The release of foreign direct investment figures, showing that inbound investment into China is now the lowest in thirty years (at USD 33bn) calls into question the health of the Chinese economy, and what Western investors should do regarding its financial markets.
Granted that it is the second largest economy, we know relatively little about what is really happening economically and politically in China. In the past decade, Western investors have put less weight on headline economic measures such as GDP in favour of micro indicators like electricity usage, owing to fears that official indicators do not ‘tell the real picture’. Politically, there is a sense that China is much less an ‘open book’ and it is therefore harder to read the intentions of its government. In the absence of such clarity, investors are staying away from China
Reflecting that, the performance of Chinese assets has been lethargic, and valuations (of equities are now very low). Compare for example the performance of Alibaba to that of AmazonAMZN. As such one can begin to wonder if the concerns that investors have over China are now price in.
Specifically, those concerns relate to three broad areas – US/China relations and the risk of a conflict around Taiwan, the structural risks to China’s economy (European readers will recognise the risks to the Chinese property market), and the apparent lack of urgency in economic policy making.
Some of these risks are ebbing, for the time being. The Taiwanese presidential election has passed without incident and diplomatic communications between the US and China have improved.
Economically, risks remain. China wants and needs to grow at a rate of close to 4% for the next decade to stay on track with its ‘grand plan’. It has not had a major recession in recent decades but as a result is likely accumulating the ingredients of a structural downturn – notably over capacity, inefficient investment and large pockets of debt. External risks remain – a new trade war with the US (should Trump win another term) and a robust European response to the dumping of electric vehicles, are just two scenarios.
My sense is that when large markets are considered ‘uninvestable’, as was the case with the euro-zone in the mid 2010’s, it is time to start to warm up the investment case. China is cheap but we do not yet have a catalyst, either an overwhelming stimulus or a form of mini-crisis (trade war or debt blow out).
A pair of large investment companies with nearly $7 trillion in assets, said Thursday they exited a climate change investor initiative that aims to pressure companies to quickly cut carbon emissions.
JPMorgan Asset Management, which manages $3.1 trillion in assets, has not renewed its membership in Climate Action 100+, saying through a spokesperson that it will oversee its stewardship on climate change with companies with its bank staff.
A second large asset manager, State Street Global Advisors, with $3.7 trillion, also dropped out, saying Climate Action’s approach “will not be consistent with our independent approach to proxy voting and portfolio company engagement,” according to a statement.
BlackRock, the world’s biggest asset manager, is also scaling back its work with the group, a spokesperson confirmed.
Launched in 2017, Climate Action 100+ aims to work with companies to halve their greenhouse gas emissions by 2030, through governance reforms, the elimination of emission through the value chain and enhanced disclosure. Its website boasts $68 trillion in assets under management.
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The moves come as Republican officials in Washington and some state governments criticize financial companies for prioritizing climate change, in some cases blocking the firms from state contracts.
Texas Attorney General Ken Paxton applauded the news, saying financial companies had undertaken an “unlawful” campaign to force environmental, social and corporate governance on customers.
“I’m pleased JPMorgan has exited the Climate Action 100+,” Paxton said on X, the former Twitter. “This is a critical step toward putting customers’ financial well-being first.”
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JPMorgan said in light of its 40 “dedicated sustainable investing professionals” and other staff, the asset manager “has determined that it will no longer participate in Climate Action 100+ engagements,” according to a company statement.
“We believe that climate change continues to present material economic risks and opportunities to our clients, and our analysts will continue to factor this into engagement with companies around the world.”
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Among the financial titans cleared to sell “exchange traded funds” that invest directly in bitcoin are Boston’s Fidelity Investments, along with other heavies such as BlackRock and VanEck. On Fidelity’s investment platform, one of the largest in the world, you can now buy these ETFs right alongside regular stocks and bonds.
Franklin Templeton, another investment giant, on Thursday posted a picture of its Ben Franklin avatar featuring the ‘laser eyes’ meme, usually used by crypto superfans on social media to embellish their profile pictures with a tongue-in-cheek, futuristic vibe.
“It’s a very big deal but possibly not for some of the reasons people have been excited on X, and all the memes and jokes of the last few hours,” said Christian Catalini, founder of the MIT Cryptoeconomics Lab. “It’s a very important step toward bitcoin establishing itself as an important, new asset class that traditional finance institutions can directly engage with.”
(Catalini is also cofounder of the bitcoin payments company Lightspark.)
If you have not been paying attention to crypto following the market crushing implosion of the FTX exchange fourteen months ago, this might surprise you: Despite mounting regulatory and economic setbacks, crypto was a top market performer in 2023.
Bitcoin, the largest and most valuable cryptocurrency, surged 154 percent last year. Meanwhile, the Standard & Poor’s 500 index gained 24 percent, and Nasdaq rose some 44 percent.
All this was happening as one-time FTX chief executive Sam Bankman-Fried went on trial — and was convicted — for the fraud associated with his firm’s collapse.
“It’s been a wild ride to see the belief system of this industry come to fruition,” said Dave Balter, chief executive at FlipSide Crypto, a Cambridge firm that specializes in crypto data analysis. “The ‘big deal’ on a personal level’s a spiritual one, where disbelievers and contrarians now recognize why our conviction has never wavered.”
But even as some big names have come along to the crypto world, there are some high-profile holdouts — and they’re airing some of the same critiques that have faced crypto for years. Namely, bitcoin and other cryptocurrencies have always been among the riskiest, most volatile investments — prone to wild swings in value that are difficult to predict.
Vanguard, the bastion of plain-vanilla index funds, said it was not planning to offer bitcoin ETFs through its brokerage even as its competitors rushed to do so.
“Our perspective is that these products do not align with our offer focused on asset classes such as equities, bonds, and cash, which Vanguard views as the building blocks of a well-balanced, long-term investment portfolio,” the company said in a statement to The Wall Street Journal.
And lest anyone think crypto had lost its ability to unpleasantly surprise investors, the market took another big hit just days after the ETF approval many boosters had been eagerly awaiting. By Sunday, bitcoin had seen its price drop by upward of 10 percent from its midweek high as investors sought to take profits following the recent runup.
It was just the first week of growing pains in the relationship between bitcoin and the big-time traditional investment firms.
“It’s like communing with the enemy,” said Ryan Shea, a London-based crypto economist at the financial technology firm Trakx. “But for moms and pops to get comfortable in this world, to gain legitimacy, it’s important to get to the next level.”
Traditionally, buying bitcoin or other cryptocurrencies has looked a lot different than trading more familiar investments. Investors often must create accounts with crypto exchanges such as Coinbase (though a handful of stock brokerages offer some crypto services). And for those who want maximum control of their assets’ security, there are a handful of independent “crypto wallets” to use for storage.
Compare that process to the relative ease of investing in one of these new bitcoin ETFs, which you can buy and sell in the same way you’d trade shares in Microsoft or Nvidia. While ETFs for stock and other investments have long been available to brokerage customers, this is the first time one of these funds can actually hold bitcoin.
Already, the 11 funds approved by the SEC are battling it out over the new money in the market, and that could mean lower costs for consumers in the short term. They are competing on fees, which tend to be below 0.5 percent of assets, and some, such as ARK Investment Management, have temporarily waived fees altogether.
Bitcoin-linked products that were on the market before, including derivatives-based funds and trusts, charge as much as 2 to 3 percent.
“It’s a land grab,” said Paul Karger, cohead of Boston’s Twin Focus, a wealth adviser. “A handful of big winners will own most of the Main Street in-flows.”
Given the lower fees, these new funds may hew to the price action of bitcoin more closely. That is something their predecessors, which were largely based on futures contracts and have been around for two years and change, have not done. This discrepancy, called ‘tracking error’ in trade lingo, occurs when an ETF’s value diverges from its underlying assets.
Matthew Walsh, of Boston blockchain investor Castle Island Ventures, said that bitcoin futures ETFs have a “tracking error,” that can reach 5 to 10 percent, while he predicts the spot ETFs will have a one-to-one correlation to the underlying price of bitcoin. “It’s a huge win for the retail investor,” Walsh said.
Eric Biegeleisen, partner and deputy investment chief at ETF investor 3Edge, said with this move, bitcoin is a step closer to becoming a “legitimate” asset. While he likes having 11 funds to choose from, now comes the work to figure out which one he likes best. “Certainly, there are concerns right out of the gate,” he added. Chief among them are fraud and asset security.
It is going to take a huge amount of education to get investors comfortable, said Ophelia Snyder, cofounder and president of 21Shares, a financial firm that worked with ARK to create one of the new bitcoin ETFs. But the early signals show there’s a lot of potential.
“Crypto’s never seen money like this. A billion dollars is a lot of money in one day, but we saw that within the first two hours. This isn’t the same ballgame anymore.”
Suchita Nayar can be reached at suchita.nayar@globe.com.
- Basel III pullbacks could improve the bottom line of investment banks
- It is hard to see if M&A activity will pick up
- A Republican victory could improve sentiment for Wall Street giants
Some US politicians have invoked the concept of America being the “indispensable nation”. That phrase could be tweaked slightly when applied to Wall Street, which could be said to have the world’s “indispensable banks”.
What they do certainly matters — as everyone discovered in the 2008 financial crisis. And while the world’s largest banks are now to be found in China, one overwhelming fact remains: Wall Street sits in the largest capital market in the world.
Last year was certainly not great for US banks in terms of fees and business activity compared to 2021. The Covid-19 pandemic was a boom time by comparison.
Dealogic’s US investment bank rankings by revenue for the full year 2023 show how firms finished from top to bottom: JPMorgan Chase, Goldman Sachs, BofA Securities, Morgan Stanley, Citi, Wells Fargo, Barclays, Jefferies, Centerview Partners and RBC Capital Markets.
There are hopes that 2024 will be different, and analysts will be closely watching Q4 2023 results from large banks for any clues.
Bank of America (BoA), JPMorgan Chase, Citi and Wells Fargo will publish their results on January 12, while Goldman Sachs and Morgan Stanley publish on 16 January.
Two good primers for what to expect from these banks, alongside Citi, over the course of the year come from recent studies published by HSBC and BoA’s global research.
The big picture
BoA and HSBC analysts think that the most advantageous and likely development for Wall Street in 2024 could be changes to the Basel III endgame rules. These were a prominent theme at the Financial Times’ and The Banker’s Global Banking Summit last November.
In a note published January 8, HSBC writes it is “incrementally positive” on US banks with moderating deposit cost pressure that should help net interest income bottom in H1 2024. And a softening of the Basel III endgame proposals could allow for more share buybacks in 2025.
Bankers have criticised Basel III as too onerous and argued they impose additional costs on direct lending and capital markets activity. Some have gone further, like Evgueni Ivantsov, chairman of the European Risk Management Council, who wrote that capital buffers have diminishing returns above a certain level.
According to BoA research notes published on January 4, there is a real chance there will be meaningful changes to the proposed policies. It points out that the lack of consensus at the Federal Reserve, pushback in Congress and upcoming US presidential elections should incentivise regulators to soften the rules.
“In our view, the current proposal doesn’t fully account for risks that could be created by reduced profitability and lending moving outside of the regulated banking entities,” it says.
BoA thinks the outcome of the November election could help drive an increase in share buybacks, put a floor under bank stock and help create a more favourable climate for mergers and acquisitions.
On the other hand, there are features of the macro picture that are less positive: uncertainty arising from geopolitics and possible rate cuts.
Whether private credit will disintermediate banks is another story that is still unfolding. Certain banks are exploring a partnership model where private debt combines with the origination capabilities of the banks.
This is done in a way that loans are not carried on the bank balance sheet, but banks continue to manage the client relationship, including providing additional banking services such as treasury management, deposits, and FX.
“We note that while this sounds good on paper, [it is] early days yet to conclude whether private debt and banks can enjoy a symbiotic relationship on a lasting basis given competing priorities,” BoA says.
It also points out that larger banks are better positioned to compete in the space via their asset management branches that compete against alternative asset managers in fund-raising activity.
Here, it is more likely that banks offload non-core lending portfolios such as indirect consumer loans instead of getting outgunned on middle market lending to businesses that require a full suite of banking services.
BoA cites numbers that evidence how much US investment banks have been undercut by private credit firms. Market capitalisation of the five largest alternative asset managers has grown by +500% to $360bn over the last five years vs growth of +22% to $1300bn for the five largest US banks. This highlights the shifting power dynamics on Wall Street in the aftermath of the financial crisis and the Dodd Frank rules. So, how will the large US banks fare in 2024?
Regaining focus
Goldman Sachs and Citi are going through a period of transition as both aim to refocus their services on core propositions. According to BoA research, chief executive David Solomon appears to have “weathered the storm” at Goldman Sachs during the past couple of years.
That came from a slump in investment banking, an underperforming consumer business and asset write downs. Mr Solomon’s decision to pull back from the consumer pivot and double down on the bank’s traditional strength — capital markets — means that the bulk of revenues are dependent on investment banking and trading. Other parts of the franchise such as Goldman Sachs’ asset management division and private bank remain an afterthought when considered by the market overall.
HSBC says that it remains positive on Goldman Sachs as improved investment banking revenue and the reconfiguration of the asset management business should drive profitability expansion in the coming years. Also, any recovery in capital markets should be favourable for Goldman Sachs.
Citi, under the leadership of Jane Fraser, is seen as the most compelling risk/reward in the large-cap banks space. BoA outlines three drivers that should help underpin Citi’s performance this year: a potential increase in share buybacks during the second half of the 2024; watered down Basel III reforms proposals that should support management to achieve profitability targets; and the likelihood of a soft landing for the US economy.
It adds that changes instituted by Ms Fraser, such as streamlining the bank’s structure, exiting lower return businesses and external hires, are a significant departure from anything “attempted under prior CEOs over the last two decades”.
HSBC is also bullish on Citi, upgrading it from ‘hold’ to ‘buy’, and says that it will disproportionately benefit from any watering down of the Basel III rules. That is because it would face a capital shortfall under current proposals but would be able to do more share buybacks if the rules are softer.
The leaders
BoA sees Wells Fargo, Morgan Stanley and JPMorgan Chase as being in the strongest position strategy-wise.
It is a big year for Morgan Stanley, where the new leadership of CEO Ted Pick will determine how the bank’s year unfolds. Mr Pick took over from James Gorman last October, and analysts are looking to see if there will be any changes in the firm’s objectives.
BoA highlights that its business model “is relatively nascent” and needs to “prove its resilience” over the long term. It says that Mr Gorman has recently talked about Morgan Stanley’s desire to expand the bank’s wealth management proposition outside the US through mergers and acquisitions, combined with organic growth.
“We expect to see some action on this front as Morgan Stanley goes head-to-head with the likes of UBS, Julius Baer, and HSBC to tap into the rapidly growing wealth management wallet, especially in Asia (Middle East, India, Japan),” BoA says.
HSBC observes that Morgan Stanley is also well positioned to benefit from a reduction in Basel III compliance. It points out that risk-weighted assets could increase by around 40% under the implementation of the current regime — more than any other bank.
Regarding Wells Fargo, BoA flags its “significant progress” under the current leadership to not only address past regulatory issues but also make investments to grow market share in various sectors. These include wealth, cards, capital markets and digital banking.
The most important trigger for the bank to surge upwards is the removal of the asset cap imposed by the Federal Reserve back in 2018. This was done in response to a fake accounts scandal in 2016 that saw the bank create bogus customer accounts to help meet aggressive sale targets.
The removal of the cap could happen before the end of 2025, but not this year given the US election.
HSBC continues to have a ‘buy’ rating for BoA due to credit and cost discipline, falling risks from deposit cost pressure, and a comparatively attractive valuation.
JPMorgan Chase is seen as the frontrunner among the US investment banks with the only wildcard factor being when chairman and CEO Jamie Dimon chooses to step down.
With the investment bank results to be published over the following week, it will be fascinating to see how the year plays out for Wall Street.