Asia Strategy For Global Investment Banks Under Capital ...
Asia Strategy For Global Investment Banks
Under Capital Market Uncertainty
Author: Yao Yao, MIB 2002, Norwegian School of Economics
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.
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)
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.
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
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
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
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
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
companies, especially in the Family businesses.
4. A declining Asia stock market in 2002 and a reduction in business
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.
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.
Internet has changed the world and most information can be found easily.
To survive the era, new products like online investment banking
communities and client relationship management systems should be
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
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.