Paul Smith, CFA Institute managing director for Asia Pacific, reveals his views on Asian financial markets and job opportunities in the professional financial services.
Q: Are equities in Asia in a bubble?
The problem in Asia it is always very difficult to generalise. Asia covers so many types of markets from India in the West up to Japan and then New Zealand. And it’s also very hard to say that all markets are in a bubble or not. They are near historically sensible levels. But there are exceptions; China’s and Hong Kong’s equities relatively speaking are quite cheap.
The backdrop to equity investing is quite negative as the world in general is struggling for growth and I think in general liquidity is squeezed. The banking system still tries to unwind the excess leverage so as a result liquidity is contracting against a backdrop of slowing economic growth. It is very hard to make an aggressive case for equities. Most fund managers are still very cautious and quite conservative.
But we have recently seen the market rally.
Well the American quantitative easing is a short term stimulus to financial markets. There is also the perception that Europeans are beginning to resolve some the of the issues within the euro and overall indebtedness of European governments. Both are helping to support financial markets. My suspicion is that what happens is a short-term boost to the market. But long term the trend is still quite negative. When people stop looking at the short-term influence and focus on the long term, say the next five years, it is hard to be positive. Banks have problems with their balance sheets. In the West it is very hard for banks to finance economic growth. At individual and company levels it is very hard to get confidence. In the West particularly, people worry about their jobs.
Why do you think that equities in China and Hong Kong are cheap?
The Chinese markets have had a very poor year. Generally investors focus on the politics, as a leadership change is coming up in November and we also have slowing economic growth. Investors are negative about China due to some political headwinds and some social dislocation as economic growth slows down. So the markets are under-supported. I suspect that it has been overdone. Economic growth would remain strong at about 6.5 per cent this year. I hope political transition would be handled smoothly. And eventually international investors would regain their confidence.
What about Hong Kong?
The Hong Kong market has been driven by international money flows. It was also influenced by what’s happening in China. If the situation in China is clarified, it would become more positive.
Are you concerned about territory rows between China and other countries – Japan, South Korea, Vietnam and the Philippines?
Yes, I’m very concerned. The disputes are extremely damaging to investor confidence. I hope that in a world of increasing interconnectivity, common sense will prevail.
Can Asian banks fill the gap left by Western banks?
Yes they are strong and have cash, but that’s only part of the picture. Western banks in the past played quite a significant role in the region, but now are in retreat. So it is a competitive opportunity for Asian banks and a lot of them are taking advantage of that. But I’m not sure there is sufficient liquidity in Asia’s banking system as a whole. You’ve got Asian banks taking some of slack but at the same time Western banks are pulling out. So it is a complicated picture. Most smaller businesses in Asia find it quite hard to get banking finance. So Asian corporates are still struggling the same way Western corporates are struggling to get access to good quality finance.
Is it much easier for companies to raise funds via capital markets?
There is a lack of confidence and a liquidity squeeze. We live in a risk-averse world. For high quality issues there is an appetite and there is dollar investment. It is not a question for high quality issues but for second-tier companies, equity raising remains very tough.
What about the prospect for professional job opportunities in Asian financial services? Are they promising ?
Yes, the market will grow in the next few years. Two areas I would particularly highlight are both of relevance to CFA [chartered financial analyst] students. First there is portfolio management in general. Over the next decade there would be considerable private and public savings in Asia markets either through pension funds, insurance companies or banks. This will give rise to strong growth of financial services and job opportunities. The other area is private wealth management. Asia has a very poorly developed industry. I think going forward there is a need for private wealth management expertise to help people as they get wealthier in Asia to invest in a structured and a longer-term fashion.
Can we trust our financial analysts or fund managers?
I think it is an excellent question. Obviously what happened over the last five or six years is there has been a complete collapse of trust in the financial services industry. It is bad for business. But also our CFA has existed for 50 years as a chartered programme. Business ethics has also been at the centre of what we have talked about. So we believe our chartered holders are people who the general public can trust. When you see someone holding a CFA designation you automatically know this is a person who operates to the highest professional standards and puts your clients’ interest before your own.
But unfortunately not everybody in financial services is a CFA charter-holder. And honestly, we have a few bad apples occasionally within our ranks as well. We have a very stringent programme to help identify those people and help remove CFA charters from them. We work very hard to maintain the quality of our memberships and to make sure the public can rely on charterholders.