Despite the continuing impact of the Covid-19 pandemic, Hong Kong’s asset management industry has shown resilience over the past year and is strongly positioned for growth in 2021 in view of vast opportunities in the Greater Bay Area (GBA), policy support, and the city’s strategic regional location and role.
Key trends supporting the industry include the continued opening up of mainland China’s financial services industry to foreign investment; regulatory reforms and incentives enacted in 2020 that are expected to encourage local market growth and increase Hong Kong’s attractiveness as a fund domicile; and the integration of environmental, social and governance (ESG) factors into investment processes, KPMG says in its new report, Hong Kong Asset Management Outlook: Key Trends for 2021.
Andrew Weir, global head of asset management and vice-chairman of KPMG China, says: “Hong Kong’s asset management industry is set for another strong year in 2021. Asset managers that take affirmative action in 2021 to capitalize on emerging trends will be able to capitalize on growth and superior performance. The industry will continue to be supported by policymakers that remain committed to encouraging growth and reaffirming Hong Kong’s status as a premier international financial centre and asset and wealth management hub.”
The report notes that mainland China will remain a strategic growth opportunity for Hong Kong asset managers this year. As China recovers more rapidly from the pandemic than other developed nations, mainland Chinese equities and bonds may become a growing component of portfolios, and major indices will likely increase their allocation to mainland China, potentially benefiting the city’s asset managers.
The GBA, with a population of 71 million and a combined GDP of US$1.6 trillion, also presents a more specific, wealth-oriented opportunity for asset managers. “The GBA’s special status will be enhanced with the imminent launch of the GBA Wealth Management Connect scheme, which will allow residents of the cities in the GBA to invest in eligible investment products distributed by banks in Hong Kong and Macau, and vice versa. We expect the scheme to evolve and expand over time, enlarging the overall size of the funds market,” says Bonn Liu, partner, head of asset management, Asia-Pacific, at KPMG China.
In Hong Kong, regulatory reforms and tax incentives have been introduced over the past two years to encourage local market growth and cement the city’s position as Asia’s premier asset and wealth management hub.
A number of new measures were announced in the city’s budget on February 24, including plans to inject a further HK$9.5 billion (US$1.2 billion) into the innovation and technology fund. Darren Bowdern, partner, head of alternative investments, Hong Kong, at KPMG China, says: “Providing a subsidy of up to HK$1 million to managers setting up an open-ended fund company (OFC) in Hong Kong, or even re-domiciling an offshore fund to Hong Kong under that regime, is a fantastic initiative that should significantly boost the appeal of using Hong Kong as the choice location for raising capital going forward.
“A similar subsidy will apply to the set-up of qualifying [real estate investment trusts] in Hong Kong, but with an increased cap of HK$8 million per REIT. In my view, this will be a small cost to the government in order to generate much larger returns from the economic activity and substance that will be established in Hong Kong from managing Hong Kong-based OFCs and qualifying REITs.”
The KPMG report also cites the introduction last year of the limited partnership fund (LPF) regime, amendments to the existing OFC regime, and proposed reforms to provide competitive tax treatment for carried interest.
“The Hong Kong government and regulators are expected to continue to focus on further tax and regulatory reforms in 2021 and going forwards,” notes Vivian Chui, partner, head of securities & asset management, Hong Kong, at KPMG China. “These reforms reflect a broader global trend to bring operations and investment structures onshore, which we expect to continue throughout the year. Asset managers looking to raise capital in Asia have more alternatives for fund vehicles than ever before, and Hong Kong ought to be a major beneficiary.”
As asset owners in China and the broader Asia-Pacific region follow the global trend and increasingly incorporate ESG factors into their manager selection and portfolio management process, institutional asset managers will need to start measuring the ESG dimensions of their investment portfolios, perform in-depth ESG analytics, aggregate ESG ratings and information, and provide ESG assurance.
“Those that are quick to take decisive steps in 2021 towards full ESG integration will be well positioned to enjoy a short-term competitive advantage – not only with institutions, but increasingly with retail investors as increasing amounts of assets are in the hands of more purpose-driven Millennial investors,” says Pat Woo, partner, head of sustainable finance, Hong Kong, at KPMG China.
According to the report, asset managers will continue to evolve their operating models and focus on the application of advanced technologies to their core processes. ESG specialists, data scientists, and domain-centric technology experts will continue to be in high demand in 2021, as will professionals who have a comprehensive understanding of the China market.