A “New networks of capital” report by HSBC explores the growing investment links between Asia Pacific and the Middle East, which “have the potential to reshape global capital flows”.
Examining progress across key markets in both regions, the report assesses the trends that are contributing to a heightened global interest in this emerging investment corridor.
It identifies the financial market shifts that are underway alongside evolving demographics and economic innovation, and highlights three key opportunities that come with them. These prospects include: enhanced intra-regional infrastructure to tap liquidity and open up new investment channels; improved access to cross-border capital to support corporate ambitions; and advanced support for clean energy assets and transition infrastructure.
To discuss what these developments could mean for the global investment community, FinanceAsia spoke with head of Global Banking for Asia Pacific at the bank, Christina Ma, whose team supports corporate, multinational and institutional clients, from locations across nine markets.
Opportunistic approach
“It goes without saying that Asia Pacific is the largest region globally in terms of both GDP and population, but the Middle East’s trajectory is similarly impressive – and it’s both of these regions that are at the centre of the world’s growth,” she said.
With an extensive history of approximately 160 years in Asia and 130 years of activity in the Middle East, this increasing connectivity offers HSBC significant opportunity as it turns to its future business priorities, Ma explained.
“Wealth, the energy transition and the renewable spaces – each form sources of growth where we have track record of excellence.” She pointed to the fact that while global wealth is forecast to grow by US$24 trillion from 2022 to 2027 – equivalent to 6% per annum – both Asia and the Middle East are set to outperform this benchmark, with growth predicted at 8.2% and 7.4% respectively.
Indeed, Asia overtook the US as being the home base for the majority of the world’s billionaires back in 2017. As of April 2024, there were 1,000 billionaires in Asia versus 813 in the US, with this year also seeing Mumbai overtake Beijing as the continent’s wealth capital. Both regions also take the lead in terms of asset ownership: constituting home to nine of 10 of the world’s largest sovereign wealth funds (SWFs) and eight of the top 20 pension funds.
“Asian and Gulf trade surpluses have made possible one of the greatest wealth creation events in history,” the report shares, detailing how both regions now account for 30% of global financial assets, totalling US$86.3 trillion.
The paper underscores the role of wealth creation in the advancement of intra-regional financial infrastructure. Although both regions’ domestic asset management sectors remain relatively under-developed – with just six of the world’s 50 largest asset managers hailing from Asia and none from the Middle East – policy direction and regulatory incentives are facilitating improved strength and scale across the corridor’s domestic asset management industries. The report proposes that this will lead to “the creation of domestic champions and local join ventures (JVs) by global asset managers” and with growing local savings, should come expanded liquidity pools making the markets more attractive for global investment.
“Capital flows between the regions are still in their infancy, but it’s inevitable that investment will follow increasingly strong trade links, which are part of a broader shift of global supply chains,” Julian Wentzel, Head of Global Banking for the Middle East, North Africa and Türkiye (MENAT) at HSBC said in the report.
Capital markets expansion
Ma joined HSBC’s Hong Kong base in March 2023, bringing with her two decades of senior leadership experience at Goldman Sachs – predominantly across equities, where she led some of Asia’s largest primary and secondary listings. And it is in this arena that she sees scope for new cross-border commercial opportunities.
“I think the really exciting story is around the potential for cross-listings as these enable investors from both sides to invest in each other, while also breaking down larger regional barriers,” she told FA.
She offered the example of CSOP Asset Management’s Saudi Arabia exchange-traded fund (ETF), which became the first Middle Eastern ETF to list on Hong Kong’s bourse in November 2023. The listing was deemed by Hong Kong Exchanging and Clearing (HKEX) leadership as reflecting “HKEX’s ongoing commitment” to connect capital with opportunity and to diversify the range of investment products in the market.
Subsequently, in July, two funds which invest indirectly through the Hong Kong-domiciled CSOP Saudi Arabia ETF – The China Southern Asset Management CSOP Saudi Arabia ETF QDII and the Huatai-PineBridge CSOP Saudi Arabia ETF QDII – debuted on the Shenzhen and Shanghai exchanges respectively, ending their sessions at their first-day price limits.
“The fact that this first ETF had such a successful debut via two markets – displaying demand from investors, speaks volumes about what is there in terms of potential for future growth,” Ma said. She added that while it will take time for more products to come to market, the government support is there.
Vision
Opening up to foreign investment – alongside economic diversification, privatisation and social progress – is a core component of the Saudi government’s Vision 2030 programme, first introduced in 2016. Boasting the largest gross domestic product (GDP) among Gulf Cooperation Council (GCC) countries and constituting nearly double the size of the next largest market, the UAE; Saudi’s stock exchange, Tadawul, also holds rank as the tenth largest globally by market capitalisation.
In September, Saudi Arabia’s Capital Market Authority (CMA) granted approval for units of an ETF tracking Hong Kong-listed companies including some Chinese firms, to be traded on Tadawul. Launch of two funds, the Albilad CSOP MSCI Hong Kong China Equity ETF, and the SAB Invest Hang Seng Hong Kong ETF followed at the end of October.
Ma highlighted additional potential across the dual listing space. “There has been ongoing dialogue about dual listings and a memorandum of understanding (MOU) signed between Saudi Arabia and Hong Kong in February 2023, but of course the infrastructure has to build up further.”
“I think this will be in the very near future. In fact, if we look at the timeframes involved with the recent ETFs – which took around eight months to launch across two markets; recent accomplishments have been pretty groundbreaking.”
Infrastructure, investment and internationalisation
Offering a local success story in terms of both infrastructure implementation as well as building traction beyond trade ties, Ma raised Hong Kong-headquartered financial solutions provider, Valuable Capital Group. The firm, which has grown to become Hong Kong’s second largest online broker, launched in December 2023 an online retail investment app – Sahm –which has grown to be among the top three apps in Saudi’s domestic market – a significant feat for a non-local player.
“Valuable Capital Group is keen to build connectivity with an investor base in the market, and to do so, it’s enabled clients to be able to switch between Saudi and US accounts in real-time.”
Other global participants have also made in-roads, such as BlackRock, which announced in April a first-of-a-kind JV with Saudi SWF, Public Investment Fund (PIF) to launch a Riyadh-based multi-investment platform.
“GCC countries have been very welcoming in terms of making themselves easier to access by international investors and this is definitely not a short-term trend,” she added.
Diversification
Ma acknowledged that interest in the Asia-Middle East investment corridor is driven in part, by a desire for diversification: “the inclusion of Saudi Arabia in the MSCI Emerging Markets Index in 2019 created new demand from index-tracking global investors,” the report notes, highlighting the opportunity for Asian investors to participate in the fast growth of local economies.
Diversification also extends to currencies, she explained. “Diversification away from the dollar is real… The Fed moving on rates creates some interest rate risk and FX exposure for Asia and the net markets investing in the US or in US dollar… If you look at Asian markets, local currency bond markets are deeper, more internationalised and more active than before.”
In February, Hong Kong government issued the world’s first multi-currency digital bond issuance across HK dollar, US dollar, renminbi and euro, equivalent to HK$6 billion ($766.8 million). In recent years, China has also ramped up its international currency investment, with its 2020 purchase of Saudi Arabian bonds expanding its market exposure sixfold.
“Given the continued build-out, regionalism and strength of intra-Asian trade in particular, there will be a greater demand for using other currencies, especially between these key corridors,” Ma noted.
Private potential
The report details both the energy and renewable sectors as being drivers of Chinese investment. Indeed, in July 2024, three Chinese clean energy companies signed JVs with Saudi Arabia’s Renewable Energy Localisation Company to manufacture and assemble components for solar and wind power.
Ma sees opportunity for the private asset classes to contribute towards the corridor’s energy transition – and in particular, private credit. “This is where we’re probably seeing the greatest synergy across energy transition and the new economy segments.”
She explained that flexible financing – the capacity to cater to a broad risk appetite and allocation remit, is key: “Traditionally, Asia has tended to be more of a bank-led market but this is changing. As per client discussions, Asian investors are actively pursuing diversification and are requesting private credit for some projects, and then bank financing or capital markets funding for others.”
Geopolitical issues and an escalating humanitarian crisis notwithstanding, it is clear that in an increasingly connected world, intra-regional economic convergence is a continuing trend, with impact extending beyond the domestic to the intra-regional and international finance communities.
“Growing investment flows between Asia and the Middle East are a natural consequence of deepening economic connectivity between these two dynamic regions,” the report emphasises.
While it may still be early days, Ma and her team recognise the direction of travel and are excited about the long-term potential for this trend: “For investors, the rise of connectivity across Asia and the Middle East rise will complement and provide an alternative to existing investment opportunities,” she concluded.
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