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Putting Investors First? Issues in Investing and Regulating Securities Markets
Andrew ShengDistinguished Fellow, Asia Global Institute, The University of Hong KongThailand Investment Conference 2017, Bangkok22 June 2017
Congratulate SEC Thailand on 25th Anniversary
• Congratulations to SEC Thailand, under Khun Rapee, his predecessors and colleagues, who have made Securities and Exchange Commission of Thailand one of the most respected regulators in the region and the stewardship of the securities market in Thailand as one of the most vibrant in Asia
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Thai Stock Market Steady Progress ASEAN Market Cap 2003‐2017 (US$ bn)
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Country 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Indonesia 54.7 73.3 81.4 138.9 211.7 98.8 214.9 360.4 390.1 428.2 346.7 422.1 353.3 433.8 464.2Malaysia 160.8 181.6 180.5 235.6 325.3 189.2 289.2 408.7 395.6 466.6 500.4 459.0 383.0 363.1 411.5Philippines 23.2 28.6 39.8 67.9 102.9 52.0 86.3 157.3 165.1 229.3 217.3 261.8 238.8 239.9 262.4Singapore 148.5 217.5 257.3 384.3 539.2 265.0 481.2 647.2 598.3 765.1 744.4 752.8 640.0 649.5 723.6Thailand 119.0 115.4 123.9 140.2 197.1 103.1 177.0 277.7 268.5 389.8 354.4 430.4 348.8 437.3 457.1
Note: Stock market cap end‐Dec (2003‐2016), except Apr 2017. Data sources: WFE, IMF Article IV, World Bank and author’s calculations.
ASEAN‐5 Stock Market Cap, 2003‐2017 (US$ bn)
Thai Stock Market now 105% of GDPASEAN 2003‐2017
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Country 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Indonesia 23.3% 28.5% 28.5% 38.1% 49.0% 19.4% 39.8% 47.7% 43.7% 46.6% 38.0% 47.4% 41.0% 46.6% 45.5%Malaysia 145.9% 145.6% 125.8% 144.8% 168.1% 82.0% 143.0% 160.3% 132.8% 148.4% 154.8% 135.8% 129.3% 122.6% 135.2%Philippines 27.7% 31.3% 38.6% 55.6% 68.9% 29.9% 51.3% 78.8% 73.7% 91.7% 79.9% 91.9% 81.6% 79.0% 82.4%Singapore 153.1% 190.5% 202.0% 260.0% 299.6% 137.9% 250.1% 273.8% 217.4% 264.5% 247.9% 245.8% 218.7% 217.3% 247.9%Thailand 78.1% 66.7% 65.5% 63.2% 75.0% 35.4% 62.9% 81.5% 72.5% 98.1% 84.4% 106.5% 88.3% 106.7% 105.6%
ASEAN‐5 Stock Market Cap as % GDP, 2003‐2017
Note: Stock market cap end‐Dec (2003‐2016), except Apr 2017. Data sources: WFE, IMF Article IV, World Bank and author’s calculations.
Key Points
• Global and Asian growth recovering, but geopolitical risks remain high
• Securities markets and Investment environment undergoing major transformation under the disruptions from many quarters: QE, Technology, Climate Change, Demographics, Social Inequalities, regulation and intense competition
• What is happening to industry?• How is technology transforming business model?• Role of Regulation and Conduct
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Global FinanceMegatrends in Geopolitics, Technology and Business models
Section 1
Real GDP growth (year‐over‐year)
Global and Asian GDP Overall UpGS and Consensus forecasts 2016‐2018
7^GD estimates for annualized growth rate of potential output from 2016‐2020^Fiscal year basis (forecast). 2016 is India FY17 (April 2016‐Mar 2017)Source: Goldman Sachs. 2017. "China: Monitoring Financial Stress in Real Time."
Eight Trump Effects on U.S. & Global Growth
• Protectionism via border tax could disrupt world trade (dead on arrival in Congress?)
• Border tax would likely raise inflation, cut imports, boost exports and raise tax revenue, possibly by over $1.2 trillion over a decade
• Raise U.S. inflation by 0.5‐1%, and reduce real GDP by 1.0‐1.5%• Require looser fiscal and tight monetary policies to complement• Tax cuts + infrastructure & defense spending stimulate
consumption, but if spent on services, little benefit on trade• Higher interest rates will induce capital inflows, creating
uncomfortably strong dollar and wider fiscal and current account deficit
• Neglect of UN, WTO and global public goods could lead to more regional unrest e.g. Middle East
• Hawkish military stance risks conflicts in Korea, South China Seas
8Sources: Davies. 2017. “The Worrying Macro‐economics of US Border Taxes.” The Financial Times; and Eichengreen. 2017. "Powerful Forces Will Lead to a Strong Dollar Under Trump."
Long run global total factor productivity growth for AEs and EMEs
Productivity Falling in AEs and EMEs
9Data source: Penn World Tables database. Notes: Percentage change in median TFP growth; five year moving average.Source: Haldane. 2017. "Productivity Puzzles." Bank of England.
Capital Flows to EM Waiting for Fed
10Data sources: IIF, JPM.Source: AMRO. 2017. "ASEAN+3 Regional Economic Outlook 2017."
Central Bank Balance Sheets, 2000‐2017 (% GDP)
Unwinding QE Won’t Be Easy
11Source: DSGAsia. 2017. "Where has All the Money Gone?"
Asia Ex‐Japan Still Strong (5%‐6%) Growth (2016‐2017)
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Real GDP Growth (% yoy)
Data sources: Consensus Mean Forecast from Bloomberg (as of 31 March 2017).Source: AMRO. 2017. "ASEAN+3 Regional Economic Outlook 2017."
Global GDP and GDP of Top 10 Economies
Concentration – Top 10 Economies 79.8% of Global GDP and Wealth
13Data source: Data are from the World Bank, and as of the end of 2015.Source: CFA. 2017. "Future State of the Investment Profession: Pursuing Better Outcomes—for the End Investor, the Industry, and Society."
Disruptive Technology and RegulationsLong‐termism over Short‐termism, Disruptive Tech, Stewardship, Financial Regulatory Outlook, Macro‐pru Approach
Section 2
Disruption Everywhere
15Note: Market data as of June 10, 2016. Data sources: CB Insights; Crunchbase; Funderbeam; Bloomberg, June 2016.Source: OICU‐IOSCO. 2017. "IOSCO Research Report on Financial Technologies (Fintech)."
Automation to Reach 50% of All Activities by 2037
16Data source: McKinsey Global institute analysis.Source: Manyika. "Technology, Jobs, and the Future of Work." McKinsey.
IOSCO: Global FinTech Landscape Mapped Across 8 Categories
17Visualization based on ~1,800 FinTechs receiving the highest amount of private funding. Dataset mapped with Quid and allowed to cluster based on similar products, technologies, customers etc. 1) Data based on over 8,800 companies which were discovered across over 10 data sources. Total funding based on date of funding. Total companies based on founding year. Data as of November 2016. Data source: Fintech Control Tower, Expand, November 2016.
Source: OICU‐IOSCO. 2017. "IOSCO Research Report on Financial Technologies (Fintech)."
FinTech Investments Grew Rapidly Since 2000
18Visualization based on ~1,800 FinTechs receiving the highest amount of private funding. Dataset mapped with Quid and allowed to cluster based on similar products, technologies, customers etc. 1) Data based on over 8,800 companies which were discovered across over 10 data sources. Total funding based on date of funding. Total companies based on founding year. Data as of November 2016. Data source: Fintech Control Tower, Expand, November 2016.
Source: OICU‐IOSCO. 2017. "IOSCO Research Report on Financial Technologies (Fintech)."
Financial Ecosystem – Important Feedbacks With Trust as Core
19Source: CFA. 2017. "Future State of the Investment Profession: Pursuing Better Outcomes—for the End Investor, the Industry, and Society."
CFA: Six Megatrends Create Four Scenarios
20Source: CFA. 2017. "Future State of the Investment Profession: Pursuing Better Outcomes—for the End Investor, the Industry, and Society."
World turned upside downChange in revenues, Asset Managers vs. Wholesale Banks, 2010‐19(f), $bn (% CAGR)
Finance Industry Under PressureOliver Wyman/Morgan Stanley 2017
21Source: Oliver Wyman & Morgan Stanley. 2017. "The World Turned Upside Down."Data source: Oliver Wyman analysis.
Pressure points and value are shifting across the securities industryTotal value captured 2016 $BN, Outlook to 2019
All Financial Intermediaries Under Pressure
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1. Includes Inter Dealer Brokers, Exchanges, Central securities depositories, Custodians, Data providers. 2. Defined as organizations that participate in only one activity within this table, to include Non‐Bank Liquidity Providers, specialist data providers and independent corporate advisory firms. 3. Represents the incremental costs borne by retail investors to access Asset Management services, not including retail distribution fees Data source: Oliver Wyman analysis.Source: Oliver Wyman & Morgan Stanley. 2017. "The World Turned Upside Down."
#1 Revenues down. Compliance costs and capital requirements up
#2 Industry’s average cost‐to‐income ratio was 68% (Q1 2016)
#3 Machines can take on 30% of current workload
#4 Need Operating model flexibility. Leverage on low cost sites
#5 Only 7% of U.S. graduates saw banking /capital markets as a top industry to work for. 82% of employees expect digitization of processes in 3 years
#6 78% of users expect tailored solutions. 76% of users want a self‐directed experience
#7 90% of respondents: cloud helps businesses. 60% of institutions : cloud‐based entrants will challenge traditional models
#8 2010‐2015: $47 bn global investment in fintech
#9 40% of trading commissions allocated to research (2000‐2003). Research budgets to shrink further by 25%‐30% or $15 bn
#10 30% operational cost saving by blockchain adoption. 2018, a "year of growth" in blockchain
10 Challenges to Investment Banking 2017
23Source: Accenture. 2017. "Top 10 Challenges For Investment Banks 2017 ."
Banking Future Growth Value Analysis(% of enterprise value)
The next “S” growth curve for banks
FIs Lagging in Digital Transformation
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GAFA = Google, Apple, Facebook, Amazon *Methodology: The analysis of future growth value referred to in this paper was developed by Accenture Research based on financial performance, as of March 2017, of GAFA, 40 listed fintech companies (e.g. card networks, payments processors, software vendors, P2P lenders, robo‐advisors etc.) and 73 banks. The analysis depicts the breakdown of the enterprise value of a firm into current operations value and future value of investments. The value of current operations is the value of the current business portfolio. The future value of investments reflects investors’ expectations regarding ability to exceed the value of current operations. A positive future growth value is a premium investors are willing to pay beyond the value of current operations. The analysis also includes a qualitative assessment of the digital capabilities of 73 large banks worldwide. We identified 22 digital leader banks that have been more vocal about their digital strategies than others.These leaders show common traits. For example, their leadership have clearly set future direction announcing multi‐year digital transformation plans, released multiple digital services, appointed chief innovation officers to identify new partners, managed innovation labs, invested in multiple fintech companies, attracted talent, and established new relationships to adopt new financial technologies. Data source: Accenture Research analysis on Capital IQ data, March 13, 2017.
Source: Accenture. 2017. "Winning in the Digital Economy."
Survey of countries with most promise for disruptive technology breakthroughs with global impact
Top 7 people in global technology innovation Leading companies in driving technology innovation
U.S. and China Expected to Have Most Impactful Disruptive Technologies
25Partial lists shown. Percentages do not sum to 100%. Data source: KPMG Technology Innovation Survey, November 2016.Source: KPMG. 2016. "The Changing Landscape of Disruptive Technologies."
Aggregate gauge of short‐termism
Short‐termism in Firms on Rising Trend
26Data sources: McKinsey Corporate Performance Analytics; S&P Capital IQ; McKinsey Global institute AnalysisSource: McKinsey. 2017. "Where Companies with a Long‐term View Outperform their Peers."
Long‐term Firms Show Stronger Performance
27Data sources: McKinsey Corporate Performance Analytics; S&P Capital IQ; McKinsey Global institute AnalysisSource: McKinsey. 2017. "Where Companies with a Long‐term View Outperform their Peers."
U.S. Net Equity Issues by Nonfinancial Corporations Were Minus $4.5 trn (2006‐2015), Driven by Stock Buybacks
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Net equity issues of nonfinancial corporations in the United States, 1946‐2015,by decade, in 2015 dollars, and as a percent of GDP
Data sources: Board of Governors of the Federal Reserve System, Federal Reserve Statistical Release Z.1, “Financial Accounts of the United States: Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts,” Table F‐223: Corporate Equities, March 9, 2017, at https://www.federalreserve.gov/releases/z1/current/.Source: Lazonick.2017. "Marketization and Financialization: How the U.S. New Economy Business Model Has Devalued Science and Engineering PhDs."
Implications on Business Model and Culture Long‐termism over Short‐termism, Disruptive Tech, Stewardship, Financial Regulatory Outlook, Macro‐pru Approach
Section 3
Objective: To shape a trustworthy, forward‐thinking investment profession that better serves society
CFA FUTURE OF FINANCE
30Source: CFA Institute 2017.
Investment Conduct Strongly Influenced By Advertising And Marketing Pressure: FCA (UK)
31Source: FCA UK. 2017. "From Advert to Action: Behavioural Insights into the Advertising of Financial Products.“Occasional Paper 26.
Risks and Opportunities for Investment Professionals – CFA
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Industry disconnected from purpose
Key Challenge for Investment Professionals –CFA Survey
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Wealth advisory models
Age group Gender balance
Highly educated Wealthy investors
Wealth Advisory Models and Client Breakdown
34Source: Accenture. 2017. "The New Face of Wealth Management: In the Era of Hybrid Advice."
5 Impacts on Wealth Management Landscape
1. Competition intensified. Other FIs eating into AuMclient base. Non‐FIs (20%) and online wealth managers (30%) by 2018
2. Demographics shifted. More women and millennials to control large share of assets
3. Clients have new expectations: Better transparency, lower fees. Smarter, looking for ETF, robo‐advice and no loyalty to bank or asset manager
4. Digital has arrived5. Regulation. Increased regulation around fraud
prevention and fiduciary responsibility
35Source: Accenture. 2016. "Future of Wealth Management."
Role of RegulationsLong‐termism over Short‐termism, Disruptive Tech, Stewardship, Financial Regulatory Outlook, Macro‐pru Approach
Section 4
List of companies with “excellent” recognition level, by alphabetical order (score range: 90‐100)
Top Quartile Companies by Market Cap (10,000+ MB.), by alphabetical order
Corporate governance and market cap rankings of top 20 Thai firms, 2016
Most Thai Firms with High Market Cap have “Excellent” Level of Corporate Governance
Source: Thai IOD. 2016. "Corporate Governance Report of Thai Listed Companies 2016."
Financial Regulation and Macro‐Prudential Approach• Time to take a structural systemic view of risks and
uncertainties in Asia• Cyber‐security is high priority in light of ransomware etc.• Asia’s high‐growth and high‐savings – need to get the
balance of risk‐funding right• Use risk‐sharing approach that develops equity, long‐term
savings market to fund long‐term infrastructure and higher risk SMEs that push innovation, competition and job creation – generate Antifragility/Equity to improve resilience to shocks
• Financial supervision should be focused on enforcement of red‐lines on corruption, market manipulation and fraud
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Main revisions to the Basel III framework
BCBS Proposed Amendments to Basel III Framework
39Data source: BBVA Research.Source: Europa, IPOL & EGOV. 2016. "Upgrading the Basel standards: from Basel III to Basel IV?"
From Basel III to Basel IV
From Basel III to Basel IV – Shift in Emphasis
40Source: PwC. 2016. "Quo Vadis 'Basel IV'."
Solvency 2: Moving towards better Policyholder Protection, International Standards and Best Practice, Sustainable Insurance
Source: MAS Singapore. July 2016. "RBC 2 Review – Third Consultation."
Regulatory Focus – Supervision and Enforcement Key• Despite technology and geo‐political risks, fundamental role of regulators is to see that industry business model is healthy, competitive and playing by rules – customer comes first
• Too complex regulation makes industry behave even more cautious, sometimes predatory or risk taking (just to maintain profits)
• Focus on important rules with simple principles and enforce them rigorously
• Customer/investor expect that of the regulators42
Concluding Remarks
• Industry is already stressed by disruptive technology, complex geo‐politics and onerous regulations
• Regulators need to move to stewardship – guiding them through these complex times and ensuring that the financial industry and markets enforce corporate governance
• We need to encourage Self‐Discipline, Market Discipline, and Regulatory Discipline, plus good values
• Industry organizations and consumer societies like Institute of Directors, CFA and others key partners with financial regulators to keep the industry growing and helping Thailand prosper
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