The world’s innovation lab: outlook for 2023 in Asia______

Justin Christopher, Head of Asia

Asian investors greeted 2023 in a state of mind that would have been unrecognisable a year earlier.

Twelve months ago, investors were bathing in light at the end of a dark pandemic tunnel, greeting surging markets in a brave new world of digitalisation and cautious signs of thawing geopolitical tensions. A year later, the free-money era is over, inflation is soaring, tensions are bubbling, global recession fears gnaw at market confidence, the stocks of tech titans are (momentarily at least) in the doldrums, and crypto lies in tatters.

This perfect storm tested some trusted tenets of financial market investment. The basic principle of diversification suddenly looked like a broken model as bonds, stocks, and even gold all tumbled in tandem, and supposedly safe investments underperformed some of the high-risk assets thought to be the most prone to market upheaval.

Retail investors have been left understandably fragile as even the most conservative portfolios exited 2022 bruised and battered, while the rise of private markets has placed many of the most exciting opportunities out of reach.

This has added yet another challenge to an embattled asset management industry.

Slowing growth and the spectre of recession will overshadow the global economy for at least the first half of 2023 as central banks worldwide continue to reverse stimulus policies to counter inflation. The World Bank has cut its growth forecast from 3% to 1.7%, close to the slowest pace in three decades (outside the pandemic and global financial crisis).

The downward trend exacerbates an already difficult environment for an industry facing the now-familiar challenges of shrinking fees and margins, digitalisation, a more demanding breed of customer, emerging asset classes, and waves of new regulation.

Reasons to be cheerful

Amid the apparent gloom, there are causes for optimism among asset managers and investors in Asia, particularly those willing to take a long view. In fact, the pandemic in many ways triggered a surge of innovation that has seen Asia jump ahead of industry counterparts around the world.

Large parts of Asia emerged comparatively unscathed from 2022. Asian investors were less bearish than their European counterparts, and with interest rates likely to peak in the first or second quarter of 2023 and inflation expected to moderate, the second half of the year may see markets become friendlier. As a more benign monetary environment unfolds, and China continues to unwind its pandemic restrictions, supply chain disruptions that have fuelled inflation should dissipate, helping to re-energise Asian growth.

The region is already forging ahead when it comes to asset-management industry innovation. Whether it’s customers in China accessing robo-advisory services, retail investors in Singapore using banking apps to shop for funds or telecom customers in Thailand making micro-investments, the era of active, personalised financial management is accelerating rapidly.

Investor sentiment is also turning a corner. Investors in Hong Kong, Singapore and Taiwan continued to add to their holdings in 2022 while investors in the UK and Europe headed for the exits. Moreover, AUM in the region fell less than the global average.[1]

Addressing fundamental questions

But asset managers still have much to do, beginning with the fundamental questions of how they can rebuild confidence, enhance services, deliver alpha in a bear market, harness emerging industry megatrends, and remain relevant.

“It’s hard to imagine we have an industry where data is available to the micro-second, but we send reports 20 days after the quarter-end to clients,” Peter Harrison, CEO of Schroders, said at a Financial Times forum in 2022.

Mr Harrison’s comment encapsulates the challenges asset management faces in evolving products, infrastructure, and user experiences that have failed to keep pace with technology and customer expectations of a modern, digital investment experience.

ETFs pushed the industry a step further from mutual funds, but the industry needs to move to the next level by applying new tools and approaches to investment with the same spirit of democratisation that inspired the creation of the first mutual funds almost a century ago.

The revival of active management and selectivity, and renewed demand for advice, provides the ideal opportunity for the industry to show its worth.

Inflows into active funds and ETFs have outpaced passive investment for two consecutive years. The breakdown of traditional 60-40 diversification in 2022, the rise of alternative asset classes, the growing democratisation of private markets, and the emergence of tokenisation all offer the chance to thrive for astute managers who can offer innovative solutions. We are already seeing these solutions emerge in some Asian markets.

Private-market democratisation has a long way to travel but momentum appears unstoppable. In Asia, almost 90% of high-net-worth investors are expecting to allocate up to 25% of their portfolios to private markets, according to a Hubbis survey,[2] yet there are still large private-market gaps in HNW and UHNW portfolios. There are also huge rewards waiting for asset managers who can work out how to deliver private-market opportunities to the Asian retail investor.

“If you take the 10-year view, you will see public and private coming together much quicker,” Harrison told the FT forum. “In Europe, every distributor is already thinking about how to get private assets to investors in 15,000-euro ticket sizes – that’s where this is going.”

ESG, likewise, is driving not just ever-growing inflows into funds in Asia but also demand for greater specialisation and granularity. Increasingly, it is not enough for analysts to base decisions on balance sheets; they must be able to draw on knowledge of criteria like biodiversity, carbon pricing, Scopes 1-3, social issues, or energy transition factors. This, again, offers asset managers the opportunity to deliver value.

To that end, the industry is likely to see accelerating innovation in products that serve the twin demands of an asset manager’s core fiduciary duty – delivering performance – and fulfilling investors’ desire to see their money do good.

This trend will dovetail with rapid digitalisation and automation that will deliver granularity of data, real-time management, customisable portfolios at scale, faster settlement, and more efficient distribution.

Asia leading the way

Some Asian markets are already forging ahead in automation. In Singapore, for example, our recent survey found that 41% of organisations are fully automated, compared with the global average of 15%. This still leaves ample room for growth.

The economic challenges of the coming year look set to sharpen industry appetite for the long-term savings promised by automation and other digital technologies. Over the next 12-18 months, 47% of firms surveyed plan to use digital forms to improve automation rates, along with 35% using robotic process automation and 33% using machine learning/AI.

The emergence of Distributed Ledger Technology [DLT] is transformational, driving an unprecedented convergence of public and private markets. Our survey found that Singapore currently leads the world in the desire to deploy DLT, and crucially this desire has strong regulatory backing.

A once-in-a-generation opportunity

As DLT becomes embedded in the industry, tokenisation will become the norm. Indeed, 91% of responders in a 2022 survey ranked tokenisation as the most likely dominant future means of investment[3].

Edward Glyn, our Head of Global Markets, described tokenisation at one of our Connect Forums as a “once-in-a-generation opportunity for our whole industry to be radically better than it is today,” and this is no hyperbole.

For managers, tokenisation will deliver more efficient supply chains, simpler issuance, and better analytics. By cutting several basis points off management costs, it will also boost alpha generation.

For Asian investors, tokenisation will mean cheaper, more personalised access to previously off-limits markets, real-time investments, fair pricing, ethical transparency, and a user experience to match lifestyle apps.

Here again, Asia has jumped ahead to become the world’s innovation lab for financial technology and progressive regulation. Our survey found that investment in mobile app development in Asia-Pacific has outpaced everywhere else in the world.

Investors in countries such as Singapore, Thailand, and Indonesia are able to access frictionless small-ticket investments through apps such as GoJek, Grab, or True Money.

Part of the reason for this is the emergence of a regulatory environment in developed Asian markets where regulators are acting as sponsors of change.

Malaysia, Singapore and Australia have a strong focus on DLT, with Singapore again blazing the innovation trail. The industry in Asia and beyond is keeping a close eye on the Monetary Authority of Singapore’s Project Guardian initiative, which is exploring the potential of tokenised financial assets. The city-state’s ADDX digital asset exchange launched several funds in the last year.

A frictionless future within reach

Thanks in part to a surge in HNWIs and Assets Under Management in recent years, Asia is poised to become the world’s largest funds market. To capitalise on that opportunity, it will be essential to eliminate friction, particularly within and between emerging markets such as Indonesia or the Philippines but also in developed regional markets where manual processes and faxes are still prevalent and cross-border distribution still a challenge.

Automation no longer requires a huge amount of technological change, and widespread adoption means the benefits can be achieved at scale.

Calastone is confident that a more tech-enabled funds Asia-Pacific ecosystem is within reach. The accessibility of technology means markets like Malaysia, Thailand, Indonesia, and Hong Kong can leapfrog markets that have struggled to overcome legacy systems and inefficiencies before automating.

We’ve spent the last eight years exploring, developing, and building with DLT to meet the challenge of evolving a new market. This led to the release of our Distributed Market Infrastructure (DMI) in 2019. Now we are partnering with Microsoft and using its Confidential Consortium Framework (CCF) to further evolve what we can do.

Tokenisation allows us to scale it further and build a completely new way of operating by directly tokenising collectives of assets for distribution to the mass market, using our DMI.

The key benefit of our approach is that it leverages the scale of the existing Calastone network, instantly connecting more than 3,500 members of the global asset management ecosystem. Where other companies are building new products in isolation, we can use all our existing connectivity and infrastructure to enable fund managers to distribute new, token-based collective investment products globally from day one, without any costly replatforming.

Asia’s funds industry is on the cusp of great change, and a greater future, in which investment is digital, affordable, and universal.

[1] 2023 Calastone Global Fund Flow Index

[2] Hubbis


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