Future is bright for emerging markets

Future is bright for emerging markets

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Institutional investors are increasingly looking for exposure to developing markets, as economic power shifts east and south, according to Cian Burke, head of HSBC Securities Services.

In line with predictions that by 2050 emerging economies will have increased five-fold and become larger than the developed world, Burke says that institutional investors are already gearing up to take advantage of the future world power structure.

"As the global economy evolves, institutional investors are developing investment strategies to take advantage of opportunities for increased yield and diversification and we are seeing asset allocation increasing in emerging markets," said Burke.

"Alongside these changes in asset allocation, there is also a demand for greater governance, transparency and control to underpin the investor appetite for growth – expertise on the ground is becoming essential."

At the same time, opportunities to invest in developing markets are increasing rapidly.

"Perhaps most significantly, the anticipated opening of the Saudi stock market in 2015 to Qualified Foreign Investors (QFIs) unlocks one of the last large markets closed to foreign investors. With half of the region’s market capitalization and two thirds of the trading turnover, Saudia Arabia clearly dominates the Middle East financial landscape," said Burke.

"Full details have yet to be fleshed out, but the draft QFI regulations have been announced and the final regulations are expected to be released in H1 2015 following a consultation process.  We expect initial market opening to take place in mid-2015."

China opened up its market to foreign investors through the Qualified Foreign Institutional Investor scheme (QFII) in 2002 and RMB QFII scheme in 2011, channeling strong demand from global investors. By August this year, 354 foreign institutions had obtained QFII/RQFII licenses and the approved investment quota had increased to $105bn. 

This has been followed by the opening of Hong Kong-Shanghai Stock Connect, which further improves foreign investor's access to mainland China.

"China’s regulators are looking to grow the investment from foreign institutions to around 10% of total market capital or $433bn at the current value, so we anticipate that this threshold will continue to increase progressively," said Burke.

Driven by the unprecedented pace of RMB internationalization, the RQFII scheme is attracting considerable attention from foreign asset managers. RQFII licenses are now available in London, Singapore, France, Korea, German and Taiwan, with Australia, Malaysia, Switzerland and Luxembourg next on the list. The total approved quota for RQFII is already $46bn – more than three-quarters the volume of the QFII scheme which was launched 9 years earlier.

Markets are also opening in the Middle East. In 2014 the capital markets of UAE and Qatar were upgraded by MSCI to their Emerging Markets index. This has attracted a steady stream of foreign institutional investors into the two markets, including both active fund managers and passive fund managers.

India too remains a market of significant investor interest. Investor appetite for the market has resulted in a 50% growth in HSBC’s assets under custody in the last 12 months alone. The launch of the Foreign Portfolio Investor regime in mid-2014 will widen market access further still.

"There’s little question that demand exists for greater access to developing markets, and opportunities for investment are only going to keep growing as these economies continue to grow and mature. Having access to expertise on the ground in these locations will undoubtedly become increasingly important for investors and a source of competitive advantage for service providers," said Burke.

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