Stronger demand expected to boost wealth-management business

By DALJIT DHESI daljit@thestar.com.my

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PETALING JAYA: Despite the forecast for a moderation in economic growth, the wealth-management business is poised for better times in line with stronger demand from customers to grow and preserve their wealth.

The rise of the mass-affluent segment is also seen as a catalyst in boosting the revenue of banks offering such services.

The local wealth-management industry is slated to grow at 12% to 14% in terms of revenue this year, driven among others by the mass-affluent segment, according to Citibank Bhd head of wealth management (products and Citigold segment marketing) Ronnie Lim.

Ong Shi Jie says there are many catalysts to propel the industry forward
 

“In the next three years, we expect our wealth-management business to outgrow the market by 2.5 times. Our focus will continue to be on investments, treasury products and bancassurance,” he told StarBiz.

Lim said the second wave of quantitative easing (QE2) by the US Federal Reserve would spark further demand for treasury products in the emerging market.

Treasury products like high-yielding retail bonds, derivative products with equity and foreign exchange as the underlying assets were likely to experience good demand, he noted.

QE refers to the Federal Reserve's efforts to jump-start the economy and stave off deflation by buying back US$600bil in Treasury bonds, hence putting more money into the system.

OCBC Bank (M) Bhd head of wealth management Ong Shi Jie, without specifying the numbers, said the bank expected percentage growth in the “high teens” for its fee income-related wealth-management products like unit trusts, structured investments and insurance.

“There are indeed many catalysts to propel the wealth-management industry forward. For example, the insurance product penetration in Malaysia is still low compared with our neighbours. Our capital markets are liberalising and becoming increasingly plugged into the global landscape.

“Furthermore, Islamic financial planning is still at its infancy stage and, hence, there is a lot of room for growth. This augurs well for the wealth-management business,” she added.

United Overseas Bank (M) Bhd (UOB) head of wealth management (investment, personal financial services division) Samantha Lim expects the bank's wealth-management business to pick up this year as more sidelined investors return to make use of the opportunities and ride on the momentum of global activities.

She said the bank's wealth-management business was currently growing at about 30%, especially the investment business.

“Liquidity is ample, investors are looking for yield pick-up over deposit returns,” she said.
Moving forward, the investment opportunity in emerging markets, the US and in sectors such as commodities would provide room for the business.

Alliance Bank Malaysia Bhd head of integrated wealth management Marc-Olivier Francq expects overall retail wealth-management business to improve across various products such as investments, insurance, takaful and stock broking due to various macroeconomic factors.

On the challenges facing the business, Citibank's Lim said it was two-fold talent and the ability to roll out new products that could cater to the needs of the mass affluent.

“In the wealth-management space, talents such as treasury specialists, relationship managers, investment consultants, product managers and wealth practitioners are very much needed in Malaysia. Key to a sustainable growth is the ability to hire and retain talents,” he noted.

UOB's Lim said one of the immediate challenges in wealth management was the ability to effectively balance the risk of interest rate hikes while continuing to ride on the wave of liquidity as sudden interest rate hikes might adversely impact certain investments.

US & China on the threshold of new opportunities

BEHIND THE HEADLINES
By BUNN NAGARA

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US Defence Secretary Robert Gates arrives in Beijing later today at a crucial time.

Backed by Japan and South Korea, the United States is prodding China to restrain a wayward North Korea that is unnerving its pro-US neighbours again. Following joint military exercises in the South deemed provocative, Pyongyang’s artillery claimed several lives south of the border.

The near-autarkic North Korea has few friends, so China as an accommodating neighbour and its least likely foe is often seen as its closest ally. At a time of potential instability on the Korean peninsula, any help Beijing can provide would be useful.

Like everyone else, China would like to see continued stability on the peninsula. How­ever, its actual leverage on North Korea can be limited.

US envoy Stephen Bosworth has described his visits to Beijing and Tokyo in recent days as “useful”. China may recommend that Japan, South Korea and the US resume six-party talks with Pyongyang, Beijing and Moscow, as North Korea is now proposing, as a way forward.

However, the larger prize of Gates’ visit to Beijing today is renewed relations between the US and China.

At a time of China’s pivotal “rise” and continuing uncertainty in the US economy, the implications of the world’s most important bilateral relationship between the planet’s two largest economies have never been greater.

Preparations for President Hu Jintao’s visit to Washington from Jan 18 make Gates’ presence in Beijing even more significant. Issues of mutual concern like trade, currency, energy, subsidies, the environment and military postures are likely to impact on much of the world.

The latter subject will be the core of Gates’ talks from tomorrow. The next few days will see China and the US signalling a new phase in bilateral military cooperation, building on a fresh start seen last month.

Both the range and the depth of US-China relations these days are vast, and thus of corresponding importance for other countries as well. Unfortunately, certain vested interests are spoiling the moment by playing party pooper.

A warming of ties between Beijing and Washington would be seen as improving relations, placing pressures on defence budgets. The US military-industrial complex and rightwing Obama-bashers are thus concerned, particularly after costly adventures in Iraq and Afghanistan have constrained US expenditures.

Another interested party is the Western international media, with some adopting a China-bashing slant in recent weeks. A China bogey over a range of issues helps to sell press space and air time, besides armaments.

A non-issue that has been massaged into a double predicament concerns “China’s military build-up” and “US defence cuts”. Both are supposed to be happening simultaneously, increasing the sense of urgency, even panic, among sections of the US public.

Repeatedly increased defence budgets in China may seem disturbing to a potential foe. However, greater wealth that facilitates larger expenditures all-round applies to all countries.

China has clearly had rapid military expenditures in recent years, but government spending in other sectors has grown even faster. Unless seen in perspective, scaremongers are likely to claim more victims.

China currently spends around 2% of its GDP on the military, compared to the US spending nearly 5% of a much larger GDP.

The US consistently spends on defence about the same as the rest of the world, including China, put together.
Independent figures for 2009 place US military expenditure at more than US$660bil (RM2tril), and for China at almost US$100bil (RM307bil), after adjusting for official underestimates.

The allotment that Gates has applied to Congress for 2012 is some US$100bil less. But far from being cuts, the reduction comes from eliminating wastage such as unused, redundant or obsolete items and services.

As an indication of how these savings can easily be made, the different branches of the US military have already identified a total of more than US$100bil they do not need, a sum more than China spends or has ever spent on its armed forces.

Gates’ “budgeting” is in fact reorganisation, involving updated priorities and more focused needs. The US$553bil (RM1.7tril) he now hopes to get for 2012 will still have allotments for additional items such as advanced technology, new warships and more drones.

China’s military forces are characterised by two major features that are negative in international perceptions: a large standing army, and low-grade technology.

A universal principle in defence budgets is that most of the allocation goes to the salaries and benefits of personnel. To have a large army not only looks threatening, it also increases the allocations to personnel, with less funds available for armaments and even less for offensive weapons systems.

Low-grade technology is not only unimpressive, it also means more effort and funds are needed to upgrade it.
Then when technological advances are made, critics assume there is so much of a military build-up, forgetting the low technological base to begin with.

China today is the world’s second largest economy with the greatest potential for growth, trade and investments. It also has the world’s largest population, one of the largest land areas, considerable coastlines and some challenging border regions.

It is continuing to demobilise in reducing the number of troops, with the problem of having to find new jobs for retired soldiers. Its navy, reputedly stronger than its air force or its army, still has no aircraft carrier while the armed services are still dependent on second-hand Russian technology.

These realities seldom make world headlines. However, when China finally gets its first aircraft carrier later this year, more sensationalist reports about a “China threat” can be expected.

Regional currencies to rise on China factor

By CECILIA KOK  cecilia_kok@thestar.com.my

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SPECULATION about China's intention to allow its currency to appreciate soon has been strengthened after an official paper over the week said the Chinese government would let the yuan, or sometimes called the renminbi, rise about 5% against the US dollar this year.

That's about two-percentage point higher than the expectations of most investors, who thought the maximum that the Chinese government would allow this year would just be an appreciation of 3% in the value of the yuan against the US dollar.

Needless to say, any appreciation of the yuan would certainly be welcomed by Western powers, especially the US government, which has long blamed China's currency policy of keeping its exchange rate significantly undervalued against the others as the main cause of global imbalances.

Western powers claim that China's significantly undervalued currency has given the country unfair trade advantage, and they point to China's ability to continuously enjoy huge trade surpluses over the years, while leaving the West with continuously huge trade deficits, as support of their claim.

Economists at Washington-based Peterson Institute for International Economics say their recent calculation show that the yuan remains 17%-20% undervalued against the US dollar to this day. That, the institute claims, is a deliberate manipulation to gain export competitiveness.

So, given the perceived significant undervaluation of the yuan, many economists do not think that the (probable) 5% rise in the yuan's value would be enough to appease the Western governments. Market observers believe China will remain under tremendous international pressure to let its currency rise faster to help in the global-rebalancing effort.

But to be fair, China has indeed made an effort to reform its currency policy the only thing is that it is doing it gradually. This is to maintain stability in its own financial and economic system.

Inflation management tool
In June last year, the Chinese government removed the two-year peg of the yuan to the US dollar, which had stayed at around 6.83 per US dollar since July 2008, to allow its currency to appreciate.

The removal of the yuan peg resulted in the yuan gaining about 3.33% against the US dollar as at the end of 2010. Nevertheless, the yuan was still an under-performer last year compared with other currencies in the region (as shown in the chart).

According to the China Securities Journal, a leading voice on the country's economic affairs, the Chinese government would most likely allow the intended rise of the yuan to be accelerated in the first half of this year. This comes as the Chinese government concedes to the use of currency as a tool to manage its fast-rising inflation.

China faces mounting inflation pressures after its November consumer price index (CPI) soared to a new 28-month high at 5.1%, and some economists had warned that if no urgent measures were implemented, the country's CPI could grow by 7%-8% over the next two months.

Economists say that by allowing its yuan to appreciate, China can alleviate the inflationary pressure as its imports of goods and services will naturally become cheaper. A higher value of its currency can also help reduce the impact of rising global commodity prices, especially that of crude oil and crude palm oil, on its domestic economy.

Regional currencies to advance
Besides the urgent need to curb rising inflation pressure, many believe that China President Hu Jintao's upcoming visit to the United States in the middle of this month, will also lead to the yuan rising faster in the first half of this year.

And with growing expectations of the yuan's appreciation in the near term, economists say regional currencies, including that of Malaysia, will likely gain further momentum, particularly in the early part of this year. Regional currencies tend to move in tandem with the changes in China's yuan, as the latter is often regarded as the “anchor” currency of the region.

Last year, the China factor had also played a role in lifting regional currencies, as wide expectations of a yuan revaluation then attracted many investors to put their bets on Asia-Pacific. Of course, the region was also attractive to investors because of its growth prospects and wide interest rate differentials with major developed economies.

And as foreign capital poured into the region, Malaysia's ringgit turned out to be the top-performing currency last year, having appreciated from 3.424 against the US dollar from the beginning of 2010 to 3.0635 against the US dollar at the end the year.

(As at the time of writing yesterday, the ringgit was quoted at 3.0698 to the US dollar.)

Based on local economists' report so far, the ringgit is expected to strengthen further in 2011, but only marginally, as policymakers are expected to intervene to minimise its rise. Economists believe the ringgit would end the year trading within the band of 3.00-3.05 to the US dollar.

They also believe that the strengthening of other regional currencies will also be somewhat curtailed, as Asian policymakers become increasingly concerned over the impact of the rise of their currencies on export competitiveness.

On the back of all these recent developments, it will be interesting to see how Asian governments adapt their currency policies this year to balance between the need of maintaining export competitiveness to support economic growth and boosting their purchasing power by allowing the currencies to rise, and hence, promote domestic demand.