Cotlook A Index - Cents/lb (Change from previous day)

22-05-2019 78.30 (-0.50)

16-05-2018 92.05

16-05-2017 94.90

New York Cotton Futures (Cents/lb) As on 24.05.2019 (Change from

previous day)

July 2019 67.50 (+0.02)

Oct 2019 67.02 (-0.18)

Dec 2019 67.49 (+1.31)

24th May

2019

Election Results 2019: World leaders congratulates

Modi over imminent victory

Fiscal policy to manufacturing: What corporate

leaders expect from Modi 2.0

Trade sector wants strong policies, jobs from NDA-2

Bangladesh: Exporters may get more cash incentives

Cotton and Yarn Futures

ZCE - Daily Data (Change from previous day)

MCX (Change from previous day)

May 2019 21340 (+220)

Cotton 14180 (-300) June 2019 21610 (+220)

Yarn 21765 (-370) July 2019 21760 (+210)

www.citiindia.com

2 CITI-NEWS LETTER

-------------------------------------------------------------------------------------- Election Results 2019: World leaders congratulates

Modi over imminent victory

Fiscal policy to manufacturing: What corporate leaders

expect from Modi 2.0

Trade sector wants strong policies, jobs from NDA-2

High-level panel pitches for 'Elephant Bonds' for infra

projects, investing undisclosed income

View: An active private sector and liberal trade policy

will help the growth story

Tax cuts, robust banking sector can revive private

investment

Centre and states should collaborate to beat farm blues

With end of uncertainty, FDI flows may perk up

----------------------------------------------------------------------------------

Bangladesh: Exporters may get more cash incentives

Eurozone manufacturing contracts as trade tensions

weigh

China seeks to join WTO talks over ICT products tariff

in India

NGOs criticise EU for requiring exemption from global

PFOA ban

Cover Story: Good prospects in overlooked Asean

--------------------------------------------------------------------------------

NATIONAL

---------------------

GLOBAL

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3 CITI-NEWS LETTER

NATIONAL:

Election Results 2019: World leaders congratulates Modi over imminent

victory

(Source: Elizabeth Roche, Live Mint, May 24, 2019)

With the results of India’s national polls showing a decisive win for Prime Minister

Narendra Modi’s Bharatiya Janata Party (BJP), messages of congratulations poured in

for the prime minister on Thursday.

Leaders of the US, Japan, China, Russia, France and Australia besides many heads of

government from South Asia sent messages of congratulations via Twitter to Modi as

news of the imminent win came through. Coincidentally, it also came on a day when

Pakistan reportedly tested a 1,500 kilometre range surface-to-surface ballistic missile

that could target most Indian cities, though Prime Minister Imran Khan posted a

message on Twitter saying he looked forward to work with Modi on furthering peace in

South Asia in the evening.

“I congratulate Prime Minister Modi on the electoral victory of BJP and allies. Look

forward to working with him for peace, progress and prosperity in South Asia," Khan

said in the post.

In his response, Modi said: “Thank you PM @ImranKhanPTI.I warmly express my

gratitude for your good wishes. I have always given primacy to peace and development

in our region."

Among those who posted messages on Twitter congratulating Modi were US president

Donald Trump who said:"Congratulations to Prime Minister @NarendraModi and his

BJP party on their BIG election victory! Great things are in store for the US-India

partnership with the return of PM Modi at the helm. I look forward to continuing our

important work together!"

The message came in as Modi looked set to take office for a second term with his BJP

party leading in 292 of the 542 parliamentary constituencies that went to the polls,

according to trends from the Election Commission.

One of the first messages of congratulations has come in from Israeli Prime Minister

Benjamin Netayahu who hailed Modi’s “impressive victory" and pledged to strengthen

their "great friendship" as well as bilateral ties.

"Greetings from the depth of my heart dear friend on your impressive victory in the

elections," Netanyahu said in Twitter posts in Hebrew and Hindi. "The election results

are a re-approval of your leadership and the way you lead the world's greatest

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4 CITI-NEWS LETTER

democracy. Together we will continue to strengthen the great friendship between us and

India and Israel and lead it to new heights," Netayahu said.

Bangladesh prime minister Sheikh Hasina was among the first leaders from South Asia

to call Modi and congratulate him, the Indian foreign ministry said in a statement. “The

two leaders pledged to continue to raise the India-Bangladesh relationship to

unprecedented new heights," the statement said adding “the leaders also agreed to

identify dates for a meeting at the earliest, to resume work in service of the bilateral

relationship."

“Congratulations to PM @narendramodi on his historic victory in the Indian general

elections. It is a strong affirmation of the Indian people's confidence in the BJP/led

government. I look forward to closer and enhanced ties of Maldives-India cooperation,"

read the message posted on Twitter by the President of the Maldives, Ibrahim

Mohammed Solih.

Sri Lankan president Maithripala Sirisena in his message, also posted on Twitter said:

“Congratulations on your victory and the peoples re-endorsement of your leadership. Sri

Lanka looks forward to continuing the warm and constructive relationship with India in

the future. @narendramodi"

The Chinese president Xi Jinping also sent a message which was posted on Twitter by

India’s foreign ministry. “Chinese President Xi Jinping congratulates PM

@narendramodi on the electoral victory under his leadership," said Indian foreign

ministry spokesman Raveesh Kumar in a Twitter post. “President Xi noted the great

importance he attachedto the development of India-China relations and his desire to

work with prime minister Modi to take the closer development partnership between the

two countries to a new height. President Xi also expressed satisfaction at the strong

momentum of development in India-China relations in recent years," the message from

Xi to Modi posted on Twitter by Kumar said.

According to the Indian foreign ministry, many of the leaders who posted messages on

Twitter also telephoned Modi to convey their greetings. These included the King of

Bhutan Jigme Khesar Namgyel Wangchuk and Prime minister Lotay Tshering.

Tshering, in his Twitter message said: “I, on behalf of the people of Bhutan, offer

heartiest congratulations to Prime Minister Shri Narendra Modi @PMOIndia and his

team on the election victory. As we look forward to working closely in years to come, we

pray India achieves greater success under your leadership."

Afghan president Ashraf Ghani was also among those to post a congratulatory message

on Twitter for Modi.

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5 CITI-NEWS LETTER

“Congratulations to PM @narendramodi on a strong mandate from the people of India.

The government and the people of Afghanistan look forward to expanding cooperation

between our two democracies in pursuit of regional cooperation, peace and prosperity

for all of South Asia," he said in his message.

Nepalese Prime Minister K P Sharma Oli too greeted Modi on a "landslide victory."

"I extend warmest congratulations to Prime Minister @narendramodi ji for landslide

election victory in the Lok Sabha Elections 2019. I wish all success ahead. I look forward

to working closely with you," he tweeted.

Russian President Vladimir Putin called Modi to congratulate him – the first head of

state from a P-5 (five permanent members of the UN Security Council) to do so. "I am

convinced that as the Prime Minister of the Republic of India you will further contribute

to strengthening the centuries-old friendship between our peoples and enhancing

comprehensive development of special and privileged strategic partnership between

Russia and India," Putin said.

Japan’s Prime Minister Abe Shinzo also conveyed his message of congratulations to

Modi in a telephonic conversation, the first by a foreign leader, the Japanese embassy

said in a statement. “Prime Minister Abe stated that he would like to closely work with

Prime Minister Modi hand in hand toward strengthening Japan-India relations and

realizing a free and open Indo-Pacific," the embassy statement said.

The French president Emmanuel Macron also congratulated Modi in a phone call. “The

two leaders reaffirmed their commitment to work together towards further

strengthening of the Strategic Partnership between India and France. Prime Minister

Modi thanked France for her steadfast support to India on critical issues," India’s

foreign ministry said in a statement. Macron also invited Modi to France for a bilateral

visit as well as to attend the G-7 meet in his country.

In his letter congratulating Modi, Singapore’s prime minister Lee Hsein Loong said he

hoped for stronger India-Singapore ties in Modi’s second term in office. “Our relations

are already very substantial, but we should do more to exploit our complementarities,

tap the reservoir of goodwill between the two countries and peoples, and fully realise the

potential for enhanced cooperation including in the fintech and digital space," he said.

Australian prime minister Scott Morrison who himself won national polls last week in

his message said: “Australia and India enjoy a strong, vibrant and strategic partnership,

and our India Economic Strategy will take our ties to a new level. I look forward to

meeting again soon."

Meanwhile, Pakistan with whom India shares tense relations, on Thursday tested the

Shaheen-II missile that was capable of hitting targets in India, a PTI report said.

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6 CITI-NEWS LETTER

"Shaheen-II Missile is capable of carrying both conventional and nuclear warheads upto

a range of 1,500 kilometers. Shaheen-II is a highly capable missile which fully meets

Pakistan’s strategic needs towards maintenance of desired deterrence stability in the

region," the Pakistani Army said. It said that the launch, having its impact point in the

Arabian Sea, was witnessed by Director General Strategic Plans Division, Commander

Army Strategic Forces Command, senior officers from the Army Strategic Forces

Command, scientists and engineers of the strategic organisations.

President Arif Alvi and Prime Minister Imran Khan have also congratulated scientists

on their achievement, the statement said.

Home

Fiscal policy to manufacturing: What corporate leaders expect from Modi

2.0

(Source: Business Standard, May 24, 2019)

We all wanted a strong Centre with a decisive mandate from the people, to allow them to

take bold decisions, says Pawan Goenka, CEO & MD, Mahindra & Mahindra

Centre should focus on GDP growth: Adi Godrej, Chairman, Godrej group

I think it is very good that the NDA has come back to power. It will lead to economic

growth, which we badly need right now. The verdict will give the government a mandate

to take action. That is key. They were earlier in election mode. Now they will get down to

business, which is important for the development of the economy.

Above all, GDP growth is what it should concentrate on. That is because growth will

bring jobs, improve income, and spending power. It will also help address distress,

especially in rural areas and bring about some revival in those markets.

The Centre should look at reducing corporate tax rates. They had announced this earlier,

but it was done only for small companies, not the large ones.

We all know that Indian corporate tax rates are the highest in the world. I think this can

be looked into more closely, and also addressed immediately. As soon as the

government takes action on improving GDP growth as well as kicking off further

reforms, private sector investment will follow. I don’t think it will come with a lag if the

government is committed to reviving growth.

Manufacturing has to be competitive: Pawan Goenka, CEO & MD,

Mahindra & Mahindra

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7 CITI-NEWS LETTER

The mandate is even more decisive than what the most staunch supporters of BJP+

would have expected. This augurs well for the country because this is a reconfirmation

on the direction the Centre had taken during its first term.

We all wanted a strong Centre with a decisive mandate from the people, to allow them to

take bold decisions. The next five years can be golden provided the government,

industry and the civil society work together.

The immediate job for the government has to be getting the consumption cycle going,

which has been on a pause mode for a few months, supposedly because of the elections.

Stimulus of government spending will be required and I hope the next Budget will focus

on this.

Moving beyond the short term, one of the initiatives that got slightly on the back burner

was ‘Make in India’. If we want a trillion-dollar manufacturing economy, a lot more has

to be done for making Indian manufacturing more competitive.

One of the biggest long-term concern has to be job creation and therefore industries that

generate jobs must get higher priority.

Majority augurs well for policy: Kaku Nakhate, President and Country

Head, Bank of America

Today’s verdict is pro-incumbency and reflects the general satisfaction of voters on the

government’s performance. The electorate rewarded the government for its consistent

policies and project execution capabilities, in both social as well as economic spheres.

A clear majority augurs well for policy continuity and supports our house view of fiscal

prudence in the years to come. We think lowering lending rates, bank recapitalisation,

and re-couping forex reserves will top the Centre’s agenda. With a commitment to

lowering cost of capital, the government will now focus on injecting liquidity. Land and

labour reforms, and digitisation are also key initiatives the government could focus on.

As global trade conflicts intensify, the government must seize the opportunity to invite

multinationals to set up base here, boosting job creation. The verdict clearly vindicates

the government’s stance of driving growth through investments, instead of handouts.

This means road construction, infrastructure development, housing, and projects like

‘Smart Cities’ will dominate the new government’s decision-making process.

Credit, liquidity should top agenda: Vetri Subramaniam, Group president

& head (equity), UTI Mutual Fund

For the market and economy, the return of Modi signals continuity in policy. The

outcome has also voided any tail risk related to a potentially unstable coalition

government. Equity markets have moved up recently, signaling comfort with this

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8 CITI-NEWS LETTER

outcome, but face headwinds from valuations. The focus shifts from politics to economy

and policy.

Bloomberg consensus forecasts for FY20 GDP growth for have started pointing to a dip

from September 2018. High-frequency indicators and company feedback suggest

weakness in demand and constrained credit availability. A post-election seasonal growth

uptick is likely, but addressing the credit market pressures and tight liquidity should be

top the government’s and RBI’s agenda. Given the current CPI (consumer price index)

inflation, there is room for the monetary policy committee to ease rates, but injecting

liquidity is equally crucial.

The market will hope the track record on controlling inflation continues. Policy needs to

target better balance between consumption aspirations and financial savings of the

Indian household. This will enhance macro-economic stability, while creating room for

investment revival.

Priorities have to change in 2nd term: Harsh Mariwala, Chairman, Marico

Group

The performance of the ruling coalition in the elections has beaten all expectations,

including exit polls. Having said that, we need to have a stronger opposition. I think,

there is need for introspection among opposition parties.

The focus of the new government should shift from welfare to reforms. The last five

years saw greater thrust on welfare rather than on reforms, though there were some key

measures such as the Goods and Services Tax, and Insolvency and Bankruptcy Code.

Demonetisation, while not a reform, was needed to reduce dependence on cash. But

now, the focus should be on implementing reforms such as land, labour and agricultural

reforms.

The Centre hasn’t moved strongly in these, and I believe priorities have to change during

the second term. The thrust on privatisation also has to grow. Further, the government

has to address the issue of liquidity, increase infrastructure spending, improve credit

offtake, and simplify direct tax laws. All this will create jobs, as well as improve

sentiment and spending power. Private sector will set up plants and increase

manufacturing capacity only if consumption grows.

Home

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9 CITI-NEWS LETTER

Trade sector wants strong policies, jobs from NDA-2

(Source: The Hindu, May 23, 2019)

The business community seems overwhelmed to see the second coming of the Narendra

Modi-led NDA dispensation. The trade and industry, however, expect strong policy

initiatives and more jobs and farmer security from the government this time.

Kiran Mazumdar Shaw, chairperson and managing director of Biocon Limited, said Mr.

Modi has continued with his winning streak in 2019, leading the NDA to another

sweeping victory. In its first five-year term, the NDA developed an economic agenda

that sought structural policy changes and economic reforms as he quickly diagnosed the

key impediments throttling the nation’s economic engine.

“I would like to convey that NDA 1.0 succeeded in formulating a five-year strategic plan.

Now, NDA 2.0 must focus on the implementation of this plan in order to unlock

opportunities for inclusive economic growth. Over the next five years NDA 2.0 must

introduce policies that are bold, innovative and transformational to translate the

economic potential into prosperity for all,” she said.

Mega missions

According to Vikram Kirloskar, president of the Confederation of Indian Industry, over

the last five years, the Prime Minister has brought in innovative mega missions that

have changed the lives of hundreds of millions of citizens, driving a new template for

development. With the mandate for another five years under his visionary and strong

leadership, the transformation of India is on the fast track.

Harish Bijoor, brand guru and founder of Harish Bijoor Consults Inc, said: “This kind of

a strong mandate for the BJP gives us a strong government. And this means that we can

expect strong policy initiatives.”

Kris Gopalakrishnan, former CEO, Infosys said, in a democracy, people's mandate

decides. “Business looks for stability and reforms. Economic growth is needed for job

creation and I belive the new government will focus on this.”

Home

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10 CITI-NEWS LETTER

High-level panel pitches for 'Elephant Bonds' for infra projects, investing

undisclosed income

(Source: Money Control, May 23, 2019)

The high-level panel also recommended a host of other measures that include a road map

for doubling India's exports of goods and services to over USD 1,000 billion by 2025.

A government-appointed advisory group has suggested issuance of 'Elephant Bonds'

wherein people declaring undisclosed income will have to mandatorily invest half of that

amount in these securities.

The high-level panel also recommended a host of other measures that include a road

map for doubling India's exports of goods and services to over USD 1,000 billion by

2025.

These recommendations are part of a report prepared by the 12-member group, set up

by the commerce ministry in September last year.

The group submitted the report to Commerce and Industry Minister Suresh Prabhu

Wednesday, an official said.

Suggesting amnesty-like scheme, the panel asked the government to create "Elephant

Bonds" (25-year sovereign bonds) in which people declaring undisclosed income will be

bound to invest 50 per cent.

The fund will be utilised only for infrastructure projects, the report said.

The other key recommendations include lowering effective corporate tax rate, bringing

down cost of capital and simplifying regulatory and tax framework for foreign

investment funds. These are aimed at increasing India's exports of goods and services

from USD 500 billion in 2018 to over USD 1000 billion in 2025.

The report argued that India's competitors have less than 20 per cent effective tax rates.

Besides, the group recommended increasing capital base of EXIM Bank by another Rs

20,000 crore by 2022, setting up of empowered investment promotion agency and

seeking inputs from industry and MSMEs before signing free trade agreements (FTAs)

and sensitising them of its benefits.

It said there is a need for an in-depth assessment of the existing agreements and their

impact on the competitiveness of the Indian industry; remedial measures, if any, to be

considered for future FTA negotiations and maintaining a database based on such

assessment.

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11 CITI-NEWS LETTER

The nine non-industry specific recommendations also include building a comprehensive

export strategy and rationalise tariff structure.

"State governments need to be closely involved in improving the competitiveness of

exports by providing support measures in a WTO (World Trade Organisation)

consistent manner," the report said.

Further, the seven industry specific suggestion include separate regulation for medical

devices and a single ministry for the sector.

For textiles and garments sector, it suggested modification in labour laws (like the

Industrial Disputes Act, 1947) to remove limitation on firm size and allow

manufacturing firms to grow.

To promote tourism and medical value tourism, the group recommended simplification

in medical visa regime, setting up of a pan-India tourism board.

Similarly, to promote agriculture exports, it has asked for abolishing Essential

Commodities Act and the APMC (Agricultural Produce Market Committee).

The panel was headed by economist Surjit Bhalla. The other members include Principal

Economic Adviser Sanjeev Sanyal, former commerce secretary Rajiv Kher and Quality

Council of India Chairman Adil Zainulbhai.

Since 2011-12, India's goods exports have been hovering at around USD 300 billion.

During 2018-19, the shipments grew by 9 per cent to USD 331 billion. India services

during April-February 2018-19 stood at USD 204 billion.

Promoting exports helps a country to create jobs, boost manufacturing and earn more

foreign exchange.

Home

View: An active private sector and liberal trade policy will help the growth

story

(Source: Arvind Panagriya, Economic Times, May 24, 2019)

Creation of well-paid jobs for this vast workforce is nearly synonymous with

transforming India into a modern economy

The Narendra Modi government has won a resounding mandate. This soundly puts him

and his administration in a position to seriously confront a problem that confronts

India.

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12 CITI-NEWS LETTER

Today, a disproportionately large part of India’s workforce consists of farmers with

holdings of less than a hectare, selfemployed, and those employed in lowproductivity

activities in farming or micro enterprises in industry and services. This vast workforce

earns near-subsistence level of income or wages.

Creation of well-paid jobs for this vast workforce is nearly synonymous with

transforming India into a modern economy. As such, no one should make light of the

challenge this task poses. Accomplishing it requires interconnected reforms in virtually

all areas of the economy. The first point that the new government, and public at large

need to recognise is that job creation is not the job of the government. What the second

Narendra Modi government can do is to put in place employment-friendly policies. But

private entrepreneurs must create the vast majority of well-paid jobs. Often the

government may not know precisely what it is that is keeping entrepreneurs from

creating jobs. Under such circumstances, entrepreneurs, their industry associations and

public policy experts have the responsibility to inform it of necessary policy changes

rather than join the political class in continuously attacking it for the failure to create

job.

Because private sector needs to be on the forefront of this mission, the first step is to

accelerate fiscal consolidation. Today, the public sector, which includes agencies such as

Food Corporation of India (FCI), borrow nearly all financially intermediated household

Food Corporation of India (FCI), borrow nearly all financially intermediated household

savings, plus even a part of corporate savings. This greatly weakens private investment.

Woes of banking sector have added to this problem. We also need to resuscitate it by

accelerating a non-performing assets (NPAs) clean-up and infusion of capital.

Home

Tax cuts, robust banking sector can revive private investment

(Source: Kritika Suneja, Economic Times, May 24, 2019)

The statistics office expects gross fixed capital formation (GFCF), an indicator of an

indicator of investment, to grow 10% in 2018-19 from 9.3% in FY18.

Government capital expenditure has been the highlight

of India’s investment story so far, with private funding

lagging, but independent economists say this could

change if the new administration strengthens the

banking sector, boosts household savings and offers tax

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13 CITI-NEWS LETTER

cuts.

The statistics office expects gross fixed capital formation (GFCF), an indicator of

investment, to grow 10% in 2018-19 from 9.3% in FY18. Average investment growth was

9.2% in FY17-FY19, higher than 3.6% GFCF growth over FY14-FY16. The current

expected investment recovery is dependent on government spending as incremental

private corporate capex has yet to revive. Capital expenditure for 2019-20 is estimated

to be Rs 3.36 lakh crore.

“Sustained and lasting effort to resolve the non-performing asset situation in the

banking sector, further reforms in ease of doing business and revamping the ‘Make in

India’ strategy at a sectoral level are some key areas to work on,” said Tushar Arora,

senior economist at HDFC Bank NSE -3.06 % . “Resolving NPAs and non-banking

financial companies’ liquidity should be a priority area for a robust banking sector. Tax

cuts for households and corporates will go a long way in improving consumption,” said

Madan Sabnavis, chief economist at CARE Ratings.

Higher capacity utilisation has not been able to make up for a loss in industrial output

and capital goods production. Factory output, as measured by Index of Industrial

Production, grew at a three-year low of 3.6% in 2018-19.

India Ratings and Research said the inability to bring stuck capital back into the

production process will have implications for investment recovery.

“Resolving structural issues is key to stimulate private investment. This can be done by

reviving household savings and finding a solution for funds stuck in the real estate

sector. This will boost consumption, savings and investment," said Devendra Kumar

Pant, chief economist at India Ratings. As per Kotak Institutional Equities, the

household savings rate declined to 17.2% in FY18 from 23.6% in FY12. “Make in India

needs a major revamp to include services and agriculture. We still score low in terms of

dispute resolution and paying taxes in ease of doing business. Land and labour reforms

haven’t got much attention,” said an economist of a domestic bank.

Upasna Bhardwaj, economist at Kotak Mahindra Bank NSE 0.30 % , said: “Private

investment is linked with government spending, which came to a halt recently due to

election-led uncertainty. We expect it to continue in the near term.”

Home

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14 CITI-NEWS LETTER

Centre and states should collaborate to beat farm blues

(Source: Rituraj Tiwari, Economic Times, May 24, 2019)

Centre in collaboration with state govts

should develop marketing infrastructure for

agriculture along major highways to ensure

easy market accessibility and review existing

export-import policies, say experts.

A tough task for the new government will be

meeting the aspiration of farmers, who are deeply indebted and often suicide prone.

Rural distress has grown in recent years as the monsoon failed twice, while heavy

hailstorms damaged an intervening rabi, or winter-sown, crop, which made farmers

restless and politically active.

India’s impoverished farmers have the same wish list from the new government which

they had for every previous regime: Better prices for their produce, improved irrigation

facilities, cheaper inputs like seeds, fertilizers and pesticides, and significantly higher

procurement by official agencies.

The PM-KISAN scheme, which gives direct cash benefit of Rs 6,000 a year to small and

marginal farmers, has helped the most impoverished farmers, but they are asking for

much more.

More importantly, they pray for good weather, which is by far the biggest driver of

incomes in rural India, which is home to two-thirds of India’s population but

contributes barely 15% of the country’s Gross Domestic Product.

Analysts and farm leaders say farmers need close coordination of the state and central

governments, as both have a strong bearing on agriculture. “Agriculture is a state

subject. If state governments don’t take any initiatives, things may not move that fast.

Few state governments have offered loan waivers and the centre has floated direct cash

benefit to farmers which is a good step. Cash benefits are a good ‘idea’ to help farmers

fight distress,” said Madan Sabnavis, chief economist, CARE ratings.

Volatile prices of agricultural commodities are a major reason for agrarian distress.

Prices steeply fall immediately after crop harvest when majority of farmers sell their

produce. However, the end consumers continue to pay higher price, giving fat margins

to middlemen. As a result, efforts to raise agricultural output do not help farmers much.

“Developing and liberalising markets should receive high priority as volume of produce

from different parts of the country has increased manifold. Government should

gradually withdraw from fixing agricultural prices and their procurement. Attract

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15 CITI-NEWS LETTER

organised private sector to develop agricultural markets. Let market decide prices and

government may compensate farmers in case of steep fall in prices of key agricultural

commodities,” said PK Joshi, Fellow, National Academy of Agricultural Sciences.

Vijay Sardana, an agribusiness expert said that the Centre in collaboration with state

governments should develop marketing infrastructure for agriculture along major

highways to ensure easy market accessibility.

“The Centre should set up warehouses with grading facilities along the highways with

the support of state governments. These warehouses should be linked to processing

units to give an easy marketing access to farmers. This will solve the ‘point of sale’

problem of farmers and they can get better remuneration for their produce without

much transportation cost,” he said. He said that the government should also review the

existing export import policies and frame them in the interest of farmers.

“Minimum Support Price (MSP) trade policies should be linked in harmony. Policies

should ensure that Indian farmers get better realisation of their produce. If domestic

prices are ruling higher than global prices, duties should be imposed to safeguard the

interest of farmers,” he said. Experts said farmers also need job opportunities away from

the fields. “In the long run, a large number of farmers need to move out from agriculture

for better employment opportunities. This will help in expanding per-capita land

holding to generate a decent income. We should set up Industrial Training Institutes

(ITIs) in rural areas to train youth in agriculture related skill sets and ancillary works

which will lead to farm mechanisation and use of modern technology in agriculture. This

will also stop exodus of rural population in search of jobs,” said former agriculture

secretary PK Basu.

More than 86% holdings have land less than 2 hectares. This group has tiny marketable

surplus; they have high transaction cost and low bargaining power.

“These farmers should be incentivise to form farmer producer organisations, self-help

groups or cooperatives and promote contract farming and develop vertical integration.

The Centre should incentivise states to implement already developed Model Land Lease

Act to give larger land parcels for better resource utilisation,” Joshi said.

Home

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16 CITI-NEWS LETTER

With end of uncertainty, FDI flows may perk up

(Source: Bavadharini KS, The Hindu Business Line, May 23, 2019)

With the NDA set to form the government once again with full majority, Foreign Direct

Investment (FDI) is likely to receive a boost.

While the FDI flow increased sharply between

2014-15 and 2016-17, over April-December

2018, it dropped 3 per cent to $46.6 billion

compared with the same period last year.

This, experts say, was due to the political

uncertainty in the country.

Policy reforms to help

One of the top priorities when Narendra Modi

became Prime Minister in 2014 was to attract

more foreign companies to invest in the

country’s Make-in-India programme.

Sectors facing capital crunch were identified and FDI regulations relating to those were

relaxed.

These sectors included defence, construction and infrastructure (including railway

infrastructure), telecommunication, automobile and manufacturing. For instance, 100

per cent approval was given under the Automatic Route for sectors such as food product

retail trading, construction and development, industrial parks and NBFCs.

Under the central government approval route, sectors such as airport transport services,

telecom services, broadcasting content services, defence and railway infrastructure were

given approval for receiving FDI up to 100 per cent.

Though the UPA government had also introduced reforms in the FDI policy in retail,

civil aviation, broadcasting and infrastructure sectors and allowed foreign direct

investment in power trading exchanges, big-ticket investments did not materialise due

to stringent rules.

Annual FDI inflows declined from about $41.8 billion in FY09 to $34.2 billion in FY13.

But under the NDA, FDI inflow increased 18.6 per cent (CAGR) between 2013-14 and

2016-17.

In 2016-17, it was at a record high of $60.2 billion. In 2017-18, growth moderated, but

absolute inflows still hit a new high of $60.9 billion.

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17 CITI-NEWS LETTER

Initiatives such as Digital India, Smart Cities and Startup India, in addition to relaxation

of FDI regulations, made it easier for foreign investors to access India. Some of the

companies that have entered the Indian markets in recent years are Amazon, Ikea and

Walmart. Further, smartphone companies such as Xiaomi and Samsung have opened

multiple manufacturing plants.

FDI inflows have moderated in the last two years, growing at 8 per cent in FY17 and at

an even slower pace of 1 per cent in FY18. This could be due to domestic jitters including

political uncertainty and changes in the FDI policy on e-commerce, say experts. But

changing global market scenario with the US Fed raising rates and rising geopolitical

tensions are also disturbing FDI inflows, says Madan Sabnavis, Chief Economist, CARE

Ratings.

However, he added that the environment is favourable for FDI flows now thanks to the

recent reforms.

Home

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18 CITI-NEWS LETTER

GLOBAL:

Bangladesh: Exporters may get more cash incentives

(Source: The Daily Star, May 24, 2019)

The government mulls over increasing the

cash incentive for exports by one

percentage point as it looks to motivate

exporters to leverage the sudden

opportunities presented by the US-China

trade war.

Currently, 26 sectors are provided with

cash incentives ranging from 2 percent to

20 percent of their export proceeds to

encourage higher shipments.

But garment exporters, who fetch more

than 80 percent of the country’s export

receipts, demanded more cash incentives

in the incoming fiscal year to tide them through the rising costs amid implementation of

the new wage scale in the industry.

The finance ministry though is planning to extend the facility to all sectors as the

escalating US-China trade war has suddenly expanded Bangladesh’s export market.

The export growth, which slowed down last fiscal year, has started looking up again this

fiscal year thanks to the trade war kick-started by US President Donald Trump in 2018.

In the first ten months of fiscal 2018-19, export receipts soared 11.6 percent year-on-

year in contrast to 6.41 percent registered a year earlier, according to data from the

Bangladesh Bank.

Like every year, the government allocated Tk 4,500 crore for cash incentive purpose in

the current budget.

Of the amount, Tk 500 crore went to the jute sector and the other Tk 4,000 crore was

allocated for all sectors, including textile and garments, according to finance ministry

statistics.

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19 CITI-NEWS LETTER

So if the cash incentive is increased by one percentage point next fiscal year, as decided

in a budget meeting chaired by the prime minister earlier this week, the total amount

would be Tk 5,000 crore.

Textile and garment sectors get the lion’s share of the cash subsidy.

At present, garment makers that use local yarn enjoy subsidy of 4 percent on their

export earnings.

Those who export to new markets -- which are destinations other than the US and the

EU -- also get cash subsidy.

Garment exporters demanded 5 percent cash incentive due to the rising cost after the

wage hike, said Siddiqur Rahman, the immediate past president of the Bangladesh

Garment Manufacturers and Exporters Association (BGMEA). Moreover, the prices of

garment products declined in the international market, he added.

The near-term export outlook is fairly good, particularly in the context of the renewed

tariff escalation between the US and China, said Zahid Hossain, lead economist of the

World Bank’s Dhaka office.

“The rationale for a further increase in cash subsidy to exports is thus not immediately

obvious.”

It is also possible to support both exports and remittances by allowing greater flexibility

to the exchange rate.

“This has the advantage of providing essentially the same cash support without much

additional pressure on the budget, except for the rise in the cost of imports in taka,

which can be managed through appropriate import tariff adjustments.”

He estimated that one taka increase in the exchange rate would be equivalent to Tk 15

billion subsidies to remittances (assuming it is $15 billion) and Tk 37 billion gross (since

their cost of imports will also rise) subsidy to all exports (assuming $37 billion exports).

Home

Eurozone manufacturing contracts as trade tensions weigh

(Source: Financial Times, May 23, 2019)

Services sector resilient but factory output shrank in May, survey data show

Manufacturing in the eurozone contracted in May, with an influential gauge indicating

that activity remains weak as producers grapple with the intensifying US-China trade

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20 CITI-NEWS LETTER

war and a slowing global economy. The single currency area is struggling to recover

from the slowdown that began almost a year ago, according to the closely watched

eurozone manufacturing purchasing managers’ index, which remained below the crucial

50 level in May. The flash manufacturing reading, which gives an indication of broader

export sentiment, hit a two-month low of 47.7, just below April’s reading of 47.9. Export

growth has been under pressure since the middle of 2018, affecting manufacturers

across the region, including in Germany, the zone’s economic powerhouse. Another

closely watched poll, the Ifo Institute’s business climate indicator, which reflects

business sentiment in Germany, fell to 97.9 in May, the lowest level since

2014. “Germany's export-oriented growth model, which specialises in capital goods,

continues to be under pressure in the face of cooling global GDP growth, lingering auto

sector problems and growing risks for world trade,” said Katharina Utermöhl, economist

at Allianz SE. However, services activity, which accounts for 73 per cent of the eurozone

economy, continued to expand in May, suggesting that low unemployment and better

wage growth is propping up domestic demand. In Germany, the May reading of 52.5

helped to put the composite index for the whole economy above the 50 mark and at a

two-month high. A separate services reading for France, the region’s second-largest

economy, rose to a six-month high. Some analysts argued that this divergence was not

sustainable, however. “If manufacturing production continues to decline for a prolonged

period, this will worsen the outlook for the service sector,” said Bert Colijn, economist at

ING.

Nicola Nobile, economist at Oxford Economics, said the sentiment indicators for April

and Maymade it “increasingly likely” that her data firm would downgrade their

projection for growth in the second quarter from 0.4 per cent to 0.3 per cent.

Policymakers at the European Central Bank watch the PMIs closely because they tend to

track GDP. However, a divergence between the hard data and business surveys has

emerged since the turn of the year. Official figures for eurozone and German GDP in the

first quarter were both better than expected, with each showing an expansion of 0.4 per

cent between the end of 2018 and March. A detailed breakdown of German GDP data,

also published on Thursday, showed that household spending was the main driver of the

economic rebound. Construction was also strong, with a 1.9 per cent quarter-on-quarter

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21 CITI-NEWS LETTER

expansion. The data breakdown, from the national statistics office DeStatis, indicated

that growth was dragged down by changes in inventories after German carmakers

delayed the introduction of new emissions standards.

Home

China seeks to join WTO talks over ICT products tariff in India

(Source: Amiti Sen, the Hindu Business Line, May 23, 2019)

Says exports worth $2.5 b hit due to the levy on mobile phones, base stations

China has sought to participate in the dispute consultations requested by Japan with

India on import duties imposed on certain IT and telecom products, including mobile

phones, on the ground that the duties have hit Beijing’s exports worth $2.5 billion

annually.

Six other members, including the EU, the US, Canada, Singapore, Chinese Taipei and

Thailand, have already given requests to the Dispute Settlement Body seeking

permission to take part in the India-Japan talks.

“China has a substantial trade interest in the consultations as it is one of India’s major

sources of import of mechanical and electrical products…For example, the statistics

show that in 2018, China’s export of telephones for cellular networks to India amounted

to $1.9 billion, base stations amounted to $0.23 billion, and machines for the reception,

conversion and transmission or regeneration of voice, images or other data amounted to

$0.28 billion,” according to China’s submission.

The EU, too, has requested a separate consultation with India on the issue of import

duties on IT and telecom products.

Both Japan and the EU have pointed out that the duties, ranging from 10 per cent to 25

per cent, imposed by India on mobile phones, base stations and routers, as well as the

circuit boards and other components that go into these devices, were against the

commitment of zero per cent duties undertaken by India when it signed the IT

Agreement (ITA) of the WTO in 1996.

While New Delhi has been arguing that the identified IT and telecom products on which

import duties have been imposed did not exist in the present form when the ITA was

signed, it is not being accepted by the opposing countries.

If the consultations fail to result in a breakthrough, the complainants may ask the WTO

set up a dispute settlement panel to rule on the matter.

Home

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22 CITI-NEWS LETTER

NGOs criticise EU for requiring exemption from global PFOA ban

(Source: Caterina Tani, Chemical Watch, May 23, 2019)

A group of international NGOs has criticised the EU for requiring an exemption for

medical textiles from a global ban on the use of perfluorooctanoic acid (PFOA) agreed at

the UN Conference of the Parties (COPs) earlier this month.

In a 10 May statement, NGOs, including the Health and Environment Alliance (HEAL),

Health Care Without Harm (HCWH) and Arnika, expressed "deep regret and

disapproval" for the request, which could "undermine an otherwise effective worldwide

ban".

Delegates from more than 180 countries agreed the prohibition of the use of the

chemical, adding it to Annex III of the Stockholm Convention at the conference in

Geneva.

However, several exemptions for the substance, including one for medical textiles, were

requested by the EU delegation – along with China and Iran – and approved.

PFOA is widely used for its resistance to water and oil. PFOA-related compounds are

used as surfactants and surface treatment agents in textiles, papers and paints and

firefighting foams. The substance has been identified as persistent, bioaccumulative and

reprotoxic by the EU.

The NGOs said the exemption goes "against the recommendations from the POPs

Review Committee for the Stockholm Convention", which identified several potential

alternatives to PFASs for use in medical textiles, but no specific applications

"absolutely" requiring a PFOA use.

During the COPs talks, the NGOs said even representatives of the fluorochemicals

industry "repeatedly opposed this exemption request", because of the "wide availability

of existing alternatives to the substance".

The NGOs also blamed the EU for requesting the exemption during the meeting, after

having previously nominated PFOA for listing under the Stockholm Convention, and

participating in the evaluation process – during which exemptions should normally be

listed.

This behaviour, they said, shows "a very disturbing disrespect of the UN’s careful review

process and illustrates the EU’s flagrant disregard of the accepted protocol for listing

exemptions under the Stockholm Convention".

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23 CITI-NEWS LETTER

In requesting the exemption, the chemicals policy and projects officer at HCWH Europe,

Dorota Napierska, added, "the EU has effectively lowered the bar in global chemicals

management and brought other countries in line with its own weak regulation".

This, she added, will have a "significant direct impact" on the amount of PFOA released

into the environment as the substance is used in significant amounts in the treatment of

medical textiles.

NGOs called on the EU to "change its behaviour" and "truly embrace its powerful

mandate" demonstrating a strong leadership in protecting the environment.

Home

Cover Story: Good prospects in overlooked Asean

(Source: Khairani Afifi Noordin, Edge Markets, May 23, 2019)

Over the past few years, there has been a lot of talk about the appeal of emerging

markets (EM) among investors and market observers. However, the markets usually

referred to were in China and India while Asean — collectively the sixth largest economy

in the world with a combined GDP of US$2.6 trillion and a population of more than 500

million — has been largely overlooked, according to fund managers.

“With favourable demographics, a growing middle class, rising incomes as well as

infrastructure development underpinning Asean’s economic growth, the region is

projected to become the world’s fourth largest economy by 2030,” says Soh Chih Kai,

Lion Global Investors Asian equities portfolio manager.

Asean consists of Malaysia, Indonesia, Singapore, the Philippines, Thailand, Brunei,

Laos, Cambodia, Vietnam and Myanmar.

These countries have become attractive as they have strengthened both their corporate

and government balance sheets since the two major financial crises in the last 20 years

— the 1997/98 Asian financial crisis and the 2008 global financial crisis, says RHB Asset

Management Sdn Bhd managing director and regional head Eliza Ong.

Soh concurs. He points out the fiscal positions of these companies have strengthened

with government debt levels lower than 50% of GDP and a high savings rate of at least

one-third of GDP. “The growth rate of Asean countries has also become less volatile

since 2000. These should provide a buffer to cushion future external shocks.”

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24 CITI-NEWS LETTER

Given all this, it may come as a surprise that Asean countries have been overlooked but

UOB Asset Management Bhd CEO Lim Suet Ling says this is because Asean is just a

small constituent of the much talked about investment category of emerging markets.

“EM also includes North Asia; China and Korea represents almost half (46%) of the

MSCI Emerging Market Index while Asean, excluding Singapore, is only 8%. That’s why

when people talk about emerging markets, the first market they go to is China.

“When a fund manager looks at a market, they look at market capitalisation. Who is the

biggest contributor to Malaysia’s economy? Petroliam Nasional Bhd, but it is not listed.

So the FBM KLCI does not look big. As an economy, however, Malaysia is bigger than

what is represented. Asean is small but there is growth, so investors should look at it in

terms of individual stocks and opportunities,” says Lim.

As of March 29, the MSCI AC Asean Index has provided 11.98% in annualised 10-year

returns, compared with the MSCI Emerging Markets Index’s returns of 9.31% over the

same period.

Asean is the market to invest in for those looking for consistent, stable returns over the

long term given its lower beta compared to most North Asian countries, says Patrick

Chang, chief investment officer at Principal Asset Management Bhd.

“A lot of investors think that Asean markets are risky. But China’s stock index fell 30%

last year. Isn’t that considered risky? Asean markets did not fall as much — in fact, most

Asean countries, including Indonesia, Vietnam and the Philippines were actually

showing positive returns last year,” Chang points out.

That being said, he admits that the Asean market is lacking depth when compared to the

North Asian markets. However, Asean is going through a normalised, healthy growth

and its companies are giving out higher dividends yields compared to the companies in

North Asia, he adds.

Asean’s diversity an added advantage

Asean is well-positioned for global trade, being the world’s fourth largest exporting

region collectively accounting for around 7% of global exports.

According to Lion Global’s Soh, Asean’s member states have developed more

sophisticated manufacturing capabilities that enhance their trading positions globally,

with Vietnam specialising in textiles and apparel, Singapore and Malaysia in electronics

and chemicals and Thailand in automobiles and automotive parts among others.

“Other examples include Indonesia — the world’s largest producer and exporter of palm

oil, largest exporter of coal and the second largest producer of cocoa and tin; Myanmar,

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25 CITI-NEWS LETTER

which has large reserves of oil, gas and precious minerals; as well as the Philippines

which has established a thriving business process outsourcing industry,” he adds.

Each Asean country is unique with different strengths and challenges — it is a region of

varying economic development, resources and infrastructure. Instead of seeing this as

an obstacle, investors should view it as an opportunity, says Chang.

“Asean can be divided into three economic stages — mature economies like Malaysia

and Singapore, emerging economies like Indonesia, Thailand and the Philippines and

lastly, high-growth economies such as Vietnam and Myanmar. By investing in Asean,

investors are able to benefit from all these different economic cycles, which are

progressing in a nice trajectory,” says Chang.

He adds that while it is natural for investors to only focus on the two mature economies

within Asean, the other countries do present interesting opportunities that may provide

investors with very good returns.

“The largest, deepest market in Asean today is actually Thailand. This country, regarded

as the ‘sick man of Asia’ 20 years ago, is no longer sick. It now has a hefty current

account surplus and one of the strongest inflows in the Asean bond market. Not many

people have noticed this,” says Chang.

He thinks that Indonesia also looks interesting at the moment, adding that he believes

the country will strive to sustain its GDP growth of between 5% and 6% moving forward,

driven by labour reforms and infrastructure development initiatives, among others.

“Indonesia has embarked on its first mass rapid transit system project and there are

more high-rise residential properties, hospitals and ports that are being built.

“Beyond the traditional brick and mortar industries, the country also has a very

interesting internet sector, driven by e-commerce sites like Tokopedia and Bukalapak,”

he adds.

Chang is also in favour of Vietnam. In fact, he has been monitoring it closely for the past

seven years. Being a pure frontier market, he finds feels the country’s key growth driver

would be its favourable demographics. Vietnam’s population is triple that of Malaysia at

95 million, 65% of whom are below the age of 30, presenting investors with strong

demographic dividends.

Not only does this translate to a higher consumption of fast-moving consumer goods, it

also leads to a flourishing internet sector, says Chang. He adds that internet penetration

in Vietnam is one of the highest in Asean — its citizens are now using their mobile

phones for various tasks and transactions.

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26 CITI-NEWS LETTER

“It’s also a very hardworking population, surpassing many developed countries in terms

of Program for International Student Assessment (PISA) score,” he says. PISA is a

worldwide study by the Organisation for Economic Cooperation and Development to

evaluate educational systems by measuring 15-year-old students’ scholastic performance

on mathematics, science and reading.

“This means that it has a very attractive and cheap workforce. A lot of multinational

corporations (MNCs) are taking advantage of this by moving there. For example, 70% of

Samsung’s mobile phones are produced out of Vietnam,” says Chang.

This is a trend throughout Asean. According to Ong, Asean’s role as a manufacturing

hub is growing in prominence as its wages have become more competitive than China’s.

In light of the trade tensions between the US and China, MNCs are now relocating their

production out of China to these lower-cost countries, which have adequate production

facilities and a good network of free-trade agreements in place.

While it has been going on for a few years now, the US-China trade war had prompted a

sharp acceleration of this trend as companies attempt to avoid US import tariffs on

Chinese goods, according to various reports.

So what are the more interesting sectors in Asean? So far, the majority of fund

allocations have been in the banking and telecommunications sectors. RHB Asset

Management’s Ong explains that this is because the countries in Asean are still

developing — meaning that businesses located here would still need financing and

infrastructure.

“These sectors are likely to be linked to government or large conglomerates owned by

founding patriarchs or matriarchs. As the economy progresses, the rise of industrials

can be seen. Then the economy would take off from industrialisation to further progress

into innovation [such as information technology and healthcare] along with the growth

in wealth, which will then boost consumption,” says Ong.

Besides the banking and telecommunications sectors, Lion Global Investors’ Soh says he

also likes the consumer and infrastructure sectors that provide exposure to Asean’s

young population, rising middle class with increasing purchasing power and

infrastructure spending.

A quick look at some Asean-focused unit trust funds in Malaysia reveals that most of

these have the financial sector as their highest allocation. For instance, the RHB Asean

fund has an allocation of 46.48% to this sector, according to its April fund fact sheet.

The top holdings of most of these Asean-focused funds include DBS Group Holdings

Ltd, Oversea-Chinese Banking Corp and United Overseas Bank Ltd.

Challenges and long-term drivers

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27 CITI-NEWS LETTER

While there are a lot of advantages to having an Asean exposure, there are also a couple

of risks. For instance, Asean is more susceptible to capital flows and currency impact as

most of the countries in the region still require external financing and investments to

fund their development, says Soh.

“Varying levels of economic development among the 10 member states — from a

developed economy like Singapore to a frontier economy like Myanmar — and the

diversity in culture, language and religion make it difficult to create a one-size-fits-all

investment strategy.”

Aside from that, the region also has high external trade dependence and strong trade

reliance on China, says Ong. “Asean’s total merchandise trade to GDP grew to 87% in

2016 from 43.1% in 1967. Additionally, China accounted for 20.3% of total Asean

imports of goods and 14.1% of total exports of goods in 2017,” she adds.

UOB Asset Management’s Lim says the market of some Asean member states lack

liquidity, especially Cambodia, Laos, Myanmar and Vietnam. As retail investors are used

to daily liquidity, they may find it difficult to navigate these smaller markets. Therefore,

she suggests either buying into an Asean fund or investing in Asean companies that are

listed elsewhere.

“NagaCorp Ltd, for example, is a Cambodian leisure and gaming operator listed on the

Hong Kong Stock Exchange. So, even though you are investing in the Hong Kong market

you are actually getting exposure in Cambodia. Other examples are Thailand-based Thai

Beverage plc and Myanmar-based Yoma Strategic Holdings Ltd, both listed on the

Singapore Exchange,” says Lim.

Another challenge the region is facing is that most of its companies have yet to reach

maturity, she adds. Corporate governance remains a key issue and it is difficult for

investors to sieve through the companies, given the limited amount of information

available.

“Investors in the region are also not mature enough. Most of them are retail, so there is

always [motivation of] greed and fear which causes volatility. Institutional investors will

need to come in to help the markets reach maturity. Hopefully, when these funds come

in, they will provide stability for the good stocks, helping the market become steadier,”

says Lim.

Structural themes such as a growing middle-income group and rising consumption

should remain key growth drivers over the next 12 to 24 months, says Soh. Elections in

most Asean countries are over, so Lion Global Investors will focus on infrastructure

investment and development in the region as governments look to strengthen their

economies.

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28 CITI-NEWS LETTER

Chang is excited about a lot of the growth initiatives undertaken by several Asean

governments to attract long-term capital investments, such as Thailand’s Eastern

Economic Corridor (EEC), which straddles three eastern provinces — Chonburi, Rayong

and Chachoengsao.

The 13,000 sq km EEC is part of the government’s wider Thailand 4.0 plan to transform

its economy into Southeast Asia’s engine of growth. It is poised to attract about US$46

billion in investments, focused on “S-curve” industries — next-generation automotive,

aviation and logistics, smart electronics, medical tourism, food, robotics, agriculture and

biotechnology.

Another long-term growth driver is China’s Belt and Road Initiative (BRI). This is

important for Asean countries as it can help to fund and meet their infrastructure

requirements, says Ong. It also supports the success of the Asean Community Vision

2025 and The Master Plan on Asean Connectivity 2025 initiatives, she adds.

“Based on an estimation, the BRI has resulted in US$460 billion worth of investments

in the five years since its inception in 2013. However, it is notable that the BRI

continues to see serious pushback and disapproval because of its lack of transparency,

inclusivity and potential ‘debt traps’ such as the often cited case of Sri Lanka’s

Hambantota Port,” says Ong.

Although the BRI progress has stalled, Ong says the market is hopeful that the initiative

will enter a new stage following its summit held last month. “Nonetheless, we should

note that the broader motives and longer-term structural changes that the BRI will

bring to Asean could be positive. This warrants careful attention in the months and

years ahead for further potential developments within the BRI.”

Anticipating Asean start-up IPOs

Asean is home to some of Asia’s biggest technology start-ups. The scene, which was

considered small and fragmented some five years ago has turned into a thriving

ecosystem, attracting hundreds of millions of dollars in funding annually. For example,

ride hailing platform Grab has raised more than US$7.5 billion in its series H round of

funding as at March 6.

Soh Chih Kai, Lion Global Investors Asian equities portfolio manager, says that it is not

surprising to see the technology start-up industry blossoming with lots of funds flowing

into the region given the current low penetration and adoption of technology in Asean,

on top of the immense potential opportunities. This will in turn continue to drive the

growth of the industry and technology start-ups, he adds.

Patrick Chang, CIO at Principal Asset Management Bhd, concurs. He says that over the

past few years, there have been a lot of market observers who were unfairly comparing

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29 CITI-NEWS LETTER

Asean countries to North Asian countries, highlighting that Asean does not have its own

version of “Alibaba” or “Tencent”.

“The fact is that we do have a lot of these companies; they are just not listed yet. That’s

why I am hopeful that Go-Jek, Tokopedia, Bukalapak and the other big start-ups will

soon be listed. It would definitely bring the shine back into Asean and propel people’s

mindset to think that Asean is no longer a region of old economies,” says Chang.

While she thinks that this would be a good opportunity for retail investors in the region

to finally participate in the high-growth unicorn start-up scene, Lim Suet Ling, UOB

Asset Management Bhd CEO, says that investors need to be mindful of valuations as

new technology stocks tend to be more expensive due to growth potential.

“It may even be chased out of proportion, so investors have to be rational and wait for

the numbers to be brought back down to earth again. Additionally, investors will also

have to keep themselves up to date because technology moves very fast. If the investors

know where the technology is moving, they won’t be stuck in the investment,” says Lim.

That being said, retail investors can still invest in start-ups even before they are listed on

the stock exchange, Eliza Ong, RHB Asset Management Sdn Bhd managing director and

regional head, points out. They can do so via crowdfunding platforms, which are

regulated in some Asean countries such as Malaysia and Singapore. Other countries like

Thailand and Indonesia are setting up their own frameworks for such platforms.

“This, however, comes with a certain level of risk which should be properly disclosed to

non-sophisticated investors to assist them in making informed decisions,” says Ong.

More green bond issuances expected

In 2017, the Asean Capital Markets Forum (ACMF) introduced the Asean Green Bond

Standards. Subsequently, in 2018, the organisation came out with two more standards,

the Asean Social Bond Standards and Sustainability Bond Standards. According to

ACMF’s website, as at March 11, there were nine issuances aligned with the three

standards.

Going forward, there will be a continued demand for these issuances, says RHB Asset

Management Sdn Bhd managing director and regional head Eliza Ong. “To ensure that

Asean green investment opportunities are met by 2030, it is estimated that Asean will

need US$200 billion in green investment annually from 2016 to 2030, a 400% increase

from today’s annual supply of green finance.”

Patrick Chang, chief investment officer at Principal Asset Management Bhd, agrees. He

thinks the appetite for such issuances will increase due to the huge movement towards

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30 CITI-NEWS LETTER

environmental, social and governance (ESG) awareness among institutional and retail

investors globally.

“It is a typical demand and supply situation — as the demand increases, there will be

more companies interested in becoming issuers. That was how we started our bond

market in the 1970s when the government decided to issue more bonds and get pension

funds and investors like ourselves to subscribe to them, leading to a thriving bond

market. Today, Malaysia is one of the largest bond markets in Southeast Asia.

“So, I think it has to start somewhere. Malaysia is one of the pioneers of the ESG Index

in the region and I think eventually the pension funds will adopt it. Then we, as a

pension fund portfolio manager, will have to adopt it as well,” says Chang.

As at end-November 2018, the Asean green bond market recorded a total issuance of

US$5 billion with Indonesia, Singapore and Malaysia as the top three countries for

labelled green bond issuances, says Ong.

“Indonesia is the largest regional green bond issuer with its US$1.25 billion sovereign

green sukuk. Buildings is the largest category financed by green bonds (43% of the

market by volume), followed by energy at 32%. Transport is the largest sector financed

by unlabelled climate-aligned issuances with US$7.4 billion outstanding, in front of

energy at US$1.3 billion outstanding,” she elaborates.

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