Asia Strategy For Global Investment Banks Under Capital ...


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Asia Strategy For Global Investment Banks Under Capital ...

  1. 1. Asia Strategy For Global Investment Banks Under Capital Market Uncertainty Author: Yao Yao, MIB 2002, Norwegian School of Economics Preface 2002 features the end of a 20-year long bull market and prolonged economic uncertainty. Global financial market was hard hit by ‘9.11’ and numerous scandals of US listed companies. Suddenly, the global capital market fell into a serious depression and uncertainty. New Economy bubbles broke completely and investors lost confidence. Countless ‘clever and noble’ investment bankers just got laid off. In this paper I will talk about how global investment banks (GIBs) should restructure their corporate strategy at the growing Asia capital market at the time of uncertainty. Who are GIBs? Deutsche Bank, Goldman Sachs and Merrill Lynch are some of them. The paper is consisted of 3 sections. In section 1 I will illustrate the profile of Asia capital market. In section 2 I will use the SWOT model to discuss about GIBs’ positions in Asia. In section 3, I will give some suggestions about GIBs’ Asia strategy in the near future.
  2. 2. 1. Asia capital market profile How large is Asia? Asia accounts for more than half of mankind, more than one quarter of global exports, one third of global GDP. How small is Asia? Asia only account for 16% of global equity market capitalization? In fact, if I exclude Japan, the whole of Asia is only 7% of global market capitalization. This is amazing. How about current Asia? Asia’s share in global market capitalization is shrinking, compared with US MSCI share of 55%, EU 17% and others 14%. Is Asia attractive? Asia has one of the highest savings rates in the world and more than US$1 trillion in foreign exchange reserves. Asia is the biggest importer of capital, including foreign direct investments (FDI) in the world. However, Asia is still dependent upon Europe and America as engines of growth. (Source: Hong Kong Securities and Futures Commission)
  3. 3. From the chart above, we can see Japan is the leading economic power in Asia. As the region’s largest economy, Japan’s stability is important to its neighbors, and it remains a major source of bank and investment capital. How Japan addresses its industrial and bank- restructuring challenges will impact many nations in the region. The PRC will become an increasingly important regional and global economic, political, and military power after its WTO accession. China is the second largest FDI recipient except USA nowadays. China’s economy is likely to become more dynamic and competitive as the process of economic reform and legal reform continues. How the PRC addresses its banking challenges, carries out the process of industrial modernization, and expands the benefits of growth to inner-land China will all be important factors. Other nations will have to determine ways to address the challenges of the PRC’s competitive strengths and its attraction to foreign investment, as well as to take advantage of opportunities in the growing PRC market. (Source: Deutsche Bank Documents). As to the four Tigers, a high saving rate, a young educated labor source And export oriented policies have triggered their successes before Asia financial crisis. Now they are recovering quickly. Now I would like to talk about the Asia stock market a bit. The top 3 stock exchanges are Tokyo Exchange, Hong Kong Exchange and Shang Hai Exchange. Asia equities have outperformed US and Europe in recent years.
  4. 4. China’s accession to WTO is another important issue, with huge opportunities at its emerging stock market. However, Asia market is still small. I will use some statistics to compare Asia with global market. Debt and equity issuance in 2001 is USD 2735 billion in the world and only USD 97 million in Asia. Another number is M&A volume in 2001, the global figure is USD 1926 billion and Asia figure is USD 85 billion. (Source: Merrill Lynch Asia) Then, in the next section, I will use a SWOT model to evaluate GIBs briefly. 2. SWOT analysis to GIBs To know more about GIBs in Asia, SWOT would be a simple and suitable model. SWOT defines firms’ strengths, weaknesses, opportunities and threats. a. GIBs’ strengths. GIBs usually have abundant capital, excellent employee and top research ability. GIBs can influence the Asia market to some extent. Some GIBs have good relationship with Asian governments. Besides, GIBs have advanced financial services to serve Asia. For example, recently Chinese government has asked Goldman Sachs to deal with its enormous non-performing loans.
  5. 5. b. GIBs’ weaknesses. Many Asia countries are cautious to GIBs for their abilities in market manipulation and speculation. Culture adaptation is another problem. For the first factor, I will give a good case. A leading investment bank was regarded as the cause of China Telecom’s sharp price drop in Hong Kong. For culture factor, another example would be Goldman Sachs’ embarrassment to understand a Chinese business partner’s dialect and behavior. c. GIBs’ opportunities in the near future. 1.Reform and industry consolidation will increase the M&A in Asia. 2.Asia privatization is increasing, dominated by large deals. 3.Most Asia countries are seeking solutions to the prevalent non-performing loans (NPL). It is an exciting opportunity. 4.Huge chances in emerging market like China. 5.More funds are raised in active Asia local markets. d. Threats to GIBs. 1.Overcapacity in Asia IPO and more clever investors. 2.Potential instability in some Asian governments and currencies. 3.Non-transparency and poor corporate governance in Asia listed
  6. 6. companies, especially in the Family businesses. 4. A declining Asia stock market in 2002 and a reduction in business commissions. 5.Asia market is a bank-dominated one except Hong Kong and Singapore. 3. GIBs’ strategy in Asia Now we understand the GIBs better. Asia would be a good choice for them under the global capital market uncertainty. But how should Deutsche Bank or Goldman Sachs restructure its Asia strategy under the capital market uncertainty? I will list my suggestions as follows. a. Regional choice and local adaptation. Besides traditional IPO and M&A business in Asia, GIBs should focus more on emerging services like loans financial advisory and emerging markets like China. More overseas Asia returnees should be recruited to understand the local business norms. Senior government officials should also be hired to establish a good relation with Asian governments. As to organizational structure, it should be lean and flexible to respond to the fast changing market. New business divisions should be created to meet the needs of local customers. And GIBs should notice some ‘smaller scale projects’, which they would not care previously.
  7. 7. b. Advanced product line and reduction of cost . GIBs are famous for expensive personnel costs and luxurious life styles. However, the Gold Years may have disappeared .The unreasonably high employee salaries and corporate expenses should be reduced a lot. As to products range, GIBs have absolute advantages in tools like options, futures and asset- based securities. Just as mentioned above, almost no local Asian firms can provide similar services to solve non-performing loans and the battle is between GIBs themselves. However, GIBs should not only treat Asia markets a short-term profit making center and manipulate the market through expertise in advanced financial tools. Instead, GIBs should help Asian countries to develop the capital market and achieve sustainable profitability. c. Top class employees. Investment banking is a people business . GIBs should attract more practical economists from IMF or World Bank to lead their Asia research. And more technology experts should be recruited to strengthen the expertise in research and corporate financing. Qualified officials should also be attracted to keep the relationship with governments. d. Innovations. Internet has changed the world and most information can be found easily.
  8. 8. To survive the era, new products like online investment banking communities and client relationship management systems should be explored. e. Responsibility and business ethics to help in building Asian corporate governance set and market transparency. What will happen if investors were always fooled and then lost confidence completely in the capital market? What will happen if the market were full of deceptive and low quality listed firms? My answer is very simple. All investment banks are to be closed sooner or later. Investment bankers will be treated as professional cheats. Nobody would survive. Governments and firms will both lose an important financing channel and even their fames. Lastly, I want to point out that the globalization trend has connected Asia capital market tightly and made it a global part. GIBs should endeavor to make the Asia market transparent, efficient and fair.