open Banking Nigeria actively petitions the Central Bank of Nigeria to extend its role in regulating open banking in Nigeria2. The Central Bank of Kenya (CBK) published its Kenya National Payments System Vision and Strategy 2021- 2025; CBK asserted defining standards for API development and regulating secure data portability in the market3. Central Banks in Ghana, Mauritius, Rwanda and Tanzania have adopted similar approaches. Xero and one of South Africa's leading banks, Nedbank, are launching the country's first fully digital direct API bank feed. The solution gives small businesses access to daily financial data for the general purpose of cash flow management. Financial institutions thinly service a large portion of the SSA population; in these circumstances, open banking promotes financial inclusion by making customer financial data accessible and affordable for fintech companies.
2Open Banking Nigeria, Annual Report to The Central Bank of Nigeria on Open Banking Progress
3CENTRAL BANK OF KENYA National Payments System Vision and Strategy 2021- 2025¬ https://www.centralbank.go.ke/wp-content/uploads/2020/12/CBK-NPS-Vision-and-Strategy.pdf
Artificial Intelligence (AI)
Companies are increasingly using data and analytics techniques to manage their performance, for fraud prevention, to enhance the customer experience and to secure growth in today's dynamic market. AI has become pervasive in financial services. Applications include investment tools like robo-advisory and discrete internal implementations in claims processing and robotic process automation. In this way, post-trade providers are developing the operational tools to compete and deliver service in the emerging digital economy.
IMF CBDC Blog post
Retrieved from:
https://blogs.imf.org/2021/01/14/legally-speaking-is-digital-money-really-money/
SEC Digital Assets Recognised as Securities
Retrieved from:
The Securities and Exchange Commission, Nigeria
Xero API
Xero and Nedbank are set to launch South Africa’s first fully digital direct API bank feed | Xero Blog
Conclusion
Africa's potential is considerable. Its population has a mobile penetration rate that is higher than its internet penetration rate; banks and other financial institutions can leverage mobile apps, digital technology and fintech partnerships to reach out to more consumers and create an inclusive economy. CBDCs are the link to the global digital economy. The largest economies in Africa, are participating meaningfully in the digital evolution of the post-trade industry by enacting legislation that foster technology adoption and innovation. The steadily growing global interest in such financial technologies, will pave the way for the African continent to advance into the new age.
Open Banking in Africa, Hogan Lovells
Retrieved from:
https://www.hoganlovells.com/en/publications/open-banking-in-africa
Open Banking Around the World (South African Jurisdiction)
Retrieved from: https://knowledgeproducts.nortonrosefulbright.com/nrf/open-banking-global-comparative-analysis
RBI 2018 Ban on Crypto Dealings
Retrieved from:
https://www.bloombergquint.com/law-and-policy/supreme-court-sets-aside-rbi-circular-that-barred-banks-from-being-involved-in-cryptocurrency-trading
India’s Recent Tight Crypto Regulation
Retrieved from:
https://economictimes.indiatimes.com/tech/tech-bytes/crypto-community-panics-on-news-of-pvt-currencys-exit/articleshow/80620693.cms
<BR><BR><BR>Opportunities amidst the pandemic: The onset of a new era in MENA
Opportunities amidst the pandemic: The onset of a new era in MENA
The international investment appetite for the Middle East has been heavily influenced by geopolitical events that impact stability in a major oil producing region. Recent events which we will explore in some detail are clear indicators of where the region is heading in promoting greater collaboration in both the economic and political fields.
The inclusion of regional markets as part of the major equity indices has had a positive impact on inbound flows. This also coincides, not coincidentally, with a concerted effort across the regional securities services industry to adopt global standards to facilitate greater domestic and international market participation.
As one of the largest and longest established international banks in the Middle East, Standard Chartered continues with its Global Custodian partners to be at the forefront of promoting both change and consistency to ensure greater market alignment.
The incorporation of Securities Services into the Financial Markets franchise of Standard Chartered (to form Financing and Securities Services) brings particular benefits in the Middle East where the combination of our market leading foreign exchange, fixed income, custody and prime capabilities provide a unique client value proposition.
While 2020 was overshadowed by the impact of the COVID-19 pandemic, 2021 looks likely to be much of the same. However, amidst the uncertainty two positive events have unfolded in the Middle East in the last 12 months: The Israel Abraham Accord; and the resumption of relations with Qatar. These events have the potential to give the Middle East the boost its economy needs and could possibly represent a new era for the region, giving the other Gulf states the push they need to lift certain restrictions, which will allow more significant opportunities in the region for trade and business.
The Israel Abraham Accord
In August 2020, H.H. Sheikh Mohamed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the Armed Forces in the United Arab Emirates (UAE), lifted its economic boycott of Israel, ending a decades long participation in the Arab League boycott of Israel.
The UAE-Israeli Boycott Repeal Law follows the announcement of the historic UAE-Israel Abraham Accord on 13 August 2020, brokered by US President Donald Trump. Under the UAE-Israel Abraham Accord, the UAE and Israel agreed to establish full diplomatic relations in exchange for Israel’s suspension of further annexation of Palestinian territories. In addition to the UAE-Israel Abraham Accord, there was a separate treaty signed between Israel and Bahrain (Bahrain-Israel Abraham Accord). With the signing of these two treaties, there is an expectation of new opportunities for business and trade across a wide range of industries and sectors in the region.
Synergies
Many synergies may be unlocked for both economies (Israel and the UAE), which has already been enjoyed by Jordan and Egypt for several years. The loss of opportunity for trade between Arab nations and Israel is estimated to be between $10 billion, with a further $30 billion in oil exports lost in the last 10 years. Israel currently has the highest GDP in the Middle East, while the UAE has a slightly larger economy. There is now an expectation that many and wide-ranging opportunities will be created as a result of the region’s commitment to economic advancement.
The synergies that may be unlocked include:
- Israel has the largest non-hydrocarbon economy in the Middle East. The UAE’s (and indeed, most Middle East nations’) oil diversification campaigns may well benefit from an economic relationship with Israel in the ESG space. Israel is well known for its technology research and development hubs focused on sustainable finance projects.
- Israel may enjoy a more stable oil supply. Currently, Israel relies mostly on oil imports from Kurdish Iraq through Turkey, but increased hostility from Ankara towards Israel makes the UAE as supplier a welcome alternative.
- In turn, the UAE, via its state-owned entity, Abu Dhabi National Oil Company (ADNOC), can increase its oil revenues. According to studies, Israel consumes in excess of 250 000 barrels of oil per day.
- There is an increasing trend for Emirati youth to travel abroad to study, with the Kingdom of Saudi Arabi (KSA)following a similar movement. It is estimated that at least 15% of students attending Israeli universities are already Arab speaking. Of course, the university facilities in the UAE is of international quality and with the opening of borders and commercial flights already resuming, the opportunity to study in the UAE has also become a real possibility.
- Reciprocal tourism
While the pandemic has halted world travel in general, the opening of borders between the UAE and Israel offers an opportunity to mutually increase its tourism revenues. Both the UAE and Israel are known for its propensity to travel abroad. Statistics show that in the last 5 years, more than half of Israelis travel abroad annually. In addition, there seems to be a willingness to visit Arab countries, with a large contingent of travellers from Israel visiting Egypt and Jordan. With both Etihad and Emirates Airlines acting as hubs for international travel, flights to and from Tel Aviv via Dubai and Abu Dhabi to Middle East and East Asia destinations are expected to increase significantly over the coming years.
- Access to Israeli technology hubs and small business incubators
Israel is well known for the generation of new/start-up business. The opening of trade relations allows for Emirati money to be invested in these hubs, but also in its real estate economy.
After Bahrain and Sudan, Oman is also expected to soon resume relations with Tel Aviv. Egypt and Jordan resumed trade relations with Israel several years ago with relatively little animosity from other Arab countries. The UAE and the KSA are considered the leaders in the Gulf, and Arab nations generally follow their lead, but it is still too early to assess the long-term outcome of the renewed relationships forged between the UAE and Israel. The acceptance of other less prominent Arab nations of the historically strained relations with Israel is yet to be observed.
Resumption of relations with Qatar
Another development that occurred in the region would be the resumption of relations with Qatar. Following a breakthrough GCC summit held in the city of Al-Ula, KSA, in early January 2021, Saudi Arabia, the UAE, Bahrain and Egypt (the “Quartet”) ended a boycott of Qatar and diplomatic relations returned to normal. The signing of the “Al-Ula Declaration” marks the end of a three-and-a-half-year boycott against the State of Qatar, which was put in place in June 2017. The Declaration is said to be a tool to pave the way for the reestablishment of political and economic ties between Qatar and the Quartet.
Qatar’s economy is expected to return to a growth of 3.0% (2.1% prior) in 2021 following the dual shock of lower hydrocarbon prices and strict containment measures in Q2 and Q3-2020 to limit the spread of COVID-19.
The diplomatic dispute with neighbouring countries had already been negatively affecting sectors such as aviation, tourism and real estate prior to the COVID-19 shock. The lifting of restrictions on trade and travel between Qatar and the Quartet is expected to add impetus to the recovery already underway in these sectors.
Regionally, the boost to consumer and investor sentiment and lower perceived geo-political risk may contribute positively to economic outcomes, particularly ahead of significant events such as EXPO 2020, set to be hosted by Dubai in October 2021, and the 2022 FIFA World Cup in Qatar, Doha.
The UAE lifting restrictions on trade and travel to Qatar could add impetus to the UAE’s trade recovery following the dual shocks of COVID-19 and lower oil prices in 2020. However, this could mean downside risks to Oman’s trade and transit volume via its port and airport as it had benefited from the re-routing after the onset of the dispute.
Developments in Qatar have been particularly significant for our Financing and Securities Services teams in both Doha and the DIFC hub, who have seen an immediate uptick in activity as regional clients are quick to follow the political lead.
Funds Europe talks to Standard Chartered’s Simon Kellaway about the main findings from its survey into China’s funds market: China Investment Survey 2020: Leading the global economy out of slowdown
One of the primary findings from the recent China investor survey conducted with Funds Europe and Standard Chartered was that Chinese funds have increasingly become a long-term strategy for international investors.
This is down to a number of reasons ranging from the strong economic outlook in China and the difference in yield and alpha returns between East and West, according to Simon Kellaway, Regional Head of Financing and Securities Services, Greater China and North Asia at Standard Chartered.
“Our report highlighted that there is optimism that China may lead the world economy out of this slowdown. China GDP grew 2.3% YoY in 2020 (the only major economy globally to show positive GDP) while the global growth was -4.2%. China is expected to continue to lead the world's economic recovery in 2021.”
Standard Chartered Research expects the GDP growth in China will accelerate to 8% in 2021 and the global GDP growth will bounce back to 4.8% in 2021. In terms of difference in yield, according to the survey, the accumulative rate of return for China government, policy and credit bonds in the past five years are 23.3% and 25% respectively, compared to 13.4% globally.
But according to Kellaway, the main driver has been the ease of access to the onshore and offshore markets and the continuous improvement of schemes like Stock Connect and Bond Connect, cited by as many as 69% of survey respondents.
Speed and ease of account opening have been longstanding priorities for foreign investors wishing to increase their exposure to China
Simon Kellaway,
Regional Head of Financing and Securities Services,
Greater China and North Asia,
Standard Chartered
Registration, quota approval and account opening procedures have taken several months in the past but in order to attract more foreign investors, Chinese authorities have made changes to the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) rules that became effective 1 November 2020 and have shortened licence approval turnaround time from months to under 10 business days.
Meanwhile, the Stock Connect and Bond Connect schemes have been further enhanced through e-filing systems and electronic account application capability to make them even more investor-friendly, says Kellaway.
Consequently, ease of access is less of a concern for investors and was cited by just 11% of survey respondents as a priority area. However, this is not to say that further enhancements will not be necessary to ensure China’s continued growth.
“Further relaxing foreign investors’ access to China bond market is key,” says Kellaway. Aligning foreign access to both the China interbank bond market and the exchange bond market, allowing registration to be filled at legal entity level instead of product level, and introducing a multi-tier custody structure with a nominee concept are enhancements that will not only simplify the foreign investors’ application process, but also widen investment opportunities and align with the international practice,” he says.
FX market reforms, for example further expanding the scope of eligible participants in the domestic FX market, and gradually relaxing the restriction for both domestic and foreign companies or investors to conduct CNY trades, will lead to a more mature exchange rate market and lay the ground for even deepened capital account opening.
During 2020, foreign investors snapped up more than RMB1 trillion worth of stocks and bonds in China market, says Kellaway. On the equities side, net inflows through Northbound trading of the China-Hong Kong Stock Connect scheme for 2020 exceeded $32 billion, nearly double the net buy amount as of the end of 1H 2020. Total inflows to China bond market were RMB163 billion in December 2020, the second highest in history. Inflows hit another record in January 2021 with foreign bond inflows of RMB223 billion.
Standard Chartered Global Research expects foreign inflows to reach RMB1.3 to 1.5 trillion in 2021, supported by aggressive quantitative easing by developed market (DM) central banks, record-high interest rate premium over DM bond yields, inclusion on the FTSE Russell World Government Bond Index and a positive RMB outlook.
Participation in China’s bond and equities market has been broadly international with investors from Asia, Europe and the Americas all active, says Kellaway. On Bond Connect, most investors are from the US followed by Hong Kong and the UK. Among Standard Chartered’s client base, Asia investors have been particularly active with Taiwan, Japan and Singapore accounting for 40%, 21% and 10% respectively of market share in terms of number of funds or investors from these jurisdictions signed up through Standard Chartered.
US investors are also the most active participants in China’s equities market. But one area where the survey shows a clear US predominance is the wholly foreign owned enterprise (WFOE) space, says Kellaway. “Since the 51% cap on foreign ownership of investment firms was removed in April 2020, BlackRock, Neuberger Berman and Fidelity have all filed applications to establish wholly owned mutual fund subsidiaries in China. Meanwhile various securities firms, such as Morgan Stanley and Goldman Sachs have increased their shareholdings in their existing China securities company joint ventures.”
When it comes to the asset classes most likely to be in demand in 2021, fixed income is still an area relatively light on foreign ownership and where there is likely to be considerable growth potential says Kellaway. “China’s bond market is the second largest in the world but foreign ownership is materially lower than other SDR currencies. With less than 3% of total CIBM assets in foreign ownership, there is significant opportunity for this to grow further.”
Kellaway highlights Chinese Government Bonds (CGBs) as particularly good performers and a key driver for the recent foreign inflows. For example, in January 2021 foreign investors bought net RMB222.8 billion of China onshore bonds where RMB121 billion (54%) came from CGBs.
From an equity perspective, there is an increasing focus on technology and technology-related stocks, says Kellaway. “China’s progress in terms of both the number of companies it boasts within the world’s top 100 and its growing number of unicorns has been significant over the past few years. It has seen a 67% growth in its number of companies in the world top 100 over the past three years alone, whilst outside of the US, it has almost 1.5 times as many unicorns in the top 100 as Europe and the rest of the world combined.”
The development of the ChiNext market has been impressive too, contributing to a near 10 year high in IPO volume and value – approximately RMB 470 billion was raised from nearly 400 IPOs on China’s A-Shares market in 2020. At the end of 2020, the ChiNext Index, tracking China's NASDAQ-style board of growth enterprises, was up nearly 65%, compared to 44% increase in Nasdaq Composite index.
The survey also showed a high demand for active funds in China. This is partly due to the macro environment in the country, says Kellaway. “As China’s trade surplus gradually narrows and the vertiginous rates of growth delivered by some Chinese companies revert to more moderate levels, the opportunities for asset managers that are skilled at stock-picking will become increasingly important,” he says.
There have also been attractive alpha opportunities in China versus other emerging markets. At the end of 2020, the Shanghai Composite Index was up approximately 13%, compared to the beginning of 2020. “We understand that active managers in China have delivered more than 6% excess returns annually on average in the past five years, which have outperformed the benchmark and some of their peers in the emerging world,” says Kellaway.
Based on the survey’s findings, Kellaway expects that a shifting in allocation out of money market funds into actively managed equity funds will be accompanied by a contraction in investors using private market strategies, either direct investment or via privately managed funds, over the coming 24 months. “Some 60% of respondents indicated that they or their clients invest via private markets currently, but this figure will fall to 24% within two years.”
Read the full report:
China Investment Survey: Leading the global economy out of slowdown
