The Asian markets are changing rapidly, but the business world still clings on to a number of misconceptions about the region according to Fraser Thompson, a Director of economics and strategy advisers, AlphaBeta – and it's important for CFOs to understand the reality of doing business in Asia.
Thompson believes there are currently five “myths” around doing business in Asia – notions based on past experiences that have failed to stand up as Asia's economies change and market conditions fluctuate.
Thompson says CFOs need to be agile when investing and conducting business in the region. Asia is not a homogenous area and assumptions that may have held true in recent times are losing traction.
Thompson's five myths are:
- Interest rates may rise after the end of quantitative easing.
- Globalisation has run its course.
- The big cities in Asia will provide coming growth.
- Asia is holding back on artificial intelligence (AI) to save human jobs.
- World markets are stable and there will not be major economic upheaval.
To make the most of business opportunities in the region, Thompson believes CFOs are well advised to be aware of these myths and have a realistic view of the likely implications of current markets on their own payment systems.
Understand the drivers of the interest rate cycle
One of the key factors that will likely impact business in the region is interest rates – and Thompson believes businesses need to rethink prevailing impressions around the current interest rate cycle. He says there is a widespread conviction that with the unwinding of quantitative easing around the world that interest rates will rise. But in his view, this is not a surety.
He cites lower capital intensity, higher retained earnings and greater savings in emerging markets as drivers which could negatively influence rate rises.
“Many of the larger digital businesses have lower capital requirements relative to their size than their predecessors. The Googles, Apples and Microsofts of this world do not need capital injection to the same extent as General Motors or Ford,” he says.
Another strong influence on potential rates is the growth in savings in emerging markets and a peaking of savings among baby boomers.
“When you look at the growth outlook in terms of the Asian population and the need to deleverage, it puts some curbs on investments that would otherwise provide real growth. I would challenge the notion that we are going to see a return to a similar interest rate regime that we have seen in the past,” he says.
Thompson also contends that CFOs of companies investing in Asia are still setting their “hurdle rates” too high. This means they have not yet updated their own internal investment processes to reflect current market conditions. Hurdle rates, which is the lowest rate of interest which a firm expects to earn when injecting capital into a project, should have fallen quite significantly given the lowering cost of capital due to low interest rates, he says.
“They are placing much too high a bar on whether investments meet the grade. So, I would urge companies and CFOs to think about whether they are they using the right kind of internal yard stick in their own investments.”
Globalisation isn't over; it's just changing its form
Thompson's second myth is that globalisation has run its course. Since the advent of Brexit and growing concerns about the international trade environment, it has become the norm to think that trade restrictions such as tariffs, rather than globalism, is the new modus operandi in global trade.
This belief is based on data showing global trade growth lagging behind global GDP - but that misses the point, he says, and doesn't consider other key factors.
“We are measuring physical trade but missing digital commerce, digital services and digital payments, which are really driving rapid growth. Globalisation has not ended, it's just changing its form,” Thompson says.
Surprisingly, it is not trade between more developed and mature economies which is driving the trade integration agenda, he says.
Instead, it is increasingly rising trade from the emerging markets, in addition to intra-emerging market deals that are more significant. “This is not being factored in,” says Thompson.
Thompson also addresses the growing debt in China and how that might be managed. China has experienced a massive growth in debt since the global financial crisis and while it has been managed, the rapid growth and overall size of the debt is still a challenge.
Business can't count on Asia's emerging middle class for growth
Thompson questions the view future economic growth will be driven by the emerging Asian middle class. For instance, India now lacks a solid middle class which he believes, “skews the income base.”
“There's a lot of low income consumers, very few high income, and not much in between. So, there is a risk that this growth in the consuming class doesn't materialise as we first thought,” he says.
For CFOs and their businesses, this means a smaller addressable market and lower potential revenue and profit.
AI is transforming payments
Some Asian countries have low adoption of Artificial Intelligence (AI) within enterprises however this does not mean that AI has not already had significant impact.
In the payments arena, the growth of AI as well as the rise in blockchain and tokenisation are areas which could vastly change the speed of settlement and Thompson believes CFOs would be wise to prepare to take advantage of this.
“We did an informal survey of CFOs and found that most are only scratching the surface in the use of technology in payments,” he adds.
Thompson says interest rates will have a big impact on the payments industry. “If you have a look at unsecured lending, it's slowing down due to a combination of regulations and the growth in alternative lending forces.
“That would be one key shift to watch – how these changes in the lending sources shift in Asia in the coming years.”
Build in resilience to prepare for economic and regulatory upheaval
In all this, Thompson says CFOs need to build resilience into their operations. There may be potential risk factors related to exposure to debt. Another important input is the growth in cross-border payments.
“Be particularly mindful about new regulations being put in place. This is a changing regulatory landscape and it will be important for companies to be sure that they're not caught unawares.”
Thompson says his big take away and recommendation to CFOs would be to re-examine some of their own core assumptions about Asian business.
“You need to see if those assumptions are still fit for purpose,” he warns.
Key Takeaways
- Finance chiefs are advised to keep a watching brief on interest rates.
- Growing use of technologies like blockchain and tokenisation could vastly change the speed of settlements.
- CFOs could investigate building resilience into their operations. There may be potential risk factors related to debt exposure.