For more than a decade, GDP growth rates in Asia and other emerging markets (EM) have outstripped developed markets. With the trend expected to continue to grow, institutional investors’ appetite for EM will also continue to take a leap forward.
2019 will certainly be an interesting year for EM: GDP growth is expected to reach 4.4%, and a healthy pipeline of index inclusions will see a surge of passive flows and a re-weight of EM benchmarks.
China and Saudi Arabia will steal the limelight as the two most important index-inclusions in 2019.
China’s A-shares will increase to 20% of MSCI’s Emerging Market Index; making the total passive inflows into China to top $600 billion, whilst regulatory and market infrastructure changes are also increasing access to RMB- denominated assets.
Saudi’s inclusion in MSCI & FTSE will see an $18.2 billion of passive inflows and a rebalance in the EM weighting for both index-providers. HSBC Saudi Arabia is the largest international investment bank with both custody and brokerage licenses in The Kingdom, making it well placed to support investors looking to access the Saudi market.
The combination of macro-economic trends and surge of passive flows will not only attract further interest from institutional investors seeking alpha in emerging markets, but will also result in a change in EM liquidity levels.
The changes in the liquidity landscape also comes hand-in-hand with changes in the market structure landscape. Saudi Arabia’s stock exchange, Tadawul, for example, has introduced a closing auction similar to those in Europe and North America. Other global exchange technology providers are also following suit with alignment projects, focusing on rules, technology and processes, underway.
As market operators implement new micro-structures and auctions processes, liquidity becomes more available, and the trend to trade emerging markets electronically also starts to emerge. In fact, although the electronic trading of equities in Asia continues to lag behind Europe and US at around 30% based on data from Greenwich Associates, it is predicted to grow to 38% by 2021.
Electronic execution service providers must therefore develop algorithmic trading suites tailored to EM conditions and HSBC is at the forefront of this evolution.
As opposed to attempt migrating developed market electronic tools into emerging markets – without taking into consideration the differences in speed, fragmentation, and spreads – HSBC is leveraging the extensive on-the ground knowledge and expertise in emerging markets to create bespoke offerings. We have typically adapted our algos used in Asia’s developed markets as they share a multitude of characteristics in common with other EMs, albeit having a deeper liquidity.
The development of HSBC’s EM algos is the result of sophisticated machine-learning programmes, which have used large data sets in testing mode before using them in real market conditions. This also includes the development of a simulation tool which allows the client to effectively perform ‘dry runs’ of strategies against test data as a guide to likely outcomes in the live trading environment to address the Best Execution requirements where pre- and post-trade analytics are not easily accessible.
Machine-learning techniques have also been applied in passive investment vehicles space, such as ETFs, which are still considered one of the most popular ways to access Emerging Markets.
HSBC has launched the ETF iNAV, the first ETF-specific, intelligent and fair value-based algorithm. Rather than trading on-exchange ETFs via RFQ mechanisms, the algorithm calculates the ETFs NAV in real-time, as well as its creation and redemption costs in order to decide whether to interact aggressively or passively with available liquidity.
Currency and operational risks are also important factors to be taken into consideration when trading EM equities. Institutional investors require comprehensive execution services to be fully integrated with the capabilities of a global bank. In HSBC’s case, this includes execution algorithms that allow for automated hedging of FX exposures as well as access to HSBC’s network of securities services as one of the world’s largest custodians. In markets where the primary trading risks may be a function of the settlement cycle, the ability to tap world-class funding and credit services can be a source of much comfort.
A strong on-the-ground expertise, a wide range of electronic execution solutions, and a 360® product offering (trading, hedging, and custody) is what makes HSBC the global leading provider of emerging markets access.