Pandemic resilience and capital flows

5 November 2021

In “The future of Asset Servicing Leadership” webinar, organised by The Asset magazine in collaboration with Deutsche Bank, seven experts discussed how, despite the pandemic Asia’s overall wealth and digital revolution have rearranged capital flows and created a new breed of sophisticated investor. flow provides a summary of the key points

Capital market flows into Asia are changing in the wake of the Covid-19 pandemic. We have seen many Asian countries thrive in the economic climate created by the crisis, despite fears that it would have the opposite effect. Though ASEAN economies are now on the recovery path, the success of western regions, such as the US and (to a lesser extent) the EU, in their vaccination roll-out and stimulus packages has led to significant outflows to the developed world. At the same time, China has remained a strong location for investment – in part due to the high yield that can be gained through investments into the country.

“How long this recovery will take is still unknown – with most countries still below pre-Covid levels in terms of real GDP”
Michael Spencer, Chief Economist and Head of Research Asia Pacific, Deutsche Bank Research

At the same time several thematic trends, such as the implementation of technology and the acceleration of efforts toward sustainable investing, have had an impact on investments in the region. To discuss these developments and more, seven experts came together for a webinar panel presentation entitled ‘Asia Capital Market Flows: What it means for investing’. Held on 31 August, this was the second event in the new ‘Future of Asset Servicing Leadership’ series hosted by The Asset.

group photo

From top left to right: Daniel Yu (Editor-in-Chief, The Asset; Anand Rengarajan (Global Head of Sales & Head of Asia Pacific, Securities Services, Deutsche Bank), Alvin Lee (Head of Group Wealth Management & Community Financial Services, Maybank Private Wealth).

From mid left to right: Michael Spencer (Chief Economist and Head of Research Asia Pacific, Deutsche Bank); Subash Pillai (Head of Client Investment Solutions, APAC, Franklin Templeton), Ben Powell (Chief Investment Strategist, Asia Pacific, BlackRock Investment Institute).

From bottom left to right, Rishabh Saksene (Head, Investment Specialists, APAC, Julius Baer); Rejina Rahim (Country Head, Malaysia, Nomura Asset Management)

Macroeconomic assessment

As the world adjusts to the impact of the Covid-19 pandemic, the economic rebuild is now underway. But, as Michael Spencer, Chief Economist & Head of Research, Asia-Pacific, Deutsche Bank explained, “how long this recovery will take is still unknown – with most countries still below pre-Covid levels in terms of real GDP”.

While economies usually languish for years after a crisis, this has not been the case for Asia post- Covid-19. “When you look at how industrial economies, advanced economies and emerging markets tend to behave during and after major shocks, it's most common to see economies decline significantly, and never really get back to that pre-crisis trend line,” explained Spencer. He added that three years after the global financial crisis of 2008-09, US, UK and European GDP was still 10% lower. Similarly, three years after the Asian Financial crisis of 1997-98, Asian economies were down 15%. “Cataclysmic economic events” like the Covid-19 pandemic, said Spencer, create lasting damage for a range of reasons. “Take labour markets, for example,” he continued, “when people have been unemployed for a year or more, they often become less productive, get hired in less skilled roles or simply take longer to acclimatise to working again”.

Many countries in Asia are already above – or close to – pre-Covid-19 levels of real GDP. Taiwan has benefited hugely from its growth in exports during the pandemic. GDP is expected to rise by 5.88% this year and is already exceeding the pre-crisis trend line, an increase that might not have happened without the pandemic.1 This is also the case in Asia more broadly, with China, Hong Kong, South Korea and potentially Singapore set to return to the pre-Covid trend line in the second half of 2021.

One trend that has been observed is that those worst hit by Covid-19 in terms of infection levels have also seen the largest impact on GDP. In Malaysia, where 4.9% of the population has been infected, GDP is about 10% below the pre-Covid trendline. In contrast, Singapore is benefiting from its ability to handle the pandemic, with the country’s foreign reserves increasing by around US$140bn between March 2020 and August 2021, according to preliminary data from the Monetary Authority of Singapore (MAS).2

Spencer also highlighted the fact that many countries, such as Indonesia, Thailand and Taiwan are still well behind the curve when it comes to vaccinations. This is taking its toll on assets in these laggards. “Within this region, we have seen a reallocation of fixed income portfolios out of these economies, and into China,” noted Spencer. The signs are that investors feel more confident in a country that can demonstrate a strong recovery from the pandemic.

Looking to America

The search for opportunities in regions that are recovering well from the crisis has led investors to look to the developed world. For example, the dramatic action taken by the Federal Reserve at the start of the pandemic, as well as the US’s more advanced vaccination progress, has provided relative stability in an otherwise volatile environment. “Boasting a strong recovery and robust policy support, the US has, in many ways, had its cake and eaten it – and this is reflected in the flows we are seeing,” explained Ben Powell, Chief Investment Strategist for APAC, BlackRock.

Subash Pillai, Regional Head of Client Investment Solutions (APAC), Franklin Templeton agreed, stating that he has seen clients invest in developed markets, with a focus on the regions where it appeared the recovery was likely to be the strongest. “This meant allocating more towards the US in the beginning of 2021, and then moving a little bit more towards Europe in recent times,” he added.

Anand Rengarajan, Global Head of Sales, and Head of Securities Services Asia, Deutsche Bank, explained that the flow from emerging markets into developed markets is quite prominent. “While the absolute numbers are not huge, the flow of assets to developed economies – predominantly the US and, to a lesser extent, the EU – has definitely been massive in percentage terms over the last 12 to 18 months and that is a very good trend to see”.

“There’s not a lot of yield around in the world. I believe this challenging environment is going to persist for a long time to come”
Ben Powell, Chief Investment Strategist for APAC, BlackRock

Looking to China

Amid uncertain market conditions, China has retained its status as a top destination for investors throughout the pandemic. Spencer explained that “since the onset of Covid-19, we have seen a reallocation of fixed-income portfolios from economies like India and Indonesia and into China, as well as steady flows into the Chinese equity market – and we expect this to continue”.

According to Powell, while several complex factors play into this momentum, there is also a simple one: “There’s not a lot of yield around in the world. I believe this challenging environment is going to persist for a long time to come. For those that want yield, China remains the place to be, with more than half of the world’s bonds that yield over 2.5% coming from China.” The opportunity this affords, combined with the size of the market, has led BlackRock to treat China as a standalone investment destination in the same way it would treat the US.

Pillai offered a slightly different view on investment in the country. “China is our least preferred region,” he explained, “and this has been driven by the fact that we believe China’s outperformance peaked towards the end of 2020 and other markets are beginning to catch up.” Over the medium term, however, Pillai concedes that everyone is probably under-invested in China, especially with regard to fixed income. That said, within equities, it remains something of a balancing act. “We are seeing a little bit of policy support, but we are having to balance this against a higher degree of intervention in the markets – and we need to assign risk premiums that reflect this,” he noted.

The new generation

Outside of the geographical focus, several other defining changes are underway. The emergence of a new generation of younger retail investors – as well as the underlying technology needed to develop this space – is undoubtedly going to have an impact on the economic landscape of Asia. One of the drivers in this respect is the rise of the fintech sector, with many of these emerging companies now beginning to move into the distribution space. “The fractionalisation of assets – of all classes – is becoming more common on the retail side, which will make it even easier for investors to start with small sums of money,” said Rengarajan.

“I do think that digital is the way to go. And I think Indonesia is a great example of how digital penetration has actually completely changed the market in terms of facilitating financial inclusion, as a lot of investment products are now being sold on e-commerce platforms. I think this is going to be a really interesting development for the next few years,” added Regina Rahim, CEO, Nomura Asset Management.3

“Actions that have measurable results, such as impact investing or funding the energy transition, have found favour”
Rishabh Saksene, Managing Director, Julius Baer

Sustainable investing has also become an integral part of the investment process – for both banks and clients. “Actions that have measurable results, such as impact investing or funding the energy transition, have found favour,” explained Rishabh Saksena, Managing Director, Julius Baer. For Alvin Lee, Head Group Wealth Management & Community Financial Services Singapore, Maybank Private Wealth, sustainable investing is becoming quite critical – especially with the younger generation of investors coming through, who tend to be more receptive to global sustainability efforts. That said, at this stage he does not believe that returns will be compromised for the sake of the ESG component.

Fortunately, banks are making big strides forward to help expedite the sustainability journey and educate investors that ESG asset stocks do not have to mean a compromise in returns. “When it comes to ESG, we are leading the charge from front to back. In the Securities Services space, for example, we are looking at an ESG solution for post-investment follow-up that will give investors a means to monitor, track and measure the impact of their ESG investments,” said Rengarajan.

Asia capital market flows: What it means for investing, the second of the Asset Servicing Leadership series from The Asset, was held on 31 August 2021

For further detail and related background videos and podcasts, you can watch all of these, together with the event replay on demand on theasset.com here


1 See https://bit.ly/3nYhRbK at financialpost.com
2 See https://bit.ly/3ENUQix at mas.gov.sg
3 See also flow’s Indonesia profile, ‘Indonesia’s place in the sun?

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