Why CLSA's Slone see opportunity in emerging markets crunch

As the 10th anniversary of the Global Financial Crisis looms large, the veteran Asia banker sees opportunity for profit in the emerging markets crash and is planning to expand in 'sexy' private markets.
Jonathan Slone sees opportunity in crisis
Jonathan Slone sees opportunity in crisis

Buy when there's blood in the streets.

It's a maxim held true by some of the savviest global investors. And, with emerging markets facing a sustained sell-off, currencies slipping to historical lows, global trade tensions rising and the US dollar strengthening since March, now is the time for the brave to put those words into action.

The week ending September 5 saw global bond funds record their biggest outflow since late 2013 while emerging markets bond funds experienced net redemptions for the fifth time in the past six weeks, according to data from EPFR.

With more than 30 years' experience banking in volatile Asia, CLSA chief executive Jonathan Slone knows better than most that when others are rushing for the exits, it is almost always the right time to buy.

He is looking at the crisis and telling his bond traders to double down.

“There is a massive opportunity right now,” he said during an interview with FinanceAsia.

A slowing Chinese economy, a US-China trade war and rising US interest rates have spooked investors. While investors' focus remains on the free-falling Argentinian peso and the Turkish lira, Indonesia’s rupiah has fallen to its weakest level since the 1997 Asian financial crisis, the Indian and Sri Lankan rupee have dropped to all-time lows.

Slone, who first came to Asia in 1985 to work with multilateral aid groups, has been here before.
Asia’s economic growth has been punctuated by crises, such as the AFC and the global financial crisis (GFC) in 2008 [See timeline below].

But Slone queried whether investors have really learnt from previous crashes and many are surprised each time turmoil hits markets. 

"Asia's story is much more complex. People need to be on the ground to really understand it," Slone said. About 2,640 investors and corporates will be flocking to Hong Kong next week for CLSA's 25th annual investment forum, the biggest such gathering to date.

Investors in Asia were hit in 2013 by so-called "taper tantrum" after the US began slowing its bond-buying programme. “Every time US interest rates go up, there is a great sucking sound,” Slone said, meaning capital flight from Asia back into the US.

The current crisis is a case of déjà vu. US bond funds absorbed over $1 billion in early September.

PHENOMENAL GROWTH

Slone is fundamentally positive on Asian markets given the phenomenal growth the region continues to enjoy.

At the end of 2016, China had a $11.2 trillion GDP compared to $860.8 billion in 1996, according to data from the World Bank.

Investors continue to see China as a safe haven within the emerging markets universe, with over $3 trillion in foreign reserves and a government with a track record of acting aggressively to sustain 6% GDP growth. China Equity Funds took in fresh money for the sixth straight week and 29th time in the past 33 weeks, according to data from fund flow tracker EPFR Global.

Underpinning this growth over the past 20 or so years has been the rise of Asia’s middle class and their desire to put their newfound wealth to work. It has led to greater institutionalisation of savings, enabling the region to finance itself and increasingly export surplus capital to the rest of the world.
However, in the short-term Slone sounded a note of caution on valuations in Asia’s technology sector.

“There is, in some cases, asymmetric risk that the current euphoria doesn’t take into account,” Slone said, although he believes that this will work its way out of the system.

EPFR-tracked technology sector funds kicked off September by posting only their fifth weekly outflow year-to-date.

PRIVATE MARKETS

To cater to investors’ voracious appetite for yield since the Global Financial Crisis when interest rates around the world plummeted to record lows and some even turned negative, CLSA has been expanding its traditional high-touch brokerage business into private markets.

And CLSA is moving to take a bigger slice of this action, according to Slone.

“The private market is huge, and getting bigger, and exciting, and sexy. That’s where the action is,” Slone said.

However investors have long struggled with liquidity in Asia’s private markets, where the secondaries business that allows early investors to exit and new arrivals to enter is immature compared with the US or in Europe.

CLSA has a new product offering in the pipeline for the near future which will “be a big leg-up for the private markets and also us” he said. "We want to be in all sectors of capital markets.”

As an institution, having a closer eye on the action in private markets is likely to bolster CLSA’s equity capital markets business as well as the brokers serving institutional investors stuyding changes in their portfolio companies’ value chains.

“Private investment is the other side of what’s going to be a public investment very soon,” he said.

Two decades in Asia punctuated by crisis

 

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