Alfred Lee, Regional Managing Director, Asia Pacific, at Refinitiv, analyzes the important events of 2020 that impacted financial services in APAC, taking in the COVID-19 pandemic, the U.S. presidential election, China’s financial markets, the rise of sustainable finance, and digital banking developments. He also looks forward to 2021, to identify the trends that will shape financial services in the future.
- The unprecedented nature of the COVID-19 pandemic, the mayhem of the U.S. elections and the evolving regulatory landscape for Chinese IPOs make analyzing Asia-Pacific economies and the future a complex undertaking.
- Refinitiv Deals Intelligence showed that Asia Pacific investment banking fees eclipsed Europe for the first time in the third quarter of 2020, taking US$21 billion of a total US$91 billion global fee haul, and placing it second only to the U.S.
- In Asia, sustainable finance continues to gain more traction across the region. Refinitiv Lipper data shows that Asia ESG funds assets under management have continued growing in recent years, especially in Q3 2020.
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2020 has been quite the year. In fact, it is astonishing to reflect on the events and circumstances we have all found ourselves in and the collective experiences we have all endured.
APAC was the first region in the world to be hit by COVID-19 and go into large scale lockdowns. And even though many APAC nations have led the way in terms of virus control, at the time of writing, Hong Kong and Korea are experiencing new surges in cases and implementing new restrictions.
Meanwhile in the U.S., cases continue to soar to new heights, highlighting the on-going fragility of the situation.
The unprecedented nature of the COVID-19 pandemic, the mayhem of the U.S. elections and the evolving regulatory landscape for Chinese IPOs make analyzing APAC economies and the future a complex undertaking.
Turbulent times for financial services?
Against this backdrop of volatility and uncertainty, we saw record activity on our platform — user retrievals during the early days of the pandemic were 120 percent higher than in the aftermath of the UK’s Brexit vote and 75 percent higher than 2019 levels.
During February and March, the greatest uptick in demand was for data on a handful of Asian airline stocks, which spiked by almost 2,000 percent versus their 12-month average.
And yet despite such a turbulent year for markets, global equities now sit at all-time highs and continue to break records.
With the new year fast approaching, it is a timely opportunity to reflect on the fundamental shifts that have emerged amid the disruption over the past year, as well as explore new opportunities that investors and businesses can capture in 2021 and beyond.
In this article, we explore some key trends that will continue to play an instrumental role in shaping the APAC region’s financial services sector in the new year.
Geopolitical tensions in Asia continue to impact markets and deal-making
It’s been a tumultuous and dramatic year in the global and Asian political arena with COVID-19 accelerating U.S.-China tensions, the implementation of a new Securities Law in Hong Kong by China, and new tensions between India and China, to name just a few. All have had considerable impact on markets and deal-making in the region.
The election of Joe Biden as the new U.S. President has the potential to reform the U.S.-China relationship, but it will take some time for us to ascertain what his stance and policies are on Asia.
Aside from the U.S., China saw itself in conflict with its neighbor, India, which resulted in India banning 118 Chinese apps from its domestic market in September, while the U.S. ramped up its war on Chinese tech. Both of these situations are likely to continue to play out into next year.
Significantly, in November, leaders from 15 nations across Asia Pacific secured one of the biggest trade deals in history and the first to bring China, Japan and South Korea together. Refinitiv data shows that the 15 countries make up 30 percent of global exports or US$5.5 trillion. The Regional Comprehensive Economic Partnership (RCEP) aims to reduce trade barriers in the world’s fastest-growing region.
The new trade deal brings to the forefront the U.S.’s potentially waning role in Asia, with the nation absent from now both the RCEP and the TPP. It’s certainly going to be an interesting one to watch as more details on the trade deal emerge and Biden moves into the White House in January 2021.
Also notable was the appointment of Prime Minister Yoshihide Suga in Japan, as Shinzo Abe stepped down due to health reasons. Global markets and investors reacted positively to Suga’s appointment and Japan’s central bank has maintained its ultra-loose monetary policy as Japan’s virus-hit economy continues to pick up.
In fact, Japan’s economy grew at the fastest pace on record in the third quarter, rebounding sharply from its biggest post-war slump, as improved exports and consumption showed the country is recovering from damage caused by COVID-19.
In terms of transactions, Refinitiv Deals Intelligence showed that Asia Pacific investment banking fees eclipsed Europe for the first time in the third quarter of 2020, taking US$21 billion of a total US$91 billion global fee haul, and placing it second only to the U.S.
The rise in fees has been driven by China, which convincingly dominates the region’s capital markets. Year-to-date, Chinese fees have risen 35 percent to reach US$15 billion. By contrast, neighboring countries have flat-lined at best.
Australian fees generated 6 percent more than last year, but Japan showed negligible growth. India, Singapore and the rest of South East Asia registered 20 percent-plus declines.
As economies across the globe claw their way to recovery, some Asia Pacific countries have led the way with virus control and GDP bounce backs across many countries including Japan, Singapore and Australia.
Interestingly, the World Economic Forum recently announced that its annual Davos event will be hosted in Singapore in May 2021, instead of Switzerland. It will be the first global leadership event to address worldwide recovery from the COVID-19 pandemic. Singapore will no doubt do an excellent job as host and it will be exciting to have Asia on the global stage next year.
It would be trivial to predict the future given the events of this year. The financial services industry across APAC will be expecting continued volatility and will be playing particularly close attention to a new world under Biden.
China’s financial market continues to open up
China has continued to accelerate the opening up of its financial market despite the pandemic and political upheaval this year.
During the fifth plenary session of China’s 19th Central Committee, it was made clear that the priority for the country over the next five years is to make new strides in improving its economy significantly and to foster a new development pattern where domestic and foreign markets can boost each other.
In March 2020, China granted approval for both Goldman Sachs and Morgan Stanley to take majority (51 percent) ownership stakes in their Chinese securities company subsidiaries.
This year we’ve also seen BlackRock become the first foreign firm to obtain a license for mutual funds; Citi has just got its first custodian license; Vanguard has announced its plan to relocate its Asia hub to China; and JP Morgan and Goldman Sachs are actively expanding, too.
Non-U.S. institutions like HSBC, UBS, Credit Suisse, Nomura and Daiwa are all lining up ambitious expansion plans as well.
This is the latest evidence of China’s commitment to open up its domestic financial markets to foreign players. China’s plans for opening up are not new, but the dates imposed by the phase one U.S.-China Trade agreement and the impetus to stimulate the Chinese domestic economy in the face of pandemic-related recession make the next few months ripe for progress.
China also recently finalized rules to discard quotas under two major inbound investment schemes — the Qualified Foreign Institutional Investor (QFII) and the RMB Qualified Foreign Institutional Investor (RQFII) — allowing qualified foreign institutions unlimited access to Chinese stocks and bonds.
We can certainly expect further regulations and announcements to be made by the second largest economy in the world in the year ahead.
Sustainable finance gains prominence
In many respects, COVID-19 has been a wake-up call prompting governments, businesses and investors alike to pay greater attention to environmental, social, and governance (ESG) issues, and providing the impetus for all stakeholders to chart a sustainable recovery.
We see this trend in Asia as well with sustainable finance gaining more traction across the region. Refinitiv Lipper data shows that Asia ESG funds assets under management have continued growing in recent years, especially in Q3 2020.
Asia ESG Funds — Asset Type
Notably, China made a big call in September with President Xi pledging that the country will achieve carbon neutrality before 2060. Meanwhile, New Zealand became the first country to require the financial sector to report on climate risks.
Apart from governments, companies and investors are also focusing more on ESG risk management to build greater resilience in their business operations and supply chains.
Our 1H 2020 Sustainable Finance Review revealed that sustainable lending in Asia Pacific increased 3 percent compared with a year ago, and sustainable loan activity, particularly in Japan, increased by 34 percent compared with the 2019 level.
This report also revealed that Asia Pacific deal making involving sustainable companies accounted for 40 percent of mergers and acquisition activities for the first half of 2020 by deal value, while China accounted for 20 percent of total sustainable deal making activity during this period by number of deals.
As ESG data is becoming increasingly available and accessible, businesses and investors in Asia are afforded greater opportunity to actively incorporate sustainability into their internal processes and make ESG a core driver of future growth.
Digital becomes mainstream
Asia continues to make progress in digital banking. This will continue into 2021, with Singapore and Hong Kong leading the race.
In early December, Chinese fintech giant Ant Group and a consortium including Grab and Singapore Telecommunications were among the four groups to receive new digital banking licenses from Singapore’s central bank, gaining a path to offering a variety of services as well as a boost to their fintech credentials.
However, with digital solutions becoming a mainstay, especially during an ongoing pandemic, the cyber risks that institutions face have also increased as a result.
Cyberattacks are becoming more sophisticated, and the recent attacks on New Zealand’s stock exchange, which disrupted the country’s financial markets for four consecutive days, shows that organizations are vulnerable to cybersecurity risks, irrespective of their size. In short, companies cannot pay enough attention to being ahead of the game when it comes to cybersecurity.
Recent months also saw the Tokyo Stock Exchange and the Australian Securities Exchange experience technical glitches that caused trading to temporarily be suspended.
The COVID-19 outbreak has prompted more organizations to shift their business online and migrate processes to the cloud. In fact, earlier this year Asia led the world in the mass working from home experiment that we have found ourselves in.
With a virtual office environment becoming the ‘new normal’, businesses cannot afford to fall behind in their risk management capabilities. This is a timely wake-up call for companies in APAC to evaluate and enhance their technological infrastructure.
To reap the full benefits of digitalization and maximize the potential of new online tools, access to quality and reliable data is of paramount importance.
Moreover, as investors try to stay one step ahead of the COVID-19 crisis, they need access to a broad range of data to decode today’s fast-moving and interconnected markets.
Refinitiv’s Workspace can help companies adapt to this new way of working, and can be accessed anywhere via desktop, mobile or web.
Spotlight to intensify on Chinese IPO landscape
This year, the U.S.’s tougher stance on China extended into financial markets with plenty of rhetoric around Chinese companies listing on U.S. exchanges. This looks set to continue to play out into 2021, with U.S. Congress passing legislation in early December that would force companies to delist from American exchanges unless they comply with U.S. accounting rules.
At the moment China was set to offer the world’s biggest IPO in 2020, it was abruptly put on hold. China’s financial authorities have since emphasized the need for increased regulation of financial technology. A new date has still not been set for the IPO to take place, but it will be interesting to see how this all continues to play out next year.
Despite Ant being on hold, some interesting analysis from Refinitiv’s Deals Intelligence shows that Hong Kong is challenging the Nasdaq in the race to be 2020’s top IPO venue, with a wave of Chinese ‘homecoming debuts.’
More than 1,200 companies have raised US$228.7 billion through new listings so far during 2020. The figure, which includes proceeds raised from original IPOs and secondary listings, is already 11 percent higher than the proceeds raised through the whole of 2019, and higher than any other annual total since 2014.
Currently, the Nasdaq is the most popular venue for IPOs by both proceeds and by number of deals. US$46.9 billion has been raised from 168 new listings so far during 2020, a 70 percent increase in proceeds and a 24 percent increase in the number of new issues from 2019. Annual proceeds raised on Nasdaq has only been exceeded twice since our records began, during the dot-com boom in 1999 and in 2000.
Hong Kong closely follows the Nasdaq in the list of top exchanges this year, after a record level of secondary listings. The legislation that would force companies to delist from U.S. exchanges if they do not comply with U.S. auditing rules has led to a recent wave of Chinese companies securing secondary listings in Hong Kong or China.
Twelve companies, all Chinese, secured secondary listings worth a combined US$19.1 billion in Hong Kong so far during 2020, compared with just four raising a combined US$14.8 billion in 2019. Among them were e-commerce giant JD.Com, which raised nearly US$4.5 billion in June, gaming company NetEase (US$3.1B), and Yum China ($2.2B).
Increased AI/ML maturity
As firms strive to gain competitive edge over their peers, our 2020 Artificial Intelligence and Machine Learning Report reveals that machine learning (ML) is maturing in financial services globally and in the APAC region, as companies deploy ever more sophisticated technologies to drive innovation.
Our research shows that 78 percent of APAC firms are making significant investments in related technologies and over two-thirds indicate that ML is a core component of their business strategy. A majority of APAC respondents deployed ML for investment research and idea generation.
As ML adoption increases globally, ML and data science teams have also expanded, with 39 percent of APAC firms expecting an increase in the number of data science roles in 2021.
We will no doubt see an increasing amount of businesses leveraging ML to drive competitive advantage, manage risk and unlock new growth opportunities going forward.