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Concerns About Frontier Markets Debt? Global Evolution Answers

Global Evolution has been investing in frontier markets sovereign debt for more than 10 years, which gives the asset management firm a solid background and expertise in identifying investment opportunities with attractive risk-return characteristics.

Nevertheless, investors in frontier markets have some questions or concerns about an asset class that, in many cases, is something new for their portfolios. Funds Society has gathered these questions and asked Soren Rump, CEO of Global Evolution, to give us his insight on these issues. Soren Rump, who will be joining Capital Strategies on a road show across Chile and Peru next week, answered the following:

Is liquidity an issue when investing in frontier markets?

Frontier markets have over the recent years developed significantly in terms of size and liquidity. Liquidity in frontier markets is daily, but bid/offer spreads and the size of individual trades are typically smaller than those in traditional emerging markets, but often with a larger pool of price providers than, for example, emerging markets corporate bonds.

How do you manage the different regulations in each country?

Similar to traditional emerging markets debt, we access the individual regulations, such as holding periods, FX restrictions, withholding tax, etc. before entering individual local markets. We gather ongoing intelligence through our local network of market participants, such as local banks, stock exchange, regulatory bodies etc.

What is the presence and characteristics of institutional investor in these markets?

Local institutional investors are dominated by pension funds and local banks, as the two most dominant investors in the primary and secondary government bond market. By regulation, typically pension funds need to invest in local government bonds which provide a natural bid both at the ongoing auctions as well as in the secondary market.

What is the size of the market?

We estimate a liquid market capitalization of US$400bn based on sovereign bonds from 62 countries with daily valuations on Bloomberg.

What different types of bond issues are there in these markets?

You can find Eurobonds (issued in USD, EUR, JPY, CHF), offered to the market both through primary EMTN issuance programs by international banks, and in the secondary market through international banks and brokers. We also have Local T-bills and T-bonds, both offered to the market through primary auctions, and in the secondary market through primarily local market maker banks. Further to this we actively invest through the FX markets using spot FX, FX forwards, cross currency swaps etc.

Global Evolution, an asset management firm specialized in emerging and frontier markets sovereign debt, is represented by Capital Strategies in the Americas Region.

Reforms in Asia Will Have a Positive Impact on Dividend Returns

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Institutional investors believe the current reforms across Asia (excluding Japan) – from India, Indonesia, China and Korea – will have a positive impact on dividend returns in the region. This is the view of 65% of institutional investors interviewed by ING Investment Management (ING IM).

Nicolas Simar, Head of the Equity Value Boutique at ING IM, comments: “Asia provides an attractive and diverse universe of high dividend-paying stocks. Despite its reputation for growth, dividend investing in Asia has tended to outperform. Over the past five years investors tracking the MSCI AC Asia ex Japan Index would have seen a modest decline, with dividends being the only positive contributor to returns.

“We expect dividends to become an increasingly important element of total returns for investors in Asian equities because companies there are increasingly focusing on alignment with shareholders, and more are initiating or increasing dividends.”

In terms of why institutional investors expect reforms in Asia to have a positive impact on dividends, ING IM’s research reveals 43% believe the main reason is it will result in better corporate governance that will lead to companies increasingly looking to reward shareholders with higher dividends. Some 29% believe the key factor will be that reforms will encourage companies there to be more efficient, thereby improving returns.

ING IM says that as a higher proportion of Asian companies pay a dividend than in developed markets, it is possible to build a portfolio that is well diversified across countries and sectors. With Asian company balance sheets in good shape – the least leveraged globally – there are few constraints to increasing payouts, and Asia has delivered significantly stronger dividend growth than developed markets.

ING IM’s Asia Ex-Japan Equity Fund has returned 2.6% annualized since the inception of the strategy (31 March 2013). It invests in stocks of companies operating in the Asian region excluding Japan that offer attractive and sustainable dividend yields and potential for capital appreciation. The strategy combines quantitative screening with fundamental analysis to identify stocks that trade below their intrinsic value and offer an ability to grow their dividend in the future. The fund focuses on finding the strongest dividend payers from a valuation perspective and not the highest yielders.

Barclays Makes Two Senior Hires to Its Wealth and Investment Management Team in Palm Beach

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Barclays has announced the appointments of Josh Crossman and Ginny Neal as Directors and Investment Representatives for Wealth and Investment Management. Based in the Palm Beach office, they will be responsible for implementing Barclays’ global wealth management programs and for providing sophisticated alternative investment strategies to high net worth individuals, foundations, corporations, and not-for-profit organizations.

Mr. Crossman and Ms. Neal will report to John Cregan, Regional Manager for Palm Beach.

“We are very excited to have two talented investment professionals join our team in this rapidly growing region. Josh and Ginny both have the breadth of wealth management and investment expertise that our clients demand,” said Mr. Cregan. “Their appointments underscore our commitment to attracting the very best wealth advisors in order to deliver customized investment solutions that match the financial profiles and risk appetites of our high net worth clients.”

Mr. Crossman joins Barclays with 19 years of industry experience. Most recently, he was a Vice President at JP Morgan Chase & Co., where he was a Senior Leader on the Private Bank Ultra High Net Worth Investment Team. Prior to joining JP Morgan in 2010, Mr. Crossman was the Chief Investment Officer at Frontline Management AS, a family office. He began his career at Bear, Stearns & Co. in 1995.

Ms. Neal brings 15 years of both financial and legal experience to the firm. Prior to joining Barclays, she was a Senior Private Banker at JP Morgan Chase & Co., where she serviced ultra high net worth individuals and family offices. Before joining JP Morgan in 2010, Ms. Neal was General Counsel for GenSpring Family Offices, LLC. She began her career at Greenberg Traurig, PA in 1999.

With 12 offices in the US, Barclays Wealth and Investment Management provides comprehensive wealth management solutions to high net worth individuals and families. The firm focuses on providing highly customized investment solutions to clients in alignment with their long-term risk tolerance, personal aspirations, specific financial needs and personality.

MFS Launches MFS Meridian Funds – Diversified Income Fund

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MFS Investment Management announced the launch of MFS Meridian Funds – Diversified Income Fund, a fund which seeks current income and capital appreciation. Led by James Swanson, MFS’ chief investment strategist, the strategy takes a disciplined investment approach that combines broad diversification, active asset allocation and bottom-up, fundamental security selection. In seeking to achieve its investment objective, the fund focuses on five income-oriented asset classes: US government securities, high-yield corporate bonds, emerging market debt, dividend-paying equities and real estate related investments.

“We think the fund’s disciplined and flexible approach to broad diversification, active asset allocation and fundamental security selection may help position the fund for favourable risk-adjusted returns”

“Similar to a strategy available in the US, this fund may be appropriate for investors who seek both income and growth potential through a diverse mix of income-producing securities”, said Lina Medeiros, president of MFS International Ltd. “The fund follows a disciplined and flexible approach and is managed by a team of highly-skilled portfolio managers who have managed money over long periods of time through varied market conditions”.

Lead portfolio manager James Swanson manages the asset allocation among the various types of securities in the portfolio. He works closely with co-managers and MFS’ Quantitative Solutions group and draws on insights from his 30-year career to determine the fund’s asset allocation. Working with Swanson is William Adams, co-head of Fixed Income for MFS and portfolio managers Ward Brown, David Cole, Richard Gable, Matthew Ryan, Jonathan Sage and Geoffrey Schechter. The management team has an average of more than 23 years of industry experience.

“We think the fund’s disciplined and flexible approach to broad diversification, active asset allocation and fundamental security selection may help position the fund for favourable risk-adjusted returns”, added Medeiros.

Issued by MFS Investment Management Company (Lux) S.àr.l. MFS Meridian Funds are a Luxembourg registered SICAV with US$27.0 billion in assets as of 30 September 2014. The MFS Meridian Funds are comprised of 31 equity, fixed income and mixed asset class funds. The MFS Meridian Funds are managed by MFS Investment Management, a global asset manager with US$424.8 billion in assets under management as of 30 September 2014.

The Multi-Family Office Channel Controls More Than US$700bn in the U.S.

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According to new research from global analytics firm Cerulli Associates, the multi-family office channel controls more than $700 billion.

“We estimate that the multi-family office channel is comprised of more than 200 firms that control more than $700 billion,” states Donnie Ethier, associate director at Cerulli. “Traditionally, the growth has been influenced by the independent registered investment advisor (RIA) segment of the channel. While this is still true, the highly-debated commercial multi-family office segment, which is financially backed by banks, posted the greatest asset growth in 2013.”

“Despite the debate of whether or not these offices are genuine family offices, the high-end wealth management units are paying off for many of their parent banks,” adds Ethier.

“This sizing reflects the total assets controlled by their advisor forces,” Ethier explains. “Although multi-family offices undoubtedly focus on high-net-worth (HNW) and ultra-high-net-worth families (UHNW), many do have a mix of clients that do not meet Cerulli’s HNW criteria. These non-HNW assets are still a massive opportunity for third-party managers.”

In their High-Net-Worth and Ultra-High-Net-Worth Markets 2014: Addressing the Unique Needs of Wealthy Families report, Cerulli analyzes the U.S. HNW (investable assets greater than $5 million) and UHNW (investable assets greater than $20 million) marketplaces. The report focuses on the three constituencies of investors, providers, and asset managers.

“Many executives agree that the phrase ‘multi-family office’ has lost its allure because so many wealth managers use it to explain their services geared to wealthy investors,” Ethier continues. “This has generally watered down the term to a marketing scheme. Evaluating a multi-family office should be based on the practices’ high-touch services and DNA versus its assets under management.”

Cerulli believes that third-party management opportunities will only grow as additional RIAs move upmarket, qualifying for multi-family office status. More national and super regional banks and trust companies will likely follow suit and establish family-office practices of their own. Appeal will grow across the segments as the firm count and assets swell.

Global Dividends Set to Soar to $1.19 Trillion in 2014, with Further Growth in 2015

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After adjusting for currency movements and one-offs, underlying dividend growth was 9.7% year on year, in line with the strong expansion seen in the first half of the year. On an underlying basis, the US, Europe, Emerging Markets and Asia Pacific ex Japan all achieved impressive double-digit dividend increases, while the UK, Canada and Japan lagged behind. The Henderson Global Dividend Index ended the quarter at 159.

For the full year, Henderson Global Investors expects dividends to reach $1.19 trillion, a headline increase of 12.6% (underlying +10.6%). For 2015, the Henderson’s preliminary forecast is $1.24 trillion for global dividends. Next year’s expected headline increase (4.2%) is slower than the underlying 7.2%, mainly because Vodafone will not repeat its record $26bn special dividend.

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The US remained the main engine of global dividend growth in Q3 2014. US firms paid out $87.4bn, 10.8% more year on year (underlying).

Dividend growth is coming from almost every sector in the US, with financials looking particularly strong. For the year to date, US financials have already distributed double what they did in the whole of 2010. By comparison, in the rest of the world, dividend payments from financials have increased just 12.1%, indicating how quickly the industry in the US has recovered from the financial crisis.

Seasonally, Q3 is the most important quarter for Emerging Markets, particularly for China, which pays out nine tenths of its annual total in the period. Underlying Emerging Market dividend growth of 11.0% to a total of $58.4bn was strong in comparison to recent quarters. With China accounting for almost half the total, its 14% underlying growth was key to the Emerging Markets’ successful performance. Russia saw flat headline dividends with underlying growth eroded by the plunging rouble. Q3 is also the seasonal peak for Asia Pacific, which grew 10.3% (underlying), with Taiwan leading the region.

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Q3 is a seasonally small quarter for dividend payments both in Europe (which extended Q2’s double-digit gains on an underlying basis) and in Japan. The UK is typically a big payer in Q3, but lagged behind other countries, as headline growth translated into an underlying decline once the gains from a strong pound were stripped out.

Alex Crooke, Head of Global Equity Income at Henderson Global Investors said: “2014 will break a new record for global dividends. The third quarter has extended the rapid growth in income that investors have been enjoying from their shares in 2014, and we are confident of double digit growth for the full year. The US is particularly impressive, as American firms increase dividend payouts helped by rising profits. Globally, investors should reap approximately $133 billion more in dividends this year than last.

“Despite the uncertain outlook for economic growth in 2015, we expect another good year of dividend growth, albeit at a slower rate than this year. A global approach to income investing continues to offer investors an attractive mix of opportunity and diversification.”

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Private Banks and External Asset Managers Will Thrive in LatAm Serving the Region’s HNWIs

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Bancos privados y gestores externos prosperarán en LatAm ante las nuevas demandas de los HNWI — Photo: Carles Cerulia, Flickr, Creative Commons. Private Banks and External Asset Managers Will Thrive in LatAm Serving the Region’s HNWIs

Latin American high net worth individuals (HNWI) are on average far wealthier than those in other regions (USD 13.5 million compared to e.g. European HNWIs with USD 3.3 million). The USD 2.66 trillion wealth management industry servicing this clientele is changing, evidenced by a shifting landscape of market participants. The drive towards localisation, the rise of transparency and the renewed role of cross-border banking accelerate the demand for a refined HNWI service offering, focused on a sophisticated understanding of client needs and circumstances, professionalism and accessibility. In light of this new environment, financial institutions such as dedicated private banks and professional external asset managers – if committed to adapting accordingly – will thrive given the dynamism and value that can be achieved from serving the region’s HNWIs.

Julius Baer has launched the first edition of the ‘Industry Report Latin America’, covering wealth creation, wealth management and investment behaviour in Latin America. The report was produced – according to Julius Baer’s open product and service philosophy – in cooperation with leading market specialists such as Aite Group and BlackRock. Roi Y. Tavor, Head Independent Asset Managers & Global Custody Americas and Africa, who initiated the study, said: “With this inaugural edition of Julius Baer’s first Industry Report on Latin America we aspire to highlight various aspects of the changing wealth management landscape in Latin America. We hope that this report will serve as a reference for all participants in the Latin American wealth management industry, including private clients, family offices and external asset managers.”

Evolving investment behaviour

Latin American investors have become younger and more sophisticated over the past decades, resulting in an increasing risk appetite and a more diversified portfolio to achieve investment objectives. But cash, fixed income and real estate investments still represent 76% of average Latin American asset allocation today. Latin American economies, at the same time, are more integrated into the global economy today than ever before and thus more exposed to international economic cycles and global social trends. With total wealth in the region set to continue to grow, heightened exposure to external shocks and increased investor sophistication will lead to new investment behaviours. The growing middle classes are forced to think beyond their immediate consumption needs and to re-evaluate notions of saving, wealth protection, investment preferences and allocations, while considering systematic risks amongst others.

The inaugural ‘Julius Baer Industry Report Latin America’ was presented at the 35th anniversary of Julius Baer Bank & Trust (Bahamas) Ltd. in Nassau. Gustavo Raitzin, Head Latin America and Israel and Member of the Executive Board, commented: “The ‘Julius Baer Industry Report Latin America’ reflects our dedication to guiding our clients through complexity by anticipating trends and jointly developing strategies to prepare for a prosperous future.”

Ingredients for sustained wealth creation

There are a number of ingredients for sustained wealth creation in place in Latin America today. Growing at a strong pace, the region has almost tripled its gross domestic product since 2002, allowing for sustained periods of political stability. An overall higher purchasing power has enabled important parts of the population, which historically speaking were economically insignificant, to influence the overall level of activity in the region. In Brazil, for example, demand for cars has surged from 1.7 million units in 2005 to 3.8 million units in 2012. This rise of the middle class continues to shape the economic structure of Latin America.

Governments in the region have wisely used the windfall profits of the commodity super cycle to strengthen their financial position. External debt in % of GDP declined since 2002 from 42% to 25% of GDP, driving institutional and socio-economic change. A more business-friendly environment as well as checks and balances on governmental institutions continue to be established, a precondition for sustained growth. For example: Colombia carried out 27 reforms over the past eight years to improve the regulatory environment for doing business; key economies within the region have more than halved the time to start up a new business between 2003 and 2013 and the rising middle class in Brazil is increasingly educated, as reflected by a growth of tertiary education by 215% from 1998 to 2011.

Thus, the ingredients necessary to reveal the region’s full potential for wealth creation are provided for. Latin America today is one of the regions with the highest expected growth rates of wealthy individuals with the number of ultra high net worth individuals (UHNWI) expected to grow by 42% until 2023.

Investec’s 4factor Process or How to Invest Leaving Personal Feelings Aside

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Proceso 4factor de Investec - Invirtiendo sin sentimientos — Mark Breedon, Portfolio Manager and Co-Head of 4factor Equities at Investec. Investec’s 4factor Process or How to Invest Leaving Personal Feelings Aside

Lately there is a lot of talk on investment by factors, a process which has established itself amongst institutional investors, and which is also gradually descending to the retail public. Some management companies, such as Investec, have been applying this method for years, since 1999, to build their portfolios. Mark Breedon, Portfolio Manager and Co-Head of 4factor Equities at Investec, explains to Funds Society how the 4factor team works and what the key factors are for this investment method, under which Investec manages $34 billion.

What arethe broad outlines ofthe 4factor process?

The 4factor process observes four factors in all securities that pass through its filter: 1) Quality 2) Value 3) Earning revisions and 4) Momentum. The process is applied to the universe of securities that have a market capitalization of more than 1 billion dollars and which have an average daily trading volume of over $ 10 million (3500). The system sorts the securities according to these four factors and tells you which ones rate best (600); from there, the fundamental analysis of each company by analysts at Investec come into play; they will propose ideas to invest in each of the geographical strategies handled by this method: Global Equity, Dynamic Global Equity, Global Strategic Equity, European Equity, Asia-Pacific Equity, and Asia Equity.

What market environments work best for the 4factor process?

If you’re a stock picker, things are easier if the market is cheap, that’s where the best opportunities are found. However, erratic markets such as 2009 and part of 2010 and 2011, when the market moved constantly from risk-on to risk-off, are more complicated. In 2012, the selection of good companies carried out in previous months reaped its rewards, and this strategy worked very well. With volatility and correlations at normal levels, disciplined processes such as this tend to function correctly. On the other hand, it is remarkable that such processes of long-term investment perform well in all market environments, because they focus on the company’s fundamentals without placing so much emphasis on political and macroeconomic factors.

What are your 4factor filters saying geographically?

In terms of quality-returns in relation to the cost of capital, there are more US companies listed with high scores, these also show positive earning revisions, as well as good momentum. However, the factor relating to value is poor. We see good signs in emerging markets both in valuation and in momentum and improved corporate earnings; perhaps Asian companies are better positioned than the average emerging markets. Europe does not fare as well. The momentum was excellent in 2012 and 2013, quality and valuation were not bad, but these never came along with positive earning revisions. Now, in addition, the momentum has worsened and it’s bad. Japan represents an opportunity: value is good, earning revisions are improving but, for now, the quality of companies is very bad. The reforms being carried out by Prime Minister Abe may help in making companies gradually improve shareholder returns. Some are applying very positive restructuring measures.

And, by sectors?

In Technology, the result of the filters is positive, but you cannot generalize. Large companies such as Microsoft, IBM, and Hewlett Packard are big cash generators. The cycle of low value-added semiconductor companies is lengthening as there has been no investment in capacity increases, so they also look attractive. Financial institutions, especially insurance companies, are benefitting from the long cycle of low rates. However, it is early days for companies in the commodity and energy sector, the value factor is terrible because the price of commodities is very low.

What are the differential characteristics of the Global Strategic Equity strategy, which you manage?

Investors tend to underestimate change; in a way, we’re stuck in the past. We usually set a reference point, and pivot around it. But change is powerful, and in this strategy we seek companies which fare well under the 4factor filter, and which are also undergoing a process of change that can come from a process of restructuring, liberalization of a sector, consolidation moves, spin-off of one of its divisions, etc. An example is Hewlett Packard, a company in which we have invested for a year and half because, besides receiving a good score according to our 4factor filters, it was undergoing a restructuring process that has recently led to the announcement of the spin-off of its business into two and an additional 5,000 job cuts. Another example is Cash America, a pawnshop and payday loan management company which operates mainly in the US, Mexico and the UK, and that is in the process of splitting the two businesses surfacing hidden value.

Finally does your 4factor process shed any ideas for Latin America?

In the emerging markets strategy we are invested in securities listed in Brazil, Chile, and Mexico. An example is Itaú, the bank of Brazilian origin. The valuation factor gives satisfactory results for Brazil, but it’s not positive in Mexico’s case. However, earning revisions in the Mexican market are good.

Credit Suisse Boosts its China A-share Research Ahead of the Shanghai-Hong Kong Stock Connect Launch

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Foto: TreyRaatcliff, Flickr, Creative Commons. ¡Mr. Marshall ya no es americano!

Credit Suisse has announced that it has significantly expanded its China A-share Research and Analytical capabilities, providing investors with the most comprehensive and best in class analytical tools for A-shares listed in PRC.

HOLT LensTM, an analytical platform proprietary to Credit Suisse, has added more than 300 A-share companies to its database, bringing the total to more than 800 A-share companies. These stocks represent an aggregate market capitalization of US$3.9 trillion. In addition to the CSI 300, HOLT will now provide 100% coverage of all constituent stocks of the Shanghai Stock Exchange 180 and 380 indices, which include the 568 companies that are eligible for the Shanghai-Hong Kong Stock Connect Scheme (“Scheme”).

In addition, Credit Suisse Equity Research has also more than triple its coverage of domestic China A-shares to now include 130 A-share companies, representing a total market capitalization of about US$1.84 trillion. Credit Suisse plans to further expand its Equity Research to cover 300 China A-share stocks by 2016.

Nicole Yuen, Vice Chairman Greater China and Head of Greater China Equities said: “China is an important market for Credit Suisse in the region and we will continue to invest in building the bench of talent and infrastructure to provide best in class products and services to our clients. By expanding the HOLT database and our Equity Research coverage of China’s A-share companies, Credit Suisse aims to offer the leading research product on the A-share market to international investors. Combining our strengths in systematic analytical capability through the HOLT® framework and fundamental analysis through our Equity Research team, Credit Suisse provides the most comprehensive coverage in China A-share markets to international investors.”

Credit Suisse Equity Research provides comprehensive analysis of 1,350 stocks in the region, including 410 Hong Kong and China companies. The HOLT database includes analysis of over 20,000 stocks across 60 countries globally, with 860 companies in Hong Kong. It is made available to more than 5,000 investment professionals at over 750 investment managers.

Credit Suisse is one of the leading equities houses in Asia Pacific by cash turnover, including Hong Kong. It is rated #3 for Asian Equity Research in 2014 by Institutional Investor.

Ernest Fong, Head of Research, Non-Japan Asia said: “The Shanghai-Hong Kong Stock Connect is a signification step forward in the liberalisation of China’s capital account and Renminbi (RMB) internationalisation. The Scheme opens up new investment opportunities for both inbound and outbound investors. As a leading Equity Research house in Asia, we will continue to expand our equity research capabilities in the A-share market, producing insightful analysis that identifies longer term investment themes and opportunities.”

HOLT LensTM: Credit Suisse’s proprietary analytical platform

HOLT provides proprietary methodology that objectively measures economic performance and valuation for companies, globally. Delivered via the HOLT LensTM, platform, it provides investors with unique insights into a company’s performance, valuation and future expectations.

“One differentiator for Credit Suisse is that we can provide consistent valuation metrics across all sectors and geographies. By using this globally comparable framework for comparing and valuing companies, our clients are equipped to make better investment decisions,” said Jonathan Tischler, Head of HOLT’s business in Asia Pacific.

The scale of China’s capital market

With a total market capitalization of about US$4.2 trillion, the China A-share market is currently ranked #3 globally, accounting for about 6.6% of the world’s market capitalization. China is also the world’s 2nd most actively traded market with average daily turnover of US$59 billion.

A recent Credit Suisse Research Institute (CSRI) report, entitled EM Capital Markets: the road to 2030, forecasts that China will become the world’s 2nd largest equity market before 2030 and will account for almost one-fifth of the value of global equity markets.

On secondary cash equity activities, the report projects that China A-share market’s average daily traded value to reach US$396.3 billion by 2030, while its share of global traded value to double to 26.9% by 2030, compared to 13.9% this year. CSRI also projects that Hong Kong’s secondary equity annual share traded value is to increase by 8.7 times from currently about US$1.32 trillion in 2013 to US$11.49 trillion. The projected trading values would translate into potential secondary equity revenue opportunity of US$249 billion for China and of US$46.5 billion for Hong Kong cummulatively between 2014 and 2030.

Vincent Chan, Head of China Equity Research estimates that by the end of 2020, about US$112 billion of the world equity funds will be invested in China A-share market, compared to US$49 billion today.

For a copy of “Emerging capital markets: the Road to 2030,” please click this link.

Fighting for the Future of Hong Kong

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Luchando por el futuro de Hong Kong — Photo: Ching King. Fighting for the Future of Hong Kong

Pro-democracy demonstrators took to the streets of Hong Kong’s Central business district in late September and October – demanding China’s Communist Party live up to the promise of democracy made when the British transferred the territory back to China in 1997. The uncertainty surrounding Hong Kong’s future weighs heavily on its citizens, as well as the international financial community.

Will protesters’ demands for open elections in 2017 push the power of China President Xi Jinping? Could perceive instability cause international investors to take their business elsewhere, such as Singapore? Just how badly has the reputation of Hong Kong’s financial sector been damaged? Emerging market investment experts from across Natixis Global Asset Management share their view points

Assessing the economic impact of these protests, François Théret, Chief Investment Officer at Absolute Asia Asset Management, makes the following comments:

The short-term damage to the economy is already visible. Hong Kong economic growth has been slowing since 2013 and the recent developments will only exacerbate the downtrend, with retail sales and tourism badly hit. China has stopped group tours to Hong Kong and retail sales recorded double-digit falls during China’s Golden Week holiday from October 1 to 5, according to the Hong Kong Retail Management Association. The group also reported restaurants and retailers located in the Central and Admiralty business districts recorded volume drop of 40% to 50% compared to the same holiday week last year. Some watch and jewelry shops in the Central area even reported close to 80% decline in sales. The impact on financial services and merchandise trade has probably been limited so far.

The key question is whether the current protest will jeopardize the city’s long-term economic potential. We strongly believe that Hong Kong’s status as a major global financial market with strong rule of law and increasing cooperation with other international financial hubs is unshakable. Mainland China is as important to Hong Kong as Hong Kong is to China for implementation of its reforms agenda. Hong Kong has been the main test field for nearly all the new open-up policies introduced by Beijing, including the recent R-QFII (RMB Qualified Foreign Institution Investors) program and the Shanghai–Hong Kong Stock Connect. The first-mover advantage has helped Hong Kong secure the rapidly growing source of financial revenues from the offshore yuan business. Hong Kong maintains a comfortable lead over other locations, such as Singapore, London and Frankfurt.

Michael McDonough, Emerging Markets Analyst at  Loomis, Sayles & Company, adds:

Hong Kong, for here and now, is still the finance capital of Asia ex-Japan. We believe the pro-democracy protests do not undermine this leadership.

The protests do highlight that Hong Kong is ultimately a city that belongs to China. Within that, it raises a broader question of Hong Kong’s ultimate positioning: a city of eight million, within China, a country of 1.4 billion. Beijing is the political capital. Shanghai is the industrial capital. Hong Kong has been the financial capital, the place where international (offshore) investors have sought to invest in China.

With the new Shanghai–Hong Kong Stock Connect, both cities, the country overall and investors (Chinese and international) will benefit. However, over the intermediate term, we believe Hong Kong’s relevance will be less dominant as Hong Kong becomes enveloped in China and international investors gain comfort and access to the onshore market.