Banks turn to emerging markets

The Australian 12:00am January 18, 2017

Michael Roddan

Macquarie Group’s head of Asia, Ben Way, says rapidly rising interest rates in developed economies are forcing Australia’s biggest investment bank and others to turn to emerging markets for investments in infrastructure projects, rather than see equity returns “wiped out” by surging rates.

Mr Way, who has been Macquarie’s Asia chief executive for two years, said that with global investors increasingly interested in emerging market assets, the cheap prices for infrastructure projects were unlikely to last.

The bank’s portfolio of companies in Asia has doubled in the past three years to about 70 major investments. This comes after Macquarie cut its investment bank staff across Asia last year as part of an industry-wide reassessment of market-facing opportunities in the region.

But with more companies realising infrastructure investments in emerging markets are sold at a relative discount to compensate for sovereign and regulatory risks, a bidding war would not be pushing up asset prices.

“As more and more capital builds up in the world, it’s now looking for deployment increasingly in the alternative sector,” Mr Way told the Asian Financial Forum in Hong Kong yesterday. “In the developed world when an asset portfolio or company comes up for sale, the amount of capital looking to win that opportunity is much more significant than it has been before,” he said.

Infrastructure prices in the developed world are already at record-high forward multiples, and Mr Way said there was a growing risk that these investments could become unviable, and that risk was forcing companies to invest in emerging market assets.

Mr Way said if interest rates in developed economies were to rise too fast, the equity return on infrastructure assets in developed countries would be “wiped out”.

“So we’re seeing a turn away to developing markets for assets,” Mr Way said.

“In these sorts of (developing) markets today, we can actually buy assets quite well.

“But it’s not a situation that will last very long.

“There is a significant amount of capital moving into developing markets.”

Macquarie is a top-50 global asset manager with more than $490 billion under management, and has large real estate and infrastructure investments in Europe and North America.

The bank cut about 100 jobs from its various Asia offices between March and September last year, amid similar moves by investment banks including Credit Suisse, Standard Charters, RBS, Goldman Sachs and Deutsche Bank.

Commissions and brokerage income from Macquarie’s Asian securities business fell particularly hard in its most recent interim results, as market uncertainty disrupted trading activity. Income from Asia fell 33 per cent in the six months through September, year on year.

However, Macquarie’s Asian assets under management have continued to grow, up to $45.9bn as at September — up 8 per cent year on year.

Mr Way said investors needed to be educated that the regulatory arrangements in investing in Chinese assets were often very similar those in Britain, but stressed that emerging markets had much to do to reassure potential investors.

China this week unexpectedly halted construction and planning for 85 coal-fired power stations across the country amid concerns of overcapacity, and analysts said they expected more suspensions to be announced.

The Australian travelled to Hong Kong as a guest of the Hong Kong Economic & Trade Office.