By the reckoning of UBS Asset Management's Paul Guest, China’s economic volatility, its stock market turbulence, its slowdown in growth and its subsequent policy changes had an unintended consequence when it come to the expatriation of Chinese capital.
He explained: “What it has meant is an increasing capital flow out of China. It turned up all over the place: London offices for one, and in residential markets in any one of a dozen markets around the worlds. That has only increased with the volatility in the stock market.”
Guest said he believed the Chinese government would have preferred a calculated and gradual loosening rather than an accelerated outflowing of Chinese money into international markets. “
“Exporting capital prevent bubbles at home. It does also help with insuring prosperity for a growing middle class, so long as it is not destabilizing. But I got the sense they would have preferred the domestic stock market continued to grow and generated wealth at home rather than people taking capital offshore to get their returns there.”
Another Asian capital markets theme for Guest in 2015 was what he described as a rapid pick up in investment in Australia that saw yields compress dramatically. “At the beginning of the year you had global investors citing Aussie yield as some of the highest around the world.”
“Spreads between government bonds and property cap rates were among the widest around. Very quickly, capital values accelerated.”
Office yields in Sydney at the beginning of year were around 6.75 percent, for example, but have since moved by more than 100 basis points over the course of the year, he pointed out. Both domestic and foreign capital has been increasingly active, he said.
Guest pointed to a third and, as he called it, a ‘dull’ theme that really represented a continuation from prior years.
“That is of intraregional capital. In Japan, what is driving capital markets there is predominantly Japanese money, unlike the 2007 boom when it was predominantly foreign money. That has been the story for several years now, he said. Further, he said European and North American investors have been net sellers in the region and not reallocating in the current climate.
In a final theme, Guest said that 2015 saw some of the world’s biggest investors, such as Middle Eastern sovereign wealth funds or North American pension funds acknowledge they were under allocated to Asia. “A third of global GDP is in Asia and yet very few investors have a third of their capital in Asia”. There have been certain investors that moved this year to address that shortfall and Guest concluded by saying that the launch of a number of pan-regional core funds comes partly as a result of that acknowledgement.
Guest joined UBS earlier this month from LaSalle Investment Management, where he was the firm’s regional director for research and strategy.