Clifford Chance

Asian investors prepare for ride on the China through-train and Hong Kong-China mutual recognition

The annual Clifford Chance and AsianInvestor survey reveals increased investor interest in China arising from the liberalisation of capital raising and the prospects of the Shanghai-Hong Kong Stock Connect, or more popularly known as the "through-train" and the Hong Kong-China mutual recognition programmes. This is the sixth year that Clifford Chance has collaborated with Asian Investor on a regional Asset Management survey targeting the investment management industry in the region.

Other key themes to emerge are investors' increased focus on alternative funds and a renewed interest in investing in Europe.

China is hotter than ever

China is not only a top investment destination but also now a favourite jurisdiction for capital raising, tied with North America at 33%, according to survey respondents. These sentiments reflect China's relaxation of outbound investment regimes. "Today, international managers can go onshore and raise capital through Shanghai's QDLP Pilot Programme, or look to various Chinese financial institutions to structure tailored products for Chinese investors", says Beijing Investment Funds partner Ying White.

Excitement surrounding the upcoming Shanghai-Hong Kong Stock Connect programme and mutual recognition seems to be translating itself into benefits for Hong Kong already. 31% of respondents indicated they would have new products authorised for sale in Asia Pacific domiciled in Hong Kong compared with 23% last year, with Cayman Islands/other offshore remaining the same, 23%, for both years. This is in line with the responses to the question as to which passport will provide the best platform for business growth, with HK-China coming out on top with 47%, followed by APEC (23%) and Singapore (18%).

Global Head of Funds and Investment Management, Mark Shipman said, "There has been a real buzz in Hong Kong on both the Stock Connect and mutual recognition programmes and we've certainly seen an uptick in fund set-up activity in Hong Kong. It remains to be seen though whether these initiatives will meet market expectations."

Shift to alternative Investments

Whilst direct investing in equity capital markets and ETFs remain the two top investment vehicles for the fund industry with 48% and 43%, alternatives such as Private Equity funds and Infrastructure projects funds have climbed to third and fourth place respectively with 36% and 29%, a jump of 10% and more. This comes at the expense of debt capital markets (down 16%) and managed accounts (down 18%), both categories which saw a significant drop from last year's survey results. The results signal the lure of higher yields of alternative funds as the global economy stabilises.

"This is consistent with what we're seeing in the market," said Singapore Investment Funds partner Kai Schneider. "Investors are becoming more comfortable with the new regulations that impact alternatives, especially now that most of these have come into effect."

Europe on the rise

Investor enthusiasm for Continental Europe (35%) and the UK (12%) combined is almost rivalling that of China (including Hong Kong) (50%), which still comes out as the top jurisdiction for receiving the most capital over the next 12 months. This dramatic shift from near bottom in last year's survey reflects the confidence in a rebounding European economy – possibly a view to bargain hunting while valuations are still relatively low.

Hong Kong partner Matt Feldmann said, "Europe has certainly shifted from a no-go zone to a market of interest to many Asian fund managers, buoyed by a recovery in many of the countries that were affected by the Euro crisis. The general sentiment is that the worst is definitely over."

The European equities market has been doing well with the Stoxx Europe 600 Index rising for the fourth straight quarter to June 2014, although there are signs this may be beginning to wane.

Other key findings include:

• Sovereign wealth funds are expected to provide the most net flows to fund managers over the next 12 months. They continue to allocate substantial amounts to fund managers in Asia, but such allocations do not come without preferential terms.  The fund investments are also often secondary to their primary objective – access to co-investments and direct opportunities.
• Asia will see the biggest rise in fund manager's allocations according to 48% of respondents, followed by global emerging markets (23%), Europe (18%) and North America (14%).
• Hong Kong (57%) is seen as the most progressive regulatory regime for the funds management industry narrowly beating out Singapore (54%). This may be due to Hong Kong's Securities and Futures Commission becoming more proactive in public engagements and its working relationship with the China Securities Regulatory Commission on the Stock Connect programme.*
• Basel III and FATCA continue to be viewed as the key regulations impacting the investment management industry over the next 12-18 months.

The Clifford Chance AsianInvestor survey was carried out over four weeks in May and June of 2014. A total of 243 respondents regionally representing the investment management industry expressed their views on the very latest market conditions and identified investment management trends in Asia Pacific.