City’s advantages, experiences as financial hub continues to attract investment

From left: HKMA Chief Executive Eddie Yue Wai-man, Chief Financial Officer and Senior Managing Director of Blackstone Michael Chae, Chairman and Chief Executive Officer of Morgan Stanley James Gorman, Chairman of UBS Group AG Colm Kelleher, President of Bank of China Liu Jin, and Chairman and Chief Executive Officer of Goldman Sachs David Solomon pose for a photo after the panel discussion entitled “Navigating through Uncertainty”. (ANDY CHONG / FOR CHINA DAILY)

As the world economy teeters on the edge of a chronic slowdown, volatile and depressing pictures have been painted with an apocalyptic final touch. But we might have forgotten that companies around the world are going all out to navigate through the rough patches with financial and administrative maneuvers. And global financial leaders gathered in Hong Kong on Wednesday proposing new opportunities and trends amid economic uncertainties. 

Panelists weighed in with their hopeful outlooks on the financial resurrection in the “Navigating through Uncertainty” discussion at the Global Financial Leaders’ Investment Summit organized by the Hong Kong Monetary Authority. The summit is a budget initiative announced by the financial secretary of the Hong Kong Special Administrative Region in his 2022-23 Budget. 

Relentless disruptions to cross-boundary land cargo flows, tightened financial conditions due to aggressive interest rate hikes by major central banks and a raft of external factors, have perpetuated a contraction in Hong Kong’s economy. But companies in the SAR refuse to throw in the towel, and are leveraging the city’s advantages and experiences to consolidate the city’s role as an alluring place for investors, a center for offshore renminbi financing, trade settlement, and asset and wealth management.

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“It’s also certain that the Bank of China with a history of 110 years, here in Hong Kong 105 (years), will work together with all the international financial institutions to support economic growth, to support international financial cooperation, to support international trade,” said Liu Jin, president of Bank of China.

Hong Kong is not alone in the odyssey through hardship. The global economy has been plagued with nothing but abnormalities. The economic system has suffered the two most formidable shocks in the last decade that we probably had in the last 70 years, said James Gorman, chairman and Chief Executive Officer of Morgan Stanley. 

The global economic misery has its roots in the financial crisis, which led to a decade-long “stimulating policy, monetary policy, and effectively zero interest rates around the world,” recalled Gorman. 

It’s not surprising that “the interest rates are going up,” Gorman added. “They’re abnormally low and reserve banks around the world are trying to get them back to some level of normality and even higher for a period because of the rise of inflation.”

Activities in the capital market have languished pathetically, since the X factors are well known, concurred David Solomon, chairman and CEO of Goldman Sachs. Trajectories of economic growth and interest rates are all the more uncertain, he said. 

If experience is anything to go by, Solomon reckoned, transition necessitates change. 

“Market participants and capital allocators need time to adjust to that new reality. We’ve gone through a decade of very easy money, very accelerated asset price appreciation … You were generally rewarded for deploying capital and deploying capital aggressively. Now, you are not being rewarded for that.” 

That induces a paradigm shift where investors are longing for a much more significant discount and risk premium if they’re going to deploy capital, said Solomon. 

Some investors have upped the ante, participating in initial public offerings and deploying capital in new companies that have little track record, he observed. The stakes, needless to say, are high, he added.

“My gut (feeling) is the central banks will, in aggregate, tame the inflation. It’s highly improbable that we will get back to the 1 to 2 percent inflation we enjoyed before the crisis, (it’ll be) more like 4 percent in the next four years. And we’ll have to deal with that,” said Gorman. 

Colm Kelleher, chairman of UBS Group, said he has a feeling that the central banks will get inflation under control and then there’ll be bright spots for investing, “but we’re not seeing it yet.”

Kelleher said the UBS global wealth management accounts now have record levels of cash, and the same goes for the investment firm’s US accounts.

Conceding the “pretty dire returns” in both equities and fixed income and commodities except for selective spots, Kelleher, however, didn’t think there was a capitulation trade — a sudden asset selloff by spooked investors. “What we’ve had is people waiting to reallocate to get some certainty about direction,” he said.

Kelleher added that there’s clearly been a big investment shift in terms of the way people are investing. “Now, alternatives are clearly becoming a very big sector for people to invest in. And we’re beginning to see significant demand for alternatives through our network,” he said.

Rebalancing period

Lessons we learnt in the past could give us a slight clue about the path ahead when similar afflictions strike again. When we’ve had these periods in the past, it would take somewhere between two and six quarters to rebalance, said James Gorman at Morgan Stanley. 

“I think we’re going through that rebalancing period,” echoed UBS’ Solomon. While the economy is still rife with a significant amount of uncertainties as we enter 2023, we are starting to understand the trajectory of capital markets, he said. “I think we’re in the process of that journey and my expectations are that equilibrium will come more into balance in the coming quarters.”

While the discretionary spending in the digital world is seeing a salient slowdown, in some sectors, such as energy, logistics, traditional and transitional rental housing, continued strength is visible, said Michael Chae, chief financial officer and managing director of Blackstone. 

He also highlighted the ubiquitous “buy-and-hold” mindset among investors in the post-pandemic era, which has come a long way in the collective expedition through uncertainties. 

“Parts of the economy are still running pretty strongly, though there’s clearly deceleration. We’re seeing the central bank actions filtering into the real economy, but on a lag. We’re beginning to see the slowing of both inflation on the one hand and growth on the other,” said Chae. 

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When there’s a crisis, there are fresh opportunities to seize upon. It’s a highly compelling and apt environment for lending money, providing private credit to borrowers, and investing in hard assets with short duration income streams in the real estate business, he suggested. Innovation and technologies, particularly in life sciences, would be a rich seam to mine for investment, Chae added. “Excessive valuations is now a thing of the past, as we’ll see. I think that will create opportunities over time.”

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