At the bottom of the chain are service providers such as fund administrators, custodian banks and dealer brokers. They provide services to the asset managers. Therefore, asset allocation decisions by end-investors, either institutional or private wealth owners, have a knock-on impact throughout the rest of the asset management value-chain. Currently, the portfolios of asset owners in the advanced economies are still significantly underexposed to emerging markets. For example, at present, a typical US pension fund has just 6% of their investment exposure in emerging markets. Not surprisingly, given the economic challenges facing the advanced economies outlined earlier and the growth opportunities in Asia, there is growing interest from these end-investors in increasing their investment exposure to Asia, rather than relying on investing in fixed income products of the developed economies as they have in the past. This change in allocation preference towards Asia will generate significant demand for asset and wealth management services that Hong Kong’s financial institutions are well placed to provide. But the immediate question is: are we in Hong Kong ready to meet this growing demand? Well, we do start with a number of strengths and advantages. As Asia’s premier asset management centre, Hong Kong is the largest hub for Asian hedge funds and the second largest hub for private equity in Asia, only slightly trailing Mainland China. Hong Kong’s private banking platform offers unparalleled access to the growing wealth pool in Mainland China and across Asia.
Underlying this situation are challenges many and varied. Overshadowing them all is the risk of contagion from weaknesses in the advanced economies. The high level of sovereign debt at the peripheral eurozone countries, and its potential vicious feedback into economic recession, is now the principal threat to the global recovery. Meanwhile, in the US, it is still unclear whether recent encouraging signs will be sustained. A big concern there is whether public sector deleveraging will play out in the form of a fiscal cliff or a more gradual, manageable fiscal slope. Either way, via budget cuts or continued fiscal uncertainties, the near-term responses will likely continue to hold back private investment and employment. The aggregate risk of all these challenges for us in Asia is clearly a knock-on drag on Asian economies. There are also two important side effects: first, the impact of monetary loosening in advanced economies on consumer and asset prices in Asia. And second, the potential loss of lending for infrastructure projects in Asia as European banks deleverage and retrench. For policymakers, this is a triple-whammy: subdued growth, asset inflation and capital retrenchment. And compounding this are very high levels of uncertainty and volatility, as markets alternate between risk-on and risk-off. All of which makes policy calibration highly challenging and economic forecasting somewhere between extremely difficult and impossible. Position of Hong Kong’s banking system Given this backdrop, it is very important that we understand and monitor the developments in the US and Europe as closely as possible.