2017: Perspectives on Asia
12 July 2017
Hong Kong, China, Japan, emerging markets, technology development and regulation are on the agenda in Asia, says Northern Trust’s Dane Fannin
Image: Shutterstock
The securities lending industry in Asia fared relatively well in 2016 despite a backdrop of relatively lacklustre global economic growth, geopolitical uncertainty and sustained market volatility. In an eventful year, we saw a number of distinct trends, innovations and themes develop and take shape.
Hong Kong and China
Despite Hong Kong remaining a key source of revenue in the region, demand waned in the face of uncertainty and volatility from China. We are optimistic that this trend will reverse in 2017 as the prospect of higher US interest rates should break down asset price correlations and encourage traditional stock pickers’ convictions. Hong Kong will remain an attractive haven for investors with strategies pertaining to China’s economic transition.
The launch of the Shenzhen-Hong Kong Stock Connect in late 2016 was an important milestone for the industry ahead of regulators approving an ability to lend and borrow China shares via the scheme. The Shenzhen link complements the existing Shanghai-Hong Kong Stock Connect platform giving foreign investors and index providers access to China’s two major bourses. While securities lending rules here remain unviable, development and change is headed in the right direction and participants should remain vigilant ahead of this
significant opportunity. Â
Japan
Borrower demand in Japan has remained robust, helping to drive revenues higher in 2016. The bold accommodative monetary policy regime helped stoke demand for various sectors, particularly those affected by negative interest rates that drove short demand.
Notably, we observed a clear increase in borrower demand to pledge JPY-denominated collateral as a function of the negative interest rate environment. Beneficial owners accepting Japanese government bonds, for example, would have seen a notable uptick in volume. Given Japan’s significant depth in liquidity, coupled with ease of execution relative to other regional jurisdictions, we expect demand in Japan to remain robust for the foreseeable future.
Emerging markets
Emerging market demand continues to be strong in the region, offering beneficial owners attractive returns should their lending providers be able to navigate the operational complexities without exposure to undue risk. South Korea’s return profile has enhanced significantly over the last 12 to 24 months due to increased foreign investor demand. This in turn has been helped in part by constraining regulatory measures in other jurisdictions.
In Malaysia, demand remains highly sporadic as a function of the fundamentals driving activity there, such as currency and commodity price fluctuation. However, supply continues to grow, and this should drive liquidity and ultimately spur a greater allocation of capital from long/short investors.
Technology developments
Technology developments continue to influence the industry in Asia, and technology use is becoming a competitive advantage. Interestingly, the growth of quantitative investor strategies in Asia has in part helped to drive a change in the way lenders and borrowers interact with one another.
Typically, these strategies induce large amounts of flows, requiring rapid and automated execution. They have spurred investment into enhanced trading platforms utilising technology such as EquiLend’s Next Generation Trading to help enhance the automation of trading processes. Having leveraged all aspects of this technology, we believe our clients will benefit directly through increased trading efficiencies.
Regulation
Asia has certainly not been immune to global regulatory reform and consistent to other regional hubs. Industry participants have moved relatively quickly to absorb new requirements and recalibrate their business models. We continue to observe increased revenue opportunities for beneficial owners as a function of regulatory changes.
Demand for high quality liquid assets continues to drive opportunities. That is particularly case for those asset owners with a risk-return appetite conducive for lending government bonds on a termed basis versus a lower grade of collateral. We also observe a gradual trend in borrowers pursuing new entity designations in jurisdictions that are both operationally-efficient and capital-efficient. This is presenting opportunities for lending providers to capitalise on increased loan volumes where first-mover-advantage exists.
Hong Kong and China
Despite Hong Kong remaining a key source of revenue in the region, demand waned in the face of uncertainty and volatility from China. We are optimistic that this trend will reverse in 2017 as the prospect of higher US interest rates should break down asset price correlations and encourage traditional stock pickers’ convictions. Hong Kong will remain an attractive haven for investors with strategies pertaining to China’s economic transition.
The launch of the Shenzhen-Hong Kong Stock Connect in late 2016 was an important milestone for the industry ahead of regulators approving an ability to lend and borrow China shares via the scheme. The Shenzhen link complements the existing Shanghai-Hong Kong Stock Connect platform giving foreign investors and index providers access to China’s two major bourses. While securities lending rules here remain unviable, development and change is headed in the right direction and participants should remain vigilant ahead of this
significant opportunity. Â
Japan
Borrower demand in Japan has remained robust, helping to drive revenues higher in 2016. The bold accommodative monetary policy regime helped stoke demand for various sectors, particularly those affected by negative interest rates that drove short demand.
Notably, we observed a clear increase in borrower demand to pledge JPY-denominated collateral as a function of the negative interest rate environment. Beneficial owners accepting Japanese government bonds, for example, would have seen a notable uptick in volume. Given Japan’s significant depth in liquidity, coupled with ease of execution relative to other regional jurisdictions, we expect demand in Japan to remain robust for the foreseeable future.
Emerging markets
Emerging market demand continues to be strong in the region, offering beneficial owners attractive returns should their lending providers be able to navigate the operational complexities without exposure to undue risk. South Korea’s return profile has enhanced significantly over the last 12 to 24 months due to increased foreign investor demand. This in turn has been helped in part by constraining regulatory measures in other jurisdictions.
In Malaysia, demand remains highly sporadic as a function of the fundamentals driving activity there, such as currency and commodity price fluctuation. However, supply continues to grow, and this should drive liquidity and ultimately spur a greater allocation of capital from long/short investors.
Technology developments
Technology developments continue to influence the industry in Asia, and technology use is becoming a competitive advantage. Interestingly, the growth of quantitative investor strategies in Asia has in part helped to drive a change in the way lenders and borrowers interact with one another.
Typically, these strategies induce large amounts of flows, requiring rapid and automated execution. They have spurred investment into enhanced trading platforms utilising technology such as EquiLend’s Next Generation Trading to help enhance the automation of trading processes. Having leveraged all aspects of this technology, we believe our clients will benefit directly through increased trading efficiencies.
Regulation
Asia has certainly not been immune to global regulatory reform and consistent to other regional hubs. Industry participants have moved relatively quickly to absorb new requirements and recalibrate their business models. We continue to observe increased revenue opportunities for beneficial owners as a function of regulatory changes.
Demand for high quality liquid assets continues to drive opportunities. That is particularly case for those asset owners with a risk-return appetite conducive for lending government bonds on a termed basis versus a lower grade of collateral. We also observe a gradual trend in borrowers pursuing new entity designations in jurisdictions that are both operationally-efficient and capital-efficient. This is presenting opportunities for lending providers to capitalise on increased loan volumes where first-mover-advantage exists.
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