A DECOUPLING IN THE WORKS
By Udayan Gupta
Intraregional investment within Asia is starting to take hold—reducing reliance on demand from developed markets.
When Essar Power, a unit of Asian energy giant Essar Energy, raised approximately $900 million in India through the sale of around Rs5,000 crore ($1.03 billion)in domestic corporate bonds in early 2013, the transaction was a record of sorts. It established not only that a multinational company could refinance its debt through a large offering in an Asian country, but also that this could occur at rates lower than it would in more traditional debt markets of the West.
Asia is buying Asia, creating its own economic and financial universe, independent of the markets beyond. There are now numerous examples of this phenomenon: In Malaysia, domestic cable TV operator Astro Malaysia raised $1.5 billion in an oversubscribed IPO on Bursa Malaysia, the Malaysian stock exchange. And although some US hedge funds were among the buyers, the majority were Malaysian financial institutions and investors. In March, Mapletree Greater China Commercial Trust priced its IPO on the Singapore Exchange at the top end of its indicative range to raise a record $1.4 billion; and in February, the government of Singapore Investment Corporation raised approximately $1.3 billion—also on the Singapore Exchange—by selling its stake in Global Logistic Properties, a warehouse operator with properties in China and Japan.
MIDDLE CLASS CONSUMPTION
Emerging markets in the region are in transition, says Gonzalo Pangaro, manager of the Emerging Markets Stock Fund at T. Rowe Price. And even though growth has declined in major Asian markets, such as China, the fact that overall growth is being driven more and more by rising middle class consumption and domestic resource exploitation is what is attracting corporations, capital and investors.
“A record number of homes and cars are being purchased by middle class consumers in India,” reports Karthik Balakrishnan of Globescape Capital, an emerging markets advisory firm. “There is a huge shortage in consumer lending in India to meet the needs of the growing middle class. There is also a lot of demand for retail, especially high-end retail,” he adds. Moreover, in an attempt to diversify the economy, there have been increasing investments in healthcare, infrastructure and education.
After decades of relying on the growth and prosperity of the developed markets for its own growth and prosperity, Asian countries have come into their own. And it isn’t just China and India, the two countries most associated with emerging growth, but also Asean countries such as Malaysia, Indonesia, Singapore and Korea.
Nash, Verno Capital: The ability to trade with some degree of safety actually helps in domestic savings
THRIVING STOCK MARKETS
Asian stock markets are thriving. Not simply as trading marts but also as centers for investor capital. In 2012, India’s Sensex rose 26% on the back of $24 billion in foreign inflows. And bellwether stocks such as Tata Motors, ICICI Bank, automaker Maruti Suzuki and L&T, the country’s largest engineering and construction firm, showed spectacular gains, especially after a lackluster 2011. Tata shares, for example, rose 75% on high sales at its Jaguar Land Rover division. Shares of ICICI, India’s largest lender to the private sector, rose 66%, based in great part on tightening lending standards and the improved quality of its assets.
Hong Kong’s Hang Seng Index, rose 22.9% in 2012, after a dismal 2011. In spite of governmental regulations and a sharp decline of inflows into China, pent-up demand and infrastructure spending boosted many of the companies listed on the exchange, analysts say.
Bursa Malaysia, once considered an outlier, boomed in 2012. The exchange hosted three IPOs that each raised more than a billion dollars for issuers, the most recent being the $1.5 billion IPO of Astro Malaysia. In addition, Felda Global Ventures, a state-owned palm oil producer, raised $3.2 billion, and IHH Healthcare, one of Malaysia’s largest hospital operators, raised over $2 billion.
These three major IPOs in Malaysia not only created liquidity for private and public investors but also attracted domestic financial investors, who traditionally invested abroad on developed-markets exchanges. The strong post-IPO performance of these companies has also helped the exchange’s credibility.
The strength and reliability of these stock markets offers political and economic benefits, says Roland Nash, a partner in Verno Capital, an asset management firm in Moscow. Nash believes that these exchanges are proving that they can aggregate local and foreign capital to finance indigenous companies. Even more important, the ability to trade with some degree of safety and reliability on local exchanges allows for more domestic capital participation. “It actually helps in domestic savings,” says Nash.
The Institute of International Finance, which tracks capital flows to emerging markets, predicts a record inflow of capital into emerging Asian countries because of favorable monetary and growth conditions in emerging economies. “Another factor pushing capital flows towards emerging markets is the fact that risk aversion has fallen significantly over the past months,” the IIF concludes.
Asian markets still hold risks, given that the fortunes and performance of companies doing business there—local and multinational—depend on government mandates and laws. But governments have taken steps to reduce some of the uncertainties and unpredictability of doing business in these countries.
"There is a huge shortage in consumer lending in India to meet the needs of the growing middle class. There is also a lot of demand for retail, especially high-end retail."
– Karthik Balakrishnan, Globescape Capital
In March, the Chinese Securities Regulatory Commission announced that it would ease restrictions on the participation of foreign investors in mainland companies. It also directed exchanges to ease limits on the amount of profit that mainland companies can return to shareholders. By easing restrictions such as those under China’s Qualified Foreign Institutional Investor quota system, China is acknowledging the need for greater foreign investor involvement and also opening the door to greater foreign direct investment.
India has also taken steps to remove hurdles and obstacles that have made investors and foreign businesses wary. In January, India’s Foreign Investment Promotion Board approved a request by Ikea, the Swedish furniture chain, to own and operate as many as 25 stores in India—an estimated $2 billion in direct investments over the next decade or so. Ikea’s initial proposal was rejected by the Board because it called for Ikea to sell its own furniture and products manufactured by others. But the Board later reversed its position, agreeing to let Ikea operate in India as it does everywhere else.
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“The government is committed to playing a constructive role in encouraging FDI (foreign direct investment) especially in areas which create jobs and provide technological advancement,” India’s Trade Ministry stated.
Corporate and institutional investors may have shied away from Asia because the rules governing investment are not always clear or predictable. One US institutional investor likens investing in Asian markets to a one-way door. “You can get in but you’re never sure how you’ll get out.”
For many corporations and investors in the developed markets, the perception of risk held them back. But with returns in developed markets abysmally low, corporations are taking advantage of the low borrowing rates and plowing funds into Asia at accelerated rates. “The opportunities and the rewards are overriding the risks that might have been deterrents, especially for long-term, patient investors,” says Nash of Verno Capital.