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AmericasNovember 5 2007

Big Apple turnover

It is not just London that is taking business from New York, Asian markets are also rapidly growing in stature. Jules Stewart explains.
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Sir Nicholas Goodison, former chairman of the London Stock Exchange, once summed up what he considered to be the city’s unassailable position as the world’s leading financial services centre in three bullet points: “It’s the skilled people, it’s the English language and it’s the time zone.”

There is arguably no more persuasive endorsement of this view than what emerged from a recent McKinsey report commissioned by New York City mayor Michael Bloomberg. According to the report, London is now ahead of New York in over-the-counter (OTC) derivatives, “which drive broader trading flows and help foster the kind of continuous innovation that contributes heavily to financial services leadership”.

According to McKinsey: “The more amenable and collaborative regulatory environment in London makes businesses more comfortable about creating new derivative products and structures there than in the US.

The more lenient immigration environment also makes it easier to recruit and retain international professionals with the requisite quantitative skills.” In derivatives, McKinsey concludes that there is an increasing likelihood that tomorrow’s debt innovations will occur in London rather than in New York.

Advantage London

“London is clearly attracting more new issuance from the BRICs [Brazil, Russia, India and China],” says Perry Noble, co-global head of finance at Freshfields Bruckhaus Deringer. “For whatever reason, Russian, Arab and Indian corporates appear to be more attracted to London than New York. London is a very cosmopolitan and international place, and its position in the global capital markets is pretty extraordinary. It is a magnet for issuance from investors because of the quality of the service industry and the expertise. London has definitely benefited from the fact that New York is not as easy a place to do business as it once was, given the trends in regulatory tightening and the litigation issue.”

Andrew Gray, banking and capital markets partner at Pricewaterhouse-Coopers, says that an important driver of London’s growth is its international experience and expertise, as well as its time zone. “People working in the financial services industry in London can focus on close of business in Asia as well as start of business in New York, and that overlap provides a natural advantage,” he says. “This is acknowledged by the global investment banks, which are moving heads of business into London.

In many ways, the UK has a very attractive regulatory regime, in that it has a single well-established regulator that has adopted a principles-based approach. Consequently many see that the Financial Services Authority (FSA) seeks to understand the banks it regulates. The US is heavily rules-based and there are several different regulators, which creates additional complexity.

In Asia many regulators are also heavily rules-based, while China is still developing its regulatory environment and is therefore an area of more uncertainty and risk. In several Asian countries there is also less certainty regarding the penalties regulators will impose following a beach of regulations.”

As cross-border competition intensifies, New York and London are contesting two key battlegrounds, the dynamic and innovative derivatives market and the large, well-established debt financing market. Both are crucial markets because they account for a substantial share of revenues and because each city’s market position is reasonably close to the other.

“However,” notes McKinsey, “superior conditions for innovation, capital formation, risk management and investment in these markets are beginning to emerge in London, which is building momentum relative to New York.”

The size of the financial services industry in terms of jobs is now almost identical in both cities, with 328,400 professionals in New York as of 2005, compared with 318,000 in London. New York is still home to most of the top global investment banks, but with the gradual lifting of limitations on cross-border capital flows, London and other markets have become large and liquid enough to attract significant international investment.

Shrinking feeling

“Investors are establishing a greater presence in London, Hong Kong and other parts of Asia as they try to get close to new investment opportunities,” McKinsey points out. Small wonder, then, that last year saw nearly $40bn of capital withdrawn from the New York Stock Exchange and $11bn from Nasdaq, with most of the initial public offering (IPO) activity shifting to London and other European markets. New York’s share of the global IPO market last year shrank to a third of its 2001 level, while the volume captured by European exchanges (mainly London) expanded by more than 30% in the same period, and non-Japan Asian markets doubled their equivalent market share.

Leaving aside considerations such as lifestyle and access to major European centres, in which London scores higher in the league tables, New York’s relative decline in sectors such as IPO volume has other underlying causes. One is the shift of equity issuance to European centres with deep domestic markets, primarily London. Also, US companies with capital needs that outstrip even their deeper domestic market capacity are turning to London instead of US exchanges. In the first 10 months of last year, the value of IPO transactions in Europe was 270% higher than in the US.

Spotlight on Hong Kong

It is not just London that is taking business from New York. Asian markets have also been driving the shift away from the US. Five of the eight emerging market mega-IPOs that were transacted in the past two years all took place in Hong Kong. This shows that just as US institutional investors can access foreign markets, so issuers can access US capital without tapping the US markets.

The other three emerging market transactions were done in London, where deal flow related to international IPOs rose from 2% in 2002 to more than 59% in the first 10 months of last year. “A number of investment banks expect the highest growth rate to be in Asia, but with London registering the highest growth in absolute terms,” says PWC’s Mr Gray. That is, Asia will rise faster in percentage terms, but London will be ahead in dollar terms.”

“Asian centres are capturing a larger share of business because there is more coming out the region, says Freshfields’ Mr Noble. “I couldn’t say that they’re taking business away from London or New York, except to the extent that some of that business may have gone to those cities historically and investors are now accessing Hong Kong and Singapore.

“Given the sheer volume of securities issuance in Asia, their financial centres are capturing more of the business. In this sense, New York in particular has probably lost out in terms of market share.”

Mr Noble says this is not just a result of Sarbanes-Oxley and the regulatory climate, but is also to do with the litigation climate, and the fact that many Asian issuers are very risk averse on litigation. “There is also the simple fact that you don’t have to go to New York to access US dollars,” he says. “You can do that in Asia, in particular in Hong Kong, given the globalisation of liquidity.

“Hong Kong is the winner here, thanks to the depth of the market, a lighter regulatory regime and the absence of significant litigation risk, as well as its proximity to the Chinese market. Chinese issuers are familiar with and understand Hong Kong. There is no need for them to go to New York and take on the extra compliance cost and have to deal with yet more investor relations.”

The deal that most dramatically showcased the liquidity of Asian financial centres was last year’s IPO of ICBC, one of China’s four big banks. This was the largest IPO ever, raising $21.9bn for the issuer, and ICBC was the first company to debut simultaneously on the Hong Kong and Shanghai stock exchanges. This demonstrated the ability of local issuers to raise vast amounts of capital without listing in New York, London or other western exchanges.

Middle East and Asian financial centres are challenging the US and Europe in areas other than the capital markets. As of last year, the world’s rich (more than $1m in assets), who can lay claim to the title of high net worth individuals (HNWI), with $37,000bn in personal assets, numbered 9.5 million globally, with the strongest growth coming from India and Singapore, according to a report by Merrill Lynch.

“In 2007, global economies and emerging markets were fuelled by real gross domestic product [GDP] and market capitalisation to drive wealth generation,” the report says. “For the first time in seven years, HNWI wealth experienced double-digit growth of 11.4% led by emerging markets such as China and India which sustained real GDP growth rates of 10.5% and 8.8%, respectively.” Asia now accounts for about one-third of the world private banking market.

Asian leaders

Hong Kong, where 71 of the top 100 banks have a presence, is now the world’s ninth largest international banking centre. Last year Hong Kong confirmed its leading position as a fund management centre in Asia, with 63% or HK$2800bn ($361bn) of the non-real estate investment trust (Reit) fund management business assets sourced from overseas. In terms of value, assets from overseas registered a 25% year-on-year growth. The total asset size of the combined fund management business in Hong Kong grew by 25% in 2005 to HK$4,500bn, according to last year’s Securities and Futures Commission survey.

Close rival Singapore is attracting a growing number of fund managers, such as US firm Janus Capital, which has just opened an office in the city-state to complement its existing business in Hong Kong. “Singapore is quickly becoming the Asian hub for most major private banks,” says Erich Gerth, CEO of Janus’s international operations. Janus’s move follows similar decisions by global banks with large fund management arms, including UBS, Crédit Suisse and Société Générale, that are seeking to tap Singapore’s swelling pool of wealth. Fund management assets in Singapore stood at $581bn at the end of 2006, up 24% from 2005 and triple the level of 2000.

Middle Eastern promise

Both these jurisdictions, and to no less an extent the more mature wealth management centres of New York and London, are facing a major challenge from Dubai, an up-and-coming centre that has been cashing in on its start-up status. “We started operating in 2004 and this gives us an advantage over places such as New York, London and Hong Kong,” says Sandy Shipton, executive director of wealth management at the Dubai International Financial Centre (DIFC).

“We’ve been able to learn from other money centres and identify the way the DIFC should move in areas such as infrastructure, legislation and regulation. In a word, we’ve come into this without baggage.”

Mr Shipton says that Dubai enjoys a geographical advantage between the major centres, east and west. “We’re an onshore centre and fully transparent, and we are attracting a large pool of liquidity, much of which has been re-domiciled in the past few years.”

The terrorist attacks of 9/11 provided a boost to Middle and east Asian wealth management centres. The private banking industry was to an extent a casualty of the US government’s war on money laundering by terrorists, drug dealers and crooked politicians. The shock waves of this crackdown have been felt around the world, and nervous investors, fearing they could inadvertantly get caught up in this, have been scrambling to re-locate their assets in more friendly and transparent jurisdictions.

There is now more than $1000bn of Gulf Cooperation Council (GCC) wealth invested in western financial centres. HNWIs from Arab and other Muslim countries, who have come under closer scrutiny from western monetary authorities, are repatriating their assets to other jurisdictions. Dubai also benefits from having China and India on its doorstep, two of the world’s fastest growing economies with a burgeoning HNWI class.

India’s ICICI Bank has exploited this geographical advantage by setting up a private banking unit in Dubai, which to date has attracted $300m from the Persian Gulf to India. The bank’s offices in Dubai, as well as Bahrain and Qatar, are the largest contributors to its private banking business, according to Anup Bagchi, ICICI’s senior general manager of global private banking.

“We’ve written appropriate laws and regulations to fit the marketplace,” says Mr Shipton. “We’ve also established the world’s first suite of family office legislation and new trust laws. Dubai has a huge poll of financial service players. In the past three years, we’ve attracted 140 authorised financial institutions, including 21 of the world’s top 25 banks.”

New York’s response

While London is tipped to remain on top of the financial centre league table, its position is under constant threat. New York is unlikely to resign itself to becoming a domestic market, albeit a huge one. “It’s interesting to speculate whether New York can respond and whether London is vulnerable to that,” says Mr Noble.

“The current discussions around tightening up London’s regulatory environment in the wake of Northern Rock and the subprime crisis isn’t going to help in that respect. That needs to settle down, and assuming it does I think it will be very difficult for anybody to capture London’s market share. The biggest risk is cost inflation. London is a very expensive place to do business and that’s unlikely to change.”CHART: FINANCIAL STOCK 2005GRAPH: FLOTATIONS BY FOREIGN COMPANIES

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