Asia could benefit from 'flight to Quality' amid market turmoil
Monday, 20 October 2008
Jaspal Bindra
AS the ongoing market turmoil threatens to roil more financial institutions in the US and Europe, investors in Asia, Africa and the Middle East are turning to the safety and the relative stability of their home turf.
Standard Chartered, like many of its peers in the region, is seeing billions of dollars flowing into its branches from local individuals and companies.
As the appetite for risk wanes with the implosion in the equity and credit markets, Asian investors are expediting the diversification of their savings away from the US and Europe. They are moving money to the safe-haven assets such as gold and to the security of institutions and assets closer to home, where risk premiums are now lower than those in many developed markets in the west.
Asia-centric banks, like the region's economies, are by no means immune to the unfolding crisis. We have seen in recent days the pullout of funds from Asian stock markets by US and European funds as they try to raise liquidity and meet redemptions. This has caused a drop in local stock markets and currencies.
But the region's enormous currency reserves and the stronger capital base, lower leverage and higher liquidity profile of the leading financial institutions in Tokyo, Hong Kong, Singapore, Seoul, Shanghai and Mumbai are likely to insulate them in the medium-to-longer term.
It is difficult to precisely predict how the story will unfold. But the blurry contours of a road map are there for all to see.
The upheaval in the financial markets is certainly an opportunity for Asia-based financial institutions to win new clients, business opportunities and talent. This is just as well because, for every large financial institution that goes out of business in the US and Europe, customers will need another large and more financially secure financial institution to park their assets.
Even as smart money seeks new shores amid the market turmoil, regulations governing banks will universally get tighter and be implemented more rigorously.
Banks are already among the world's most heavily regulated businesses and there is little scope for tightening the rules further without hurting their long-term viability. The answer perhaps lies in stronger oversight to ensure that risk-taking remains under set parameters and is backed by sufficient capital and liquidity.
Clearly, the conservatism, prudence and caution of Asia's regulators - who benefitted from the lessons learnt from the 1997/98 financial crisis -- have stood the region's banks and economies in good stead. But there is little scope for the region to use the ongoing crisis in the West as an alibi to turn back the clock on further opening up of the financial industry to competition.
If anything, bringing in greater competition is the need of the hour as are developing the local bond and money markets and upgrading the financial market infrastructure for hedging and mitigating financial risks, so that Asia's enviable liquidity is put to better use for the region's own development needs.
Many of the local markets in the region lack proper yield curves that act as barometres for the true price of money. Bond markets lack sufficient volumes which in turn make it difficult for local companies to raise capital from investors seeking steady returns. Insurance and legal businesses in many markets still remain virtually closed to overseas participants.
Indeed, the current turmoil and the dim medium-term economic prospects in the US and Europe ought to encourage policy makers in Asia, Africa and the Middle East to make the regions' financial systems more sophisticated, deeper and robust to attract large-scale investments.
It is easy to forget that it was Asia and the Middle East's surplus liquidity -- generated by the regions' prodigious savers -- channelled to the West that lowered the cost of capital and led to excessive risk-taking at western financial institutions, which in turn resulted in the global property and other asset bubbles.
While a large part of the solution to the excesses in recent years lies with the US deleveraging and weaning itself away from Asia's largess, it is also equally important for the governments in developing Asia and Africa to make their markets more attractive for domestic and international capital.
Like Europe, Asia's developed economies -- Japan, Hong Kong, Singapore, Korea and Taiwan -- are facing the challenges of an ageing population. Pension fund managers in these financial centres, like their counterparts in Europe, will be eager to secure steady returns on their investments for years to come.
China, India and Africa's fast-growing economies are just the capital hungry magnets these financial centres need to ensure attractive and sustainable rates of return on their investments. The future lies in linking developed Asia and the Middle East more closely with developing Asia and Africa.
We are already seeing the rudiments of the emerging financial landscape where the economies are getting intertwined with each other through free-trade agreements, inter-government currency swap deals and pan-Asian production and distribution networks built by the region's leading companies.
The current tumult in the markets could prove to be a stimulus for the region to step up this historical trend towards building dynamic and mutually-sustaining economies. The key to this new world, as ever, lies in the hands of Asia's investors, financial institutions, companies and policy makers.
The writer is the CEO, Asia, Standard Chartered Bank
AS the ongoing market turmoil threatens to roil more financial institutions in the US and Europe, investors in Asia, Africa and the Middle East are turning to the safety and the relative stability of their home turf.
Standard Chartered, like many of its peers in the region, is seeing billions of dollars flowing into its branches from local individuals and companies.
As the appetite for risk wanes with the implosion in the equity and credit markets, Asian investors are expediting the diversification of their savings away from the US and Europe. They are moving money to the safe-haven assets such as gold and to the security of institutions and assets closer to home, where risk premiums are now lower than those in many developed markets in the west.
Asia-centric banks, like the region's economies, are by no means immune to the unfolding crisis. We have seen in recent days the pullout of funds from Asian stock markets by US and European funds as they try to raise liquidity and meet redemptions. This has caused a drop in local stock markets and currencies.
But the region's enormous currency reserves and the stronger capital base, lower leverage and higher liquidity profile of the leading financial institutions in Tokyo, Hong Kong, Singapore, Seoul, Shanghai and Mumbai are likely to insulate them in the medium-to-longer term.
It is difficult to precisely predict how the story will unfold. But the blurry contours of a road map are there for all to see.
The upheaval in the financial markets is certainly an opportunity for Asia-based financial institutions to win new clients, business opportunities and talent. This is just as well because, for every large financial institution that goes out of business in the US and Europe, customers will need another large and more financially secure financial institution to park their assets.
Even as smart money seeks new shores amid the market turmoil, regulations governing banks will universally get tighter and be implemented more rigorously.
Banks are already among the world's most heavily regulated businesses and there is little scope for tightening the rules further without hurting their long-term viability. The answer perhaps lies in stronger oversight to ensure that risk-taking remains under set parameters and is backed by sufficient capital and liquidity.
Clearly, the conservatism, prudence and caution of Asia's regulators - who benefitted from the lessons learnt from the 1997/98 financial crisis -- have stood the region's banks and economies in good stead. But there is little scope for the region to use the ongoing crisis in the West as an alibi to turn back the clock on further opening up of the financial industry to competition.
If anything, bringing in greater competition is the need of the hour as are developing the local bond and money markets and upgrading the financial market infrastructure for hedging and mitigating financial risks, so that Asia's enviable liquidity is put to better use for the region's own development needs.
Many of the local markets in the region lack proper yield curves that act as barometres for the true price of money. Bond markets lack sufficient volumes which in turn make it difficult for local companies to raise capital from investors seeking steady returns. Insurance and legal businesses in many markets still remain virtually closed to overseas participants.
Indeed, the current turmoil and the dim medium-term economic prospects in the US and Europe ought to encourage policy makers in Asia, Africa and the Middle East to make the regions' financial systems more sophisticated, deeper and robust to attract large-scale investments.
It is easy to forget that it was Asia and the Middle East's surplus liquidity -- generated by the regions' prodigious savers -- channelled to the West that lowered the cost of capital and led to excessive risk-taking at western financial institutions, which in turn resulted in the global property and other asset bubbles.
While a large part of the solution to the excesses in recent years lies with the US deleveraging and weaning itself away from Asia's largess, it is also equally important for the governments in developing Asia and Africa to make their markets more attractive for domestic and international capital.
Like Europe, Asia's developed economies -- Japan, Hong Kong, Singapore, Korea and Taiwan -- are facing the challenges of an ageing population. Pension fund managers in these financial centres, like their counterparts in Europe, will be eager to secure steady returns on their investments for years to come.
China, India and Africa's fast-growing economies are just the capital hungry magnets these financial centres need to ensure attractive and sustainable rates of return on their investments. The future lies in linking developed Asia and the Middle East more closely with developing Asia and Africa.
We are already seeing the rudiments of the emerging financial landscape where the economies are getting intertwined with each other through free-trade agreements, inter-government currency swap deals and pan-Asian production and distribution networks built by the region's leading companies.
The current tumult in the markets could prove to be a stimulus for the region to step up this historical trend towards building dynamic and mutually-sustaining economies. The key to this new world, as ever, lies in the hands of Asia's investors, financial institutions, companies and policy makers.
The writer is the CEO, Asia, Standard Chartered Bank