Featured Topic: Economy

ChinaChina’s economy is struggling. The devaluation of 2 percent last month added fuel to this fire, almost drowning growth strategies. Next could be a currency war. Concerns about China are also leading to worries about international growth, a commodity price collapse and the timing of an increase in US interest rates.

And let’s not forget that we’ve been there before. Memories are still ripe over the Asian crisis back in 1997/98.

But are things really all that bad?

Apparently not, according to Goldman Sachs that conducted a study analyzing various macro factors such as: banking reserves, equity valuations, foreign exchange reserves and sovereign debt.

According to Goldman Sachs, however, China’s market is one of the safest in Asia. Rather, Malaysia and Thailand are not doing well. It suggests that the “China drama” is just that – drama – and that really while there is definitely cause for concern (volatile stock market there, devaluation of the yuan etc.), there is still room for hope for China’s market.

Still, irrespective of the study, there is a lot of talk about China’s market slump which does have to be addressed.

indonesiaIndonesia has become quite the hub for consumer firms. As the region becomes increasingly middle class (closet to 250m of its residents are in that category), the high-tech buzz around Indonesia seems to have caught on to a whole slew of e-commerce startups.

One such company that clearly finds Indonesia an attractive region is SoftBank and thus it recently invested $100m in Tokopedia – the online venue for Indonesian citizens and companies to open and maintain their online stores for free.

So apart from the increase in the middle class population in Indonesia, what is making the region so attractive to foreign investors? A change in the law could be one factor. Until April 2014, many businesses were closed to foreign investments, with others posting incredibly high restrictions. Since then however, the Negative Investment List came into effect, changing this. Perhaps this was why the country’s GDP expanded by 5.12 percent between April and June. And with this change, businesses saw a change in attitude from the region’s government that has since then been seeking to develop a far more open economy.

Added to that factor is the Asean Economic Community that is due to come into play at the end of next year.

First Asia Capital analyst David Nathanael Sutyanto, recently said that due to the sharp increase in subsidized oil fuel price, there has been a review of Indonesia’s fundamentals. While eventually this will result in an improvement of Indonesian economic fundamentals, there still needs to be government anticipation of the potential short-term negative impacts.

Embraer, the Brazilian major airframe maker, has had a presence in Asia for a little over a decade. According to the company, China is now the world’s second largest market for aircraft. Embraer’s Beijing office, as well as a joint venture to build ERJ 145 jets in Harbin, are now showing their true value. The company operates primarily from Singapore, but has managed to expand its presence throughout the entire Pacific Rim.

Embraer CEO Frederico Curado explained that the company’s decision to invest heavily in the region has proven worthwhile. He added that the decision was made with careful planning, and implemented following a specific strategy- splitting the company’s marketing efforts into two regions: China, and the rest of Asia.

“I think it was the right call to separate our focus,” Curado said. “China is a specific market and demands a specific focus… I think the decision was key to our success in China.”

“China is still a planned economy,” he added. “For example, business jets have a major application within the airlines, so take Air China, take Hainan, take China Eastern, they all operate business jets within their infrastructure, so things are kind of tied. I think in China one business helps the other maybe more than in other places… There are new players coming. For example, Minsheng, one of our customers and a large operating lease facility, they belong to a bank. The market is just really growing right now; the major players are establishing themselves now; it’s a perfect moment to be there.”

As many investors and entrepreneurs know, Asia is currently teeming with business and investment opportunities. Adam Roseman, an investment banker and businessman with experience in the region, recently launched a new project called FansTang. Based in Shanghai, the “hall of fans” aims to provide American celebrities with connections throughout China. According to Roseman, the FansTang data-driven approach is one-of-a-kind. The company specializes in endorsement deals, PR trips and events, and is also producing a daily segment for Shanghai’s satellite network which focuses on Hollywood.

“There was no People Magazine and no Twitter with a common language,” Adam Roseman explained. As a result, Chinese fans had no way of connecting with their favorite stars. “On the other hand, Hollywood stars have demonstrated a clear interest in China. Our goal is to obtain data, whether it’s for them in negotiating film deals or concert promotions, or linking them with the right ad agency. Given the extreme important of China across all these groups, being able to help build relationships with the fans and to activate marketing campaigns is very valuable.”

Roseman added, “We are a data-driven business, and we keep on top of online views, TV and music downloads and other trends every day. We have a better sense than anyone at any given point in time what’s popular and relevant in this market, and it doesn’t always correlate with what’s already popular in the U.S.”

“The key to monetizing China is to understand local Chinese consumers and provide them with what they want, while creating competitive barriers in an area that local Chinese entrepreneurs cannot easily replicate on their own,” Adam Roseman said in an interview. “We are seeing success in doing this because we are bridging the gap between China and Hollywood, not only for our fans but for celebrities as well.”

Roseman explained that FansTang is best equipped to serve Hollywood stars because it combines a thorough understanding of Western culture with Roseman’s extensive experience working in China.

“Chinese business culture and the culture of Hollywood are two very distinctive, strong cultures,” he said. “To be able to cross that bridge, you have to have both patience and experience.”

Over the past year, hedge funds have increased their allocation to Asian quantitative strategies. Dealers have reported up to 50% increase in risk capital allocation throughout the region as a result of the growing Japanese equity market.

Quantitative investing uses strategies such as statistical arbitrage or high-frequency trading. The technique involves the application of data analysis across a wide range of areas including equities, historic prices, earnings and analyst recommendations.

Anthony Byrne of Deutsche Bank explains that the increase in risk capital in Asia comes primarily from US and European hedge funds.

“We have seen a strong pick-up in the amount of risk allocation to quantitative investing from hedge funds in the long/short format over the last 12 months. More than 50% of risk capital allocated to the region within our prime brokerage is quantitative in some form or another. Of that, over half comes from hedge funds that are household names with in excess of $10 billion in assets under management,” he said.

The head of quantitative strategy at a European bank in Hong Kong added, “When you have more volume, more market activity, dispersion and different types of investor classes you have a second order effect which is positive in relation to the quantitative investor who can look across a vast range of factors and take advantage of where they see pricing differences.”

Jones Lang LaSalle’s Hotels & Hospitality Group (JLL) has revealed that the total value of hotel transactions in Asia has increased 145% in 2013. In fact, JLL claims the industry is having “its strongest year since the global financial crisis.”

Key markets such as Singapore and Japan are responsible for the growth, according to JLL Hotels & Hospitality’s Mike Batchelor.

“Hotel trading performance in Asia has experienced significant turnaround over the past two years and nowhere more so than in Singapore,” he explained. “This quarter’s landmark transaction of the Grand Park Orchard Hotel and adjoining Knightsbridge retail podium heralded the single largest asset deal in the city’s history. Going forward, we are aware of approximately $1.3 billion in exchanged contracts that will contribute to a very strong pipeline over the remainder of the year.”

Batchelor added, “As investor confidence in the region continues to rally, the availability of investment grade hotels is becoming increasingly scarce and, as a result, we are seeing buyers turn their attention towards markets such as Thailand, Seychelles and the Maldives. The Maldives is proving a particular hot spot where contracts have just been exchanged on what will be our fourth transaction in the country in as little as two years.”

 

According to Jones Lang LaSalle’s most recent report, Asia’s hotel transaction volumes have doubled since last year.

Investments in the tourism markets in Singapore, Hong Kong and Tokyo resulted in a 85% increase from last year, with transaction volumes reaching $1.3 billion during the first half of 2013. Tourism in Thailand and the Maldives also contributed to the surge.

Mike Batchelor of JLL said: “During the first half of 2013, we have seen a growing number of transactions, including those at the portfolio level, and improved investor sentiment translate to increased sales. The divergence between vendor and purchaser expectations that served to restrict investment activity in 2012, has improved this year leading to a number of landmark transactions in the first half.”

“Throughout Asia, we are also aware of circa $400 million in hotel transaction volumes to be confirmed soon and a further $1 billion in due diligence.”

According to AT&T, Asian companies are leading in IT investment, surging past their European rivals.

Research that was published by Insead reveals that Asia-Pacific companies are spending the majority of their IT budgets on the newest technologies, including mobile devices and the cloud. The business school explains that investment in emerging technologies like these increases competitiveness significantly.

Insead lists three primary categories: mobile internet-connected devices like smartphones, laptops and tablets; cloud services; and collaboration tools such as conferencing and instant messaging. On the other hand, there is the more traditional side of IT which includes hardware and enterprise software.

Asian companies have revealed their plans to increase their IT budget by 30% before 2015. While European companies also intend to spend more on new technologies, they will not be able to match Asian budgets.

Still, the report warns that Asian companies “must be careful not to rush too quickly to adopt new technologies” without a platform.

AT&T regional vice president Andrew Edison added:

“Increasing productivity is one of the primary challenges facing European companies today. New technologies like cloud offer great opportunities to do this, which some high performers are demonstrating.

“However, simply adopting the newest technologies is not the answer, and is in fact a great risk. The secret is a mature platform and avoiding the creation of ‘infrastructure spaghetti’ in the rush to adopt the latest tools.”

 

The market reopened this week with the Hang Seng Index 1.6% higher than it was before the holiday. The Nikkei Stock Average also climbed 1.4% in Tokyo, reaching one of its highest levels in over five years.

The increases may be the result of a record finish for the Dow industrials and the S&P 500 as U.S. economic data looks up.

“The share-market rally across the world is putting the ‘don’t chase a rally’ adage to the test, as bourses continue to record territory,” said Matthew Sherwood of Perpetual. “Quality is essential in this market, as prices are distorted, and the foundations aren’t strong.”

Akira Amari, Economy Minister of Japan, has stated that further weakness in the yen may be harmful. As a result, the local currency is rising.

“Japan’s turbo-charged stimulus measures have helped contribute to a solid gross domestic product growth outcome in the first quarter and to the rally in risk assets, but much needs to be done in terms of reforms to help sustain growth,” explained Credit Agricole’s Mitul Kotecha.

 

A new report has revealed that Asia is the leading entity when it comes to investing in and protecting drinking water and other natural resources. The report states that all the region’s countries invested over $8 billion to enhance water security back in 2011.

Conducted by US non-government organization Forest Trends, the “State of Watershed Payments of 2012” study was released last Thursday. It reveals that $7.46 billion were invested in 83 watershed projects in Asia alone.

This approach, known as investments in watershed services, or IWS, considers the natural landscape and the social and economic conditions. These factors often impact the health of the natural environment.

The projects go by other names as well, including payments for watershed services, reciprocal agreements for water, water funds, eco-compensation, benefit-sharing arrangements, source water protection, green infrastructure investments, etc.

Michael Bennett, senior researcher at Forest Trends, explained:

“Growing pressure on limited freshwater resources is one of the factors why there is an increasing trend in watershed investment in Asia and the rest of the world.”

He added that water is especially critical in China, and has a significant impact on their future economic growth.