With the ongoing turmoil in capital markets worldwide and particularly so in the Asia Pacific (APAC) region, public policy and corporate policy needs to evolve in response to the market fluctuations and complex sociopolitical and socioeconomic dynamics of the region, says Paul Schulte.
Schulte has served as a policy analyst and advisor to governments and hedge funds, as well as a consultant to private equity firms. He has served as an advisor and consultant for the US House of Representatives, International Trade Commission, Indonesian Ministry of Finance, as well as GIC, CIC, IMF and the US Treasury.
He has also advised the International Organisation of Securities Commissioners (IOSCO) – the body that creates rules for capital markets – as well as the Australian Securities and Investment Commission (ASIC), the Hong Kong Stock Exchange and the Securities & Exchange Board of India (SEBI) on developments in financial technology.
Currently the chairman of Schulte Research, an independent research company which advises private funds, sovereign wealth funds (SWFs), consulting firms and banks on developments in GEMS banks, he shared his views with DEALSTREETASIA about how he sees the various markets of the APAC region evolve in the near future.
Bain & Co said this year that 2014 was a record year for the Asia Pacific, led by Asian deals from China and Japan (e.g. Alibaba IPO). In Southeast Asia, the research found that there is a lack of attractive deals. What’s your take?
It’s a lack of government support for entrepreneurial activity and entrepreneurism, combined with a lack of interest in creating an ecosystem for entrepreneurs. You have these entrenched oligopolies and cartels which dominate business and that’s true in Hong Kong, Singapore, Thailand, Indonesia and Malaysia.
There needs to be a renewed sense of entrepreneurship, and Singapore is getting there while HK is fighting it out. Others are also figuring it out. That’s why theres all this dealflow in the US and UK and Japan. China has its gates open for all types of innovation. What we’ve seen in Kuala Lumpur this week [at the World Capital Markets Symposium 2015] is very encouraging as well. The Malaysian government is very encouraging of alternative funding methods.
As the Chinese and Indian economies mature, what should investors be aware off? What are the pitfalls and prevailing trends you see in these?
The prevailing trend throughout most emerging markets is the maturation of the credit cycle. There just isn’t a lot more credit that can be given out, for the simple reason that savings have been exhausted and the savings in the domestic banking system have been lent out.
The number you need to look at is the loan-to-deposit ratio, which I covered in a book of mine. When these credit cycles peak and are sort of exhausted, you need to find alternative modes of credit to keep the economy going and financial technology needs to be there as an enabler for alternative means.
This is especially crucial for one of the most underserved sectors through all of IndoChina, Indian subcontinent and ASEAN – the small & medium enterprises (SMEs) lacking access to credit. You now have new SME technologies which allows firms to create ratings in new ways that never existed before. In today’s world, financial technology is financial intelligence.
What are the markets to watch in the coming years, especially those earmarked as China’s manufacturing successors by Stratfor?
So, do you want to have a hand-me down? These are low value-added, pollution-producing industries, which Indochina will get a lot of. Malaysia isn’t in the PC16, so there is every reason for countries to want to become engineering/producing countries. And for countries like Sri Lanka, Cambodia, Laos and Vietnam, what they’re getting is very low value-added and labour-intensive stuff.
Countries should not be passive recipients of these industries, as these industries are a middle class trap. It’s basically low-end labour and that’s why China is getting rid of these as China doesn’t want to be caught in a middle-income trap.The only way to progress and develop is to move up the value chain.
What should governments be mindful of economically in the next decade, from 2015-2025?
Governments have to be hyper-aware of what students they’re preparing for the university students. Are they creating thoughtful, independent-minded adults? They have to stop all the sports sponsorship and Grand Prix’s and tennis tournaments and instead focus on startup-sponsoring technology events and entrepreneurial contests and competitions, like hackathons.
This is what is happening in Berlin and Austin, Texas, Ireland, US, HK and Singapore. Malaysia needs to do this. Stop with the sports sponsorships and have an international hacking competition in KL that collaborates with the government. The future is such that the governments will have to work with the private sector and military to create safe and secure financial ecosystems. Everyone has to be involved.
Secondly, theres’ a world of private equity (PE) and a world of secondary market public equity. The world of PE may have lessened its value by the time it is right to be listed as a public entity. Often, there’s no value left for public shareholders as the PE shareholders have squeezed it out of the corporation. Some examples are OnDeck and LandingCloud they were listed and the valuations were crazy.
It’s irresponsible for people to list a company where the private equity profit and the public equity shareholders are ripped off. And regulators need to look at this. And these were the two “darling fintech pioneers” listed on NASDAQ. It’s irresponsible behaviour by Stock exchanges to allows this to occur.
The darling of Southeast Asia was Silverlake Access, based in Singapore. It was a large fintech firm that did technology work for banks and some irresponsible people published a document making allegations against SIlverlake’s management/ The stock fell by 50 per cent! And this was a totally irresponsible, anonymous document.
That’s slander and there was no evidence, and it dipped on market sentiment alone. In these new technological verticals, its’ always going to be the Wild West.
How did your grounding in philosophy impact your early approach to international finance?
The ability to learn how to think – how to learn to read and write – is more important than mathematical skills. That’s why I did my economics and international finance training after reading my philosophy degree. Every university student should be a double major, with a major in an art or science discipline and a minor in maths. Just to have a degree in accounting or engineering isn’t enough nowadays when you’re approaching financial markets.
Also, many hedge fund and private equity professionals neglect to factor I’m a crucial element of the human condition: Everybody anywhere wants to be treated with dignity.
I’ve had the experience of teaching on four continents for the past 17 years. And what some people who are engaged in doing rough &tumble businesses forget is that people want to be treated with dignity. People want dignity, and if we don’t grant them this dignity, it can and will sour a relationship.
What aspects of your counselling work as a volunteer in HK do you feel has influenced your views on international finance, given the common root of human behaviour?
I’m going to write a book called ‘Addiction Treatment for Financial Markets’. I do a lot of work with gay men in Hong Kong who have drug addiction. Gay men have 3 times higher likelihood of drug addition due to bullying and discrimination. So much of our people (finance professionals) have delusions about reality that have no basis in fact and so as in addiction, it is as in financial markets.
You need brutal honesty about what truly is the case. And I think that is the similarity, in that humans have the astounding ability to deceive themselves. We think that its ok to stay in a marriage where you’re being beaten up. We think its ok to be around people who are abusing drugs, rather than to disassociate ourselves from them.
We think that something is in our interest when it is not. We cling onto a stock when we know its bad news, over and over again. We cling onto beliefs that we know to not be in our interest all the time.
Gambling is an addiction.The American Psychiatric Association named addiction as a psychiatric disorder and in the world of banking & finance, there’s very high rates of substance abuse in trading rooms globally. Ruthless, clear-headed honesty needs to be name of the game or else self-deception sinks in really quick, in a lot of human activity.
Some analysts have said that Vietnam, Philippines and Indonesia might fall into the middle-income trap, like Thailand. How should policymakers respond to this and avert it?
Somebody said very wisely that the US is controlled by 200 families, but it has a high turnover rate. In Asia, as the founders of these businesses age, these business empires become calcified and brittle. This creates middle-income traps, as, for instance, these 4-5 conglomerates control the politicians.
Governments bear the resposnbility of that, which is a constant. Hong Kong allows significant ease and exit, in terms of corporate creation and also have bankruptcy laws and protection in place.
Public universities that allow a wide admission for the whole economy, rather than just the elites – that’s one of the lifeblood issues of Singapore, in that everyone gets access to the education system. In Brazil and Thailand, only the elites get access to education.
Again, governments need to stop with frivolous events and create festivals and events for entrepreneurship & technology. The last thing is to tell the world: “What do you want to be?” What do Bangkok, Jakarta and Kuala Lumpur want to be?”
I’ve heard that in Jakarta the pot is being stirred and something will emerge, but what does Kuala Lumpur want to be? It’s this city branding that’s critical and London has done a great job on that. I will submit that fintech is not possible without an ecosystem being created. And it’s got to be the private sector.
In Malaysia, Maybank, CIMB, RHB – they all need to create scholarships. Get students to solve a problem via international competition. To hell with the race cars and other frivolities!
Do you see China and India falling into a middle-income trap?
Definitely not China, as they’re hyper-vigilant about that. It is sending out all of this low-end manufacturing, which is indicative of moving up the value chain.
However, If you keep on devaluing the currency, all you do is punish the middle class. Constant currency devluation creates inflation and reduces the volume of imported goods and technology, with low quality consumption, investment and choice. A high currency strength encourages high-end consumption, in addition to high quality products and technology. Domestic companies just have to guess at what’s good, without any international influence.
So…India is a hard one to answer. The Indian financial system is so innovative and forward-looking and is doing some amazing stuff. Yet, outside of the financial system, you see a lack of world-class technology. Outside of management consulting and financial technology, there is a lack of innovation. India is constantly devaluing its currency, which is getting weaker.
India has some of the largest coal reserves in the world and yet is a huge importer of energy, which is patently ridiculous. How can India be one of the biggest power importers and have coal reserves rivalling the US, yet imports energy? How is this possible?
Because of the bureaucratic nightmare of company creation and regulations impacting the ability to conduct business, this deters entrepreneurs and businesspeople.
China & India, vis-a-vis Southeast Asia, which is more attractive to PE firms and hedge funds?
Far and away, it is Southeast Asia. There’s so much opportunity and there’s so many PE firms tripping over each other. China has a tremendous surplus of PE money but they’re not paying enough attention to markets like Indonesia, Malaysia and Indochina. Vietnam, Cambodia and Indonesia have the potential to be like Kenya and build a banking system overnight, which is what M-Pesa achieved.
There are many underbanked people in Southeast Asia that could benefit from something similar. And in Bangladesh, there’s B-Cash, which is going to do in Bangladesh what was achieved in Kenya.So you have the situation where people can create infrastructure on the cellphone, without a physical banking presence, which was what M-Pesa did in Kenya.
These guys in B-Cash spent 6 months in Kenya. And you have to understand that the whole world of e-currency being done through the cell phone is something that is new. The Bangladesh Central Bank is amongst the first central banks to distribute currency through the cellphone, without cash. This is terra incognito – new territory – and one that is a very exciting development.