What’s your broad view of the financial services industry in Asia?

William Pang: Overall, I see exciting long-term investment opportunities in the Asian financial sector. The revenue pool is big – and getting bigger. Emerging Asia is experiencing the rise of the middle class. Developed Asia is witnessing increasing wealth accumulation. Both contribute to greater demand for financial products and services. However, it has been increasingly difficult for banks to generate high returns for shareholders. One reason for this is the disruption caused by financial technology companies, or fintechs.

Where are you seeing attractive opportunities?

Andy Budden: As William mentioned, there is a combination of secular growth and disruptive trends impacting the industry. Looking beyond banking stocks for a moment, there are three non-banking areas where we see some interesting market dynamics and companies that are positioned to benefit.

1. Exchanges

Exchanges sit at the confluence of powerful secular trends. These include the growth of Chinese financial markets, of derivatives and, above all, of data. This means exchanges are evolving from quite cyclical to more stable growth businesses – and even, in a couple of cases, counter-cyclical. One example is London Stock Exchange Group. In financial markets trading, human judgment has been partly replaced by machines that feed off market data. In January this year, London Stock Exchange completed the acquisition of data provider Refinitiv, which is second only to Bloomberg in terms of market data coverage. Following the acquisition, market execution now is estimated to make up only about one-third of London Stock Exchange’s revenue, with the other two-thirds coming from data.¹ Furthermore, this data revenue stream is growing and recurring – as subscribers pay a regular fee to access data. With more regular and visible cash flows, London Stock Exchange is becoming a much less cyclical business.

Other examples are Hong Kong Exchanges and Clearing, which is positioned as the doorway between China’s financial markets and the rest of the world, and CME Group (previously known as the Chicago Mercantile Exchange), which is benefiting from the global growth in demand for derivatives.

2. Ratings agencies

The two biggest ratings agencies, S&P Global and Moody's, have solid business models and strong competitive moats. Many bonds issued today have two credit ratings and these tend to be given by these two agencies. With a combined market share of just over 80%², S&P Global and Moody’s have an effective duopoly in the market.

1. Insurance

We don’t see as many opportunities in general insurance – property & casualty – at the moment. Historically, an interesting time to invest is when the combined ratio – premiums over claims – becomes so compressed that insurers have no choice but to raise premiums. But we do not see that happening right now.

We prefer opportunities presented by life insurance companies, which are benefiting from a secular growth trend. In China, and the faster-growing Asian economies, an increasingly wealthy population wants to buy more financial products, including life insurance and savings. Several multinationals, including Hong Kong-based AIA, have good distribution networks in these economies and have shown the ability to manage their liability profile.

William Pang: AIA is actually good example of a company effectively deploying fintech. To me, it’s how I think about fintech – it is not limited to small start-ups; instead it applies to a broad set of companies using technology to deliver financial services to customers.

 

1. London Stock Exchange Group’s revenue mix based on Capital Group estimates, March 2021

2. Source: Corporate Finance Institute, 2021

 

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