Asset and Wealth Management Research Digest 1

PwC | AWM Asia Pacific Market Research CentreIssue 1 | 2020

Asset and WealthManagement Research Digest

Emerging Markets: Tigers and Titans

Following their ascension, Eastern Europe came into focus with ‘Emerging Europe’ economies embracing economic reform and membership of the European Union to drive their economies forward. Now, as we enter the ‘Asian Century’, a further cohort of markets across the Asia-Pacific region (“APAC”) are in various stages of economic development and financial market reform, putting the region back at the forefront of investors’ minds.

The paths taken by these various markets are being watched with avid interest by asset and wealth managers the world over as they salivate at the potential opportunities such reforms and developments could bring. Whether it is China granting foreign asset managers the ability to have a majority stake in public fund management companies, India’s ascendancy as an asset and wealth management (“AWM”) centre, or the new wave of ‘ASEAN Tigers’, the aspect of emerging markets continues its evolution from a simple descriptor of the state of development of an economy, to how its role within the global AWM space is defined; as an investment destination, product originator, source of fundraising, or something entirely different.

This research digest will examine the state of several emerging and frontier markets across APAC and South Asia. Specifically, it will focus on China, India, Thailand, Vietnam, Indonesia, Malaysia, and Philippines. This digest will frame the potential of these economies through their economic growth and investible assets, the market landscape and overview of the current AWM industry in each jurisdiction, look at recent market reforms, and examine the inter and intra-regional connectivity surrounding them.

When Antoine van Agtmael coined the term ‘Emerging Markets’ in 1981, one can wonder as to the rationale behind this term and what others were considered. As The Economist noted in their special report on emerging markets back in 2017, emerging markets are, broadly, “not too rich, not too poor, and not too closed to foreign capital”1. Based on such a definition, ‘Goldilocks Markets’ could also have been in contention. Today, the world is no closer to a common definition, and at least nine indices and institutions have their own classifications and names for them such as BRICs, EAGLEs, and NESTS, among others existed in name across.

Whatever their label, emerging markets have now existed in name across four decades, and longer in practice. As times have changed, so has the focus of the world on which markets are emerging. In the 1980’s-1990’s, it was the ‘Asian Tiger’ economies of South Korea, Taiwan, Hong Kong, and Singapore as they roared to life.

Overview

An emerging market is a country where politics matters at least as much as economics to the market.

“- Ian Bremmer

1Defining emerging markets, Oct 5th 2017

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The seven countries covered in this digest are a disparate group, two have populations in excess of one-billion and three have less than 100 million. Four have Gross National Income (“GNI”) per-capital of USD4,000 or less whilst two exceed USD9,000. Four countries are rural, with 50% or more of their population living outside of urban centres, and the remainder have majority urban-based populations, though Thailand is on the cusp of turning to a majority urban society so this balance will likely be tipped in the coming months. Finally, four have mutual fund Assets Under Management (“AUM”) of over USD100bn with three under USD35bn.

In the face of such disparity, the markets will be grouped accordingly:

China India

01

Examining the Titans and Tigers

The Asian Titans

The ASEAN Tigers

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02

Economic Growth and Investible Assets

Economic growth is crucial to the development of a domestic AWM industry. Generally, increased economic growth leads to higher incomes and higher incomes lead to greater investible income. This, in turn, provides opportunities for higher numbers of products to absorb larger pools of investable income and provide financial solutions to the increasingly affluent populace, including insurance, regular savings vehicles, mutual funds, and other investments.

Accordingly, the various growth rates of the markets and their groupings over the period 2008-2018 provides some interesting insights and context to wider growth in their respective AWM industries. This period was selected as the Global Financial Crisis (“GFC”) provided a ‘reset’ for economies across the world and particularly those in the emerging markets space.

Over the period in question, data from the World Bank shows the group of countries in question averaged Gross Domestic Product (“GDP”) growth of 5.6%. Within the respective groupings, the Titans averaged 7.4% whilst the Tigers reached 5%.

Drilling down further into the individual countries yields some surprising insights. China, whilst leading in terms of average

GDP growth over the period with 8.1%, recorded growth in excess of 10% only in 2010 and has drifted down from this zenith. Vietnam’s GDP barely seemed to notice the disruption wrought by the GFC and it finished the period as one of three economies, with the other two being Thailand and the Philippines, to have higher GDP growth in 2018 than it did in 2008.

At the other end of the spectrum, Thailand recorded the lowest average GDP growth over the period with 3.2%, and Malaysia had the highest economic contraction of -1.5% in 2009.

Following this period of broad economic growth, GDP and GNI per-capita now sit across a wide range of classifications for the countries in question.

The seven markets, their GDP per-capita, and their GNI per-capita as calculated under the Atlas method2 as of 2018, and their World Bank designation3 are shown below:

GDP per capita (current US$)

GNI per capita, Atlas method (current US$)

Atlas Method Country Classification

2 https://datahelpdesk. worldbank. org/knowledgebase/articles/378832-the-world-bank-atlas-method-detailed-methodology

3 http://blogs. worldbank. org/opendata/new-country-classifications-income-level-2019-2020

China

9,770.80 9,470.00 Upper-middle

India

2,015.60 2,020.00 Lower-middle

3,893.60 3,840.00 Upper-middle

2,563.80 2,400.00

Lower-middle

Vietnam

3,102.70 3,830.00

Lower-middle

Philippines

Indonesia

Source: Worldbank

7,273.60 6,610.00 Upper-middle

Thailand

Malaysia

11,239.00 10,460.00 Upper-middle

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Accordingly, the majority of countries examined in this digest fall into the upper-middle income classification, with the Philippines on the cusp of joining as well. India and Vietnam are currently some distance away from the upper-middle classification and are thus likely to remain in the lower-middle grouping for the foreseeable future.

With a majority of countries falling into the ‘Upper-middle’ income designation, and more on the verge of doing so, one would expect the per-capita incomes of these markets to rise. This, in turn, should lead to higher disposable and investible income which can be directed towards AWM products.

As it stands, the populations of the various economies have impressive savings rates as a proportion of their GNI, ranging from 26% for Vietnam, up to 46% in China. The average across the group stands at 33.13%, several percentage points higher

than the global average of 26.68% as of 2017. Such parsimony should remain as incomes increase and the growing pool of savings can, with relevant infrastructure and regulation, be directed into the AWM sector to promote the growth of that industry, both in the local market and across APAC.

PhilippinesChina

India

Vietnam

Indonesia

Malaysia

Thailand

12

GDP growth (annual %)

10

8

6

4

2

0

-2

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Country China India Vietnam Indonesia Malaysia Thailand Philippines

Gross savings (% of GNI)

46 31 26 33 27 34 35

Source: Worldbank

Source: Worldbank

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Market landscape and overview

The current AWM landscape across the markets in question is as varied as the cultures, languages, and customs of the people who inhabit them. Within the ASEAN Tigers, Thailand has recently allowed greater access to foreign asset and wealth managers, Vietnam has relaxed foreign ownership restrictions, and Indonesia has removed the 15% overseas investment cap on Sharia funds, among other developments. Other ASEAN Tigers are developing their AWM industries at varying speeds, but all show general signs of growth and reform which makes them increasingly attractive to foreign asset and wealth managers. China towers above all other markets but is largely focussed inwards despite increased foreign access and penetration. Whilst China is quite ready to accept foreign money coming into its capital markets, getting funds out can prove to be challenging which may limit its overall attractiveness and potential to foreign AWM players. Finally, India stands as the second titan and one that foreign firms are becoming increasingly comfortable to do business in, along with its rapidly-developing domestic industry.

There are commonalities to unite the nations in question as well as their differences. All have domestic asset managers, insurers, institutional investors, alternative investment regimes, pensions, and HNWIs in various scale and volume. Crucially, all provide some level of opportunity to foreign managers looking to gain access to their markets and investors.

Country China India Vietnam Indonesia Malaysia Thailand Philippines

Number of domestic asset managers

124 fund management companies

44 fund management companies

14 fund management companies

52 fund management companies

79 fund management companies

23 fund management companies

10 fund management companies

AUM of mutual funds (US$ billions) 1,894.4 299.5 0.6 34.0 118.3 156.0 16.3

Mutual Fund Penetration Rate (as % of GDP)

13.92% 10.99% 0.24% 3.26% 33.39% 30.89% 4.93%

4 Worldbank

Source: PwC Analysis

5AMAC6AMFI7Fund Factsheets8OJK9SC MSIA10AIMC11Lipper, Fund Factsheet

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04

Market reforms

Many of the markets in question have recently undertaken reforms to allow greater access to foreign players, deepen their potential for investor-backed growth, and encourage greater digital distribution. The latter is of particular significance in the markets in question as, thanks to a thriving FinTech scene, digital payments and distribution have the potential to leapfrog more traditional distribution channels. China for instance reported in 2017 that most retail investors purchased products via smartphone than any other channel12.

Specific examples of steps selected countries have taken in the three areas of reform stated above over the last few years are as follows:

Market Investor-backed Growth Potential

Foreign Market Access Digital Distribution

Indonesia Regulation recently issued on payment services and their use in fund purchases.

The 15% overseas investment cap on Sharia funds has been lifted.

Common payments standard issued and compulsory from January 1, 2020. This is expected to boost financial inclusion.

Malaysia Digital Investment Management framework issued, giving retail investors access to PMS.

The Islamic fund entity of fund management firms are exempted from income tax until 2020.

Joint working group to accelerate digitisation of stockbroking industry established by regulators.

Philippines SSS launches new voluntary retirement savings plan.

Regulations allowing fund houses to offer feeder funds implemented.

Amendments to REITS rules considered.

Regulators approve three new virtual currency exchanges.

Malaysia’s CIMB will be the first bank to have an all-digital platform. Unionbank was declared the first

bank partner of Visa Inc to build a blockchain-based bank-to-bank payments system.

Thailand Voluntary contribution to National Pension Scheme required.

Accredited investors specified and suitable products determined.

Regulators extend FundConnext service, enabling investors to buy local mutual funds.

Management of national pension scheme assets will be outsourced to external fund management companies.

Regulations relaxed allowing offshore funds to be sold to local investors.

Regulators implement wholesale Central Bank Digital Currency.

Draft royal decree regulating digital-asset-related transactions endorsed by the Council of State.

Regulatory sandbox for FinTech promulgated regulators, allowing FinTech developers to increase efficiency of financial services.

12AMAC

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Vietnam Small increases in number of open-ended funds launched for retail investor.

Restrictions on foreign ownership in public companies lifted in certain sectors.

Fintech steering committee established by central bank and regulatory sandbox proposed by regulators.

China New voluntary pension products introduced to market.

Foreign ownership restrictions lifted across financial sector with asset managers now able to take majority control of JVs and 100% ownership scheduled for 2020.

Digital distribution embraced across asset management industry.

India Increase in direct distribution of mutual funds with increase in retail investors’ financial awareness

The Reserve Bank of India’s November 2019 circular announced that asset management companies with a majority stake owned by foreign companies will fall under the indirect foreign investment category. This essentially puts a cap on mutual fund investments in several listed companies and sectors in line with foreign investment rules.

Regulator re-introduced “Aadhar” based e-KYC for mutual fund investors.

Retail payments to be first cohort for testing under the regulatory sandbox established in 2019. E-wallets moving into mutual fund distribution. Increased use of online platforms, chatbots and messaging applications by asset managers for digital and direct distribution.

Cyber security framework and AI/ML guidelines implemented and market participants subject to quarterly reporting following regulator guidelines.

Thus, the nations examined in this digest have undertaken market reforms to varying degrees which should prove attractive to asset and wealth managers across a range of areas.

However, the connectivity within and between regions is also of importance as APAC looks to develop a framework of intra-regional connectivity in funds, akin to that found in Europe with the UCITS regime.

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Inter and intra-connectivity

The term ‘synergy’ is often used to refer to concrete or conceptual notions whereby the whole of something is greater than the sum of its parts. Its antonym, dysergy, is perhaps more apt to describe the current collective state of the various fund passporting arrangements found across APAC, with several initiatives currently competing for attention and prominence.

Time will, hopefully, lead to greater regional consolidation and integration across the existing AWM landscapes and indeed, several initiatives are already underway.

In the funds space, the Asia-Pacific Economic Cooperation (“APEC”)-backed Asia Regional Funds Passporting (“ARFP”) is perhaps the scheme with the greatest potential across the region, with the economic bloc backing it encompassing one Titan (China) and all of the Tigers. India, whilst outside of APEC, is eligible to join ARFP and may do so in future.

Of the markets covered in this digest, Thailand is the only one which stands as a full-member of ARFP, whilst, excluding China, all others are seen as potential members in the near-future.

Within the ASEAN bloc, a stand-alone funds initiative also exists in the form of the ASEAN Collective Investment Scheme (“CIS”) programme.

Officially launched in 2014, Singapore, Malaysia, and Thailand have agreed to adopt its standards, though between these countries, only a dozen funds have been authorised for use on the scheme and it is viewed as somewhat of a damp squib. It is possible that this scheme could undergo a resurgence in the near-future. However, as previously mentioned, there is a substantial amount of cross-over for both ASEAN CIS and ARFP within the ASEAN Tigers group, and the greater potential of the ARFP may see ASEAN CIS fall by the wayside as matters progress.

Rounding out the APAC funds initiatives is the China-Hong Kong Mutual Recognition of Funds (“MRF”) programme, a bilateral agreement between China and Hong Kong whereby qualifying funds domiciled in one jurisdiction may be sold to investors in the other. Unlike Hong Kong, which has entered into numerous other such bilateral arrangement, it is unlikely China will do so in the near-future so this funds passporting programme will likely remain at two member economies.

On the broader topic of economic and capital markets integration, there are numerous initiatives across APAC which should serve in the long-term to deepen links across financial sectors.

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Perhaps most relevant for the ASEAN Tigers is ASEAN Economic Community (“AEC”) 2025. The objectives of this programme are numerous and reach across the movement of goods, services, and labour, as well as investment and capital. On the latter two points, by 2025 AEC has goals it seeks to achieve across banking integration, liberalisation of financial services, supporting cross-border trading activities, standardisation of contract clauses used in capital markets, and others. The implementation of these initiatives will stand to benefit the ASEAN Tigers via deeper integration of capital and investment markets, providing increased certainty to foreign and domestic asset managers alike along with relevant investors.

APEC’s goals are akin to that of AEC, albeit across a much wider range of economies and a larger geographic area.

APEC promotes free and open trade and investment across its, currently, 21 member economies. Whilst the potential for this bloc is arguably substantially higher than that of ASEAN, reaching agreement among 21 diverse economies can prove challenging so using this as a vehicle to promote greater financial integration among the Titans and the Tigers may only be realised in the long-term.

Regardless of the time taken, local, regional, and global asset and wealth managers stand to benefit from the efforts of AEC and ARFP as they further the cause of inter and intra-regional connectivity and lay the foundations for what will one day ideally emerge as an integrated fund marketplace. Investors too stand to benefit from the increased range of products and greater competition such initiatives are expected to facilitate.

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06

Future growth potential 

Despite being perceived as a domestic market instead of a cross-border one, India’s high growth potential across its GNI per-capita, HNWI population, and investors’ real disposable income provide numerous reasons for foreign managers to give closer examination to this fund market. Additionally, India’s mutual fund industry grew at a Compound Average Growth Rate of over 20% between 2013-2018 and is aiming for a five-fold increase in investor base over the next decade.

Though small in number, the HNWIs of the Philippines hold significant stores of wealth and, via a growing labour force and increased bank deposits, the mass-retail investor sector is emerging as a potential force in the domestic mutual fund market’s growth potential. As developments in the FinTech space develop and bring banking, payment services, and investment services across the archipelago, the potential of these mass-retail investors should be increasingly realised.

The ability to specialise as a centre of Islamic funds and finance is where Malaysia’s future growth potentially lies, and it is taking steps to ensure that it has the requisite regulations and talent to seize upon this opportunity. Outside of that niche, Malaysia may find itself crimped by its peers with younger and more numerous populations, and those with more permissible regulations towards FinTech and other digital tools.

Indonesia’s vast population and growing GDP per-capita, along with increasing household wealth and HNWIs, means it is well-positioned to become an epicenter for many global fund managers and it is likely to compete with Malaysia in the Islamic funds and finance space. Indonesia has already gained recognition in this field by launching the world’s first green Sukuk bond.

With a large percentage of Vietnam’s population being young and technologically-savvy, coupled with a permissive regulatory regime and steps that regulators are undertaking to remove restrictions on foreign investment and ownership and strengthen capital markets, the country holds great potential for foreign asset managers in the future.

Thailand provides an example of a market ready for entry under the right circumstances, and one that provides excellent potential for future growth. Recent regulatory changes have increased the opportunities for foreign asset managers to manage assets and for Thai investors to invest directly in offshore products. As its population grows in wealth and

becomes increasingly urbanised, the potential should be realised to increasing degrees.

Already possessing substantial opportunity, China stands poised to further accelerate its growth and harness yet more of its potential through recent market reforms which have seen barriers to foreign entrants reduced or removed and steps taken to develop its pension space, an area of great importance if it is to avoid growing old before it grows rich. Additional reforms have proposed doing away with restrictions on monies flowing in, though some argue it is only when the restrictions on monies going out of the country are lifted that China’s investment space will truly be seen as open and reaching its full potential.

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Conclusion

Emerging markets have long-held both promise and peril for investors and assets wealth managers alike, providing substantial rewards for those able to navigate them despite the inherent risks.

Specifically, successful managers stand to gain access to a vast and increasingly wealth pool of investors, benefit from greater interconnectivity among regional blocks, and experience in markets. Regional integration will likely play a substantial role in the perceived and realised opportunities present in these markets as well, and the ASEAN cohort potentially stands to benefit the most from this with the various intra-region initiatives currently in play, ranging from increased capital markets integration to fund passporting.

Asset managers, whether local; regional; or global, stand to benefit from the existing opportunities presented in the markets examined and the future potential of them as it unfolds in the future. With such a diverse range of markets and investor segments, it may well be the asset and wealth managers who engage in their selected niches now that stand in the best position to expand as the opportunities become available, For as the Asian Century unfolds; listen for the roar of tigers and the thunder of titans.

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Armin ChokseyPartner, Asian Investment Fund Centre & Market Research Centre LeaderPwC Singapore+65 6236 4648 armin.p.choksey@sg.pwc.com

Contacts

Look out for our next issue of the AWM Market Research digest. Subscribe to receive future research digests at our website here: https://bit.ly/2s4hijH

Conal McMahonSenior Manager, Market Research Centre,PwC Singapore+65 9678 0331conal.j.mcmahon@sg.pwc.com

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