Tomorrow's growth markets

How, where and why are global investors turning to the world's high growth markets?
What are they looking for in key markets and what would trigger more flows from them in the future?

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Investing in China: Simplicity…

Today we are seeing a China Access story that is increasingly split into two parts.

For the first wave of experienced China players, we may have done enough to meet the technical criteria for index inclusion but there are continuing pressures to normalise market rules and to improve overall usability. The concept of fungibility and transferability between channels has come to the fore(as investors seek to remove risk by consolidating operating models) as have challenges in account opening (linked largely to continuing, high-pressure index inclusion events).

But in parallel we now have a constituency of newer China investors who, seeing China as an investment destination for the first time, expect the market to be as simple as any other: with one access route, one operating model and an application process that is simple. This puts great pressure on Banks and service providers to move away from today’s “what do you need?” complexity towards a simple “gateway” offering for China.

Tomorrow’s China roadmaps need to cater to that desire for simplicity – so that we can sustain the record-rate of asset flows from the last few years.

A new era and a new breed of China investor

In 2014, foreign holdings of Chinese securities made up less than 1% of the total Chinese markets. Since then, we have begun to witness a landmark transfer of over USD740 billion into Chinese securities, taking the level of foreign participation to 4% today – and climbing.

With many of the largest index inclusion events now behind us, foreign flows into China are now driven more by market factors than by the prospect of new index weightings changes. Repeated, successful index rebalancings have not only driven large numbers of passive investors to open accounts in China, but they have also created a growing community of investors who are comfortable stock-picking in China and who see Chinese investments as increasingly core to their global exposures.

With 98% of investors ready to see their China holdings grow, the next phase of this market’s evolution will be driven not only by experienced, China experts but also by an increasingly diverse range of market participants (including hedge funds, ETF managers and wealth managers in the US and Europe).

Investing in China Simplicity and transferability as the new priorities

Today we are seeing a China Access story that is increasingly split into two parts.

For the first wave of experienced China players, we may have done enough to meet the technical criteria for index inclusion but there are continuing pressures to normalise market rules and to improve overall usability. The concept of fungibility and transferability between channels has come to the fore(as investors seek to remove risk by consolidating operating models) as have challenges in account opening (linked largely to continuing, high-pressure index inclusion events).

But in parallel we now have a constituency of newer China investors who, seeing China as an investment destination for the first time, expect the market to be as simple as any other: with one access route, one operating model and an application process that is simple. This puts great pressure on Banks and service providers to move away from today’s “what do you need?” complexity towards a simple “gateway” offering for China.

Tomorrow’s China roadmaps need to cater to that desire for simplicity – so that we can sustain the record-rate of asset flows from the last few years.

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What are Hong Kong investors looking for in a broker?

And so how to react? Unlike their US-peers, Hong Kong brokers have no ability to recycle their retail flows (by passing them into the wholesale market) and so their options are limited. First, they can broaden their offerings to include new asset classes (such as option overlays, bonds and mutual funds) or new capabilities (such as night-trading in the US market) – putting significant strain on existing broker platforms designed to run only for a single market and a single trading day. Or they can expand their margin lending revenues by broadening the range of assets that investors can leverage (into US equities, for example) – but that requires investment in new risk management tools for global securities. Either way, growth requires investment and short-term cost.

Whilst the renewed IPO momentum in Hong Kong this year has provided some respite for brokers, the longer-term equation for securities houses is inescapable: how to drive customer scale, reduce unit costs and expand quickly? The metaphor of changing the wheels of a car whilst driving 100 km/h seems extremely apt.

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