Asia Summit: Treasure Hunters—Finding Value in Today's Market
The Terrain Is Changing as Investors Seek to Boost Returns
Against an anxious backdrop of roiling Chinese markets and the Federal Reserve meeting in Washington, a panel of financiers and business leaders discussed their strategies during the panel titled “Treasure Hunters: Finding Value in Today's Market.” These experts offered varied approaches to the debt markets, explored the uncertain future of the banking industry, geopolitical hazards, and the challenges of investing in a “1 percent world.” Their favorite topic, though, seemed to be the prospects ahead as Asian capital markets develop.
Asia’s credit market is worth about $35 trillion, Rob Petty pointed out, and that’s ex-Japan. The co-founder of Clearwater Capital sees an open, expanding field with few providers, also known as competitors. “How many asset managers do you know doing credit across Asia?” he asked rhetorically.
That opportunity can take various forms. Paul Horvath, CEO of Orchard Global, favors teaming up with the megabanks that serve the region (and the rest of the world) for their entrenchment, scale, and knowledge. Expressing that view, Horvath waded into the ongoing debate in financial circles about whether banks will be “disintermediated” by technology-driven upstarts and less formal, more localized providers who will serve the throngs of new depositors and borrowers. Petty is in the other camp, the disintermediators. His firm created a “nonbank finance company” in India, with the help of capital from sovereign wealth funds. He’s also developing lending platforms in China, which he called a more difficult place to navigate.
Geopolitics is a major theme for these risk-sensitive investors. Explosions in a powder keg like the Middle East can damage portfolios as they damage lives. Takumi Shibata, president and CEO of Nikko Asset Management, introduced the issue into the discussion. Horvath agreed with the need for caution as a perilous future unfolds, but asked how caution can be implemented, underscoring the difficulty of hedging against dire and unpredictable events. He then made an interesting comparison between the post-World War II world and the post-financial crisis world—the first a go-go era when it was great to own stocks, the latter marked by weak growth, which he forecasts between -.5 percent and 2 percent annually.
The golden age is over, “the big growers have grown,” he said, and much of the world now looks like Japan after its bubble deflated. So how does one invest in that climate? “We don’t need the world to grow,” Horvath said. “We just need to lend money at the top of the capital structure.” If stuff hits the fan, you have security. If not, you just get paid back and make your yield.
Shibata urged investors to consider Asian banks, which he says are pressured by regulators to behave like utilities. They’re allergic to risk, but the debt they issue is priced like they’re driving drunk and blindfolded. Shibata, also vice chairman of the Japan Investment Advisers Association, spoke about building out Asian financial markets to fund corporate growth and public infrastructure as the region develops. The banks are healthy but not designed to do this, he said, adding that regulators should focus on cultivating sources of long-term capital.
These strong, stable banks are nevertheless vulnerable to “people who will disrupt the incumbents,” he warned, echoing Petty’s view. Shibata’s big-picture advice: “Combining the great trend of the growth of emerging markets with the growth of emerging financial services, there’s a good chance that you can make money.”