Emerging markets:Learning to speak the language

Cayman’s financial services industry began broadening its reach internationally years ago with firms opening offices in other offshore jurisdictions as a pace, appreciating the need to physically outreach to clients and ensure that their business benefitted from the cross border flows that are part and parcel of international finance.  

In recent years, emerging markets in places such as Asia, India and Latin America have been a particular focus for both Cayman’s private and public sectors. 

Yet looking to move from traditional sources of business to exploring new frontiers is not without its challenges. To begin with, there is the question of communication barriers; not simply in speaking a different language, but also in communicating when it comes to the way in which business has been traditionally conducted. 

Understanding business practices in countries experiencing surges of new growth is important because young markets tend to equate to a lack of sophistication, a new concept to business practitioners here, in a jurisdiction as sophisticated as the Cayman Islands. In addition, the quest for new sources of investment is gathering momentum, with other jurisdictions  realising the wealth of opportunity in such markets.

Another issue is the sub-sector focus.  For example, it may be obvious which jurisdictions are showing potential from an investment stand point, but to determine which sub-sector is relevant to what Cayman has to offer is a different challenge.  Is it private wealth, or funds or insurance, and how do their specific needs compare to  what we have to offer?

Asia

In an article in the latest edition of the AIMA Journal entitled ‘Trust and transparency crucial as Asian hedge funds compete for assets’, author Marie-Anne Kong of PwC Hong Kong Asset Management writes that Asia presents its own challenges for the investor, in particular the dominance of investment returns over operational risk concerns.  Asia, she says, is different from other parts of the world.

Competition for business is growing as opportunities become better understood. Polling delegates from its Asia-Pacific Alternative Investments Conference in November 2011, PWC found that that  smaller  managers without the scale to build ‘institutional’ type infrastructure were seeking capital from Asia’s new wealthy. 44 per cent% of delegates viewed high net- worth individuals and family offices as their most important investor bases.

A further 38 per cent% saw institutional investors (including sovereign wealth funds) as their primary investors, and 18 per cent% were looking to fund of funds.

Appleby has recently opened offices in Shanghai, that region clearly a success story for the firm. Huw Moses, Mmanaging pPartner, with Appleby (Cayman) Ltd says the principal reasons for the firm’s step into mainland China are client demand and opportunity.

“We work with a number of clients that are either based in, or are looking to build operations in, China. Our recent work as BVI counsel to a subsidiary of China National Petroleum, the largest integrated oil and gas company in the country, is a case in point. We worked for CNPC Golden Autumn on the issuance of RMB 3bn guaranteed bonds due 2013 and 2014, to be used for overseas corporate activities. Moses says their experience in Hong Kong, where the firm has operated for over 22 years, has taught them that the key to being successful in China lies in winning confidence and building solid relationships with their clients there.

He went on to say that Appleby were looking forward to the opportunity to better inform the Chinese market of the various international structures available utilising offshore entities.  He says they will be offering clients a cultural bridge alongside the offshore services they are used to getting from the firm.

“The complexities are manifold: China is an economy driven heavily by government policy, and its currency is not yet freely convertible even though we are seeing rapid expansion in the use of the Renminbi (RMB) outside China with the issuance of RMB bonds overseas,” he confirms.

Brazil

Despite slowing growth in 2011, earlier this year the Centre for Economics and Business Research estimated that Brazil’s economy surpassed that of the United Kingdom in 2011, with a GDP of $2.469 trillion, according to the study, making it the sixth-largest economy in the world. The Cayman Islands is one of the top five places in the world for investment in and out of Brazil, based on information from the International Monetary Fund and so the country has been one of focus for the Island’s public sector, keen to strengthen relations to facilitate cross border investment between the two countries.

As a result, a Cayman Islands financial services delegation recently attended the Brazil Investment Summit in Sao Paolo when meetings were held with members of Brazil’s private sector and key industry associations. Financial Services Chief Officer Dax Basdeo led the delegation and said that it was an extremely productive visit in that it highlighted specific areas of concern that needed to be addressed.

Even though the sophisticated business entities that have been dealing with Cayman for many years understand and appreciate the level of regulatory infrastructure and compliance with international standards here, Cayman’s public image still needs additional  work, with the cloud of the ‘Cayman Dossier’ scandal (a foiled plot to discredit the then president that involved a company with a Cayman-based bank account) still in the memories of Brazilians, as an example.  This still colours how Cayman is perceived in Brazil and is an area the government hopes to address. Other countries, such as Luxembourg, keen to benefit from the wealth newly created in Brazil are actively marketing themselves in Brazil, so competition is growing.

India

India has been another source of tremendous interest in recent years but a slowdown of its economy this year has left investors concerned. India’s economic growth slumped to its lowest level in nine years in the first three months of this year, according to recently released data. Reuters says this marks a dramatic slide in the fortunes of a country whose economy boasted nearly double-digit growth before the global recession.

The Indian economy grew 5.3 per cent in the last quarter from a year earlier, a sharp slowdown from 9.2 per cent growth in the last quarter of the previous year, government data showed. The figures were the latest confirmation that the slowdown of Asia’s third-biggest economy is deepening.

In addition, a recent report in the Deccan Herald highlighted that foreign investors were deserting Indian stocks. In the last three months or so, the report states, the Bombay Stock Exchange’s Sensex had plunged 2,463 points from 18,428 in February 16,000 in May.  The report blamed foreign institutional investors pulling out money as a major cause of the fall. As well as the fall in GDP, the falling value of the rupee against the dollar was another reason why foreign investors were voting with their feet, with the Indian rupee falling 21 per cent against the dollar since the beginning of 2012. The rupee is also the worst performer among all Asian currencies so far this year. 

Two new tax provisions were also having a detrimental effect on the economy, the report said, one that would change India’s tax laws to allow cross-border deals to be taxed retrospectively and the other would target tax evaders, using the General Anti-Avoidance Rule (GAAR), to force investors to prove that registrations in tax haven countries are not intended solely to avoid tax.

Thus, while emerging markets and the lure of new wealth is a draw for business links with Cayman to be developed and promoted, understanding the complex culture in which business operates, the dynamics affecting the country’s economy and the competition that is chasing the same end game, are all vitally important for laying down the ground for a successful forging of markets.   Culture and history are significant factors to understand in addition to (sometimes) huge differences in the legislative and regulatory frameworks of target jurisdictions.

The partnership between gGovernment and private sector has always been a key factor in the success of the Cayman Islands financial services industry.  Further building on this partnership would be an asset in any renewed approach towards gaining further access to emerging markets. Trips such as the recent visit to Brazil and others being planned will contribute greatly if we can combine the Cayman Islands gGovernment’s understanding of gGovernment to gGovernment relations with the required adjustment by private sector in understanding how to do business in these new  markets.

Our strong public private sector partnerships can only help as we combine our strengths in improving our market share for emerging market clients in financial services. Furthermore clients and investors alike will only gain confidence in the jurisdiction as this partnership increases our prominence as the right jurisdictional partner.

 

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