Many invaluable lessons have been captured as we navigate through year two of the pandemic. For an analysis of the new reality, DTCC’s Hasan Rauf, Executive Director and Head of Business Development, Asia Pacific, recently spoke with Dr. Taimur Baig, Managing Director and Chief Economist, Group Research at DBS Bank, on the unprecedented market conditions of 2020 and the road ahead for business.
Rauf: Due to intense market volatility during the early phase of the pandemic, countries in the Asia- Pacific region recently formed a free trade agreement. What are your thoughts on regional integration?
Baig: The COVID-19 crisis did not crystalize the idea to form a regional alliance for free trade. 2020 happened to be the year that the Regional Comprehensive Economic Partnership (RCEP) Agreement was signed after more than seven years of negotiations. In a world where there are large trading blocs such as the U.S.-Canada-Mexico Agreement and the European Union, a regional bloc is essential for Asia to continue to pursue economic growth and level the playing field.
That said, there is a degree of additional impetus to focus on regional issues – triggered by COVID. COVID has also pushed firms in Asia and elsewhere to build resilient supply chains to address demand volatility. One could argue that there could be a countervailing trend to promote globalization of market and production despite the potential disruption to the flow of intermediary goods and services during a crisis.
Rauf: During the global financial crisis in 2008/09, we saw a shift in investment strategy to fixed income instruments. Do you see diversification as key to reduce investment risk in today’ s complex climate?
Baig: Diversification is a controversial word. Do we spread risk around or it is just a case of lots of firms owning the risk in the name of diversification? While owning government backed assets enjoy a favorable risk weight and offer stability and security in our portfolio, environmental, social and governance (ESG) considerations have increasingly become part of the risk evaluation. Today, it is not just a question of investment strategy shifting to fixed income instruments, investment decisions are now driven by the underlying asset of the fixed income instrument and the type of fixed income instruments – with ESG analysis gaining importance in the investment process.
Rauf: In your opinion, which market segment within the financial services industry has benefited from the current normal?
Baig: Firms that have kept pace with digitalization of payments have done well. The stark reality is neo banks like Tencent and Alibaba are not just succeeding in China, they will succeed all over the world. Neo banks are challenging the traditional banking model through its technological expertise, nimble and low-cost business model. Unlike traditional banks, neo banks are not constrained by bureaucratic administrative processes – clients enjoy great convenience with account opening, making electronic payments and low migration cost.
Recognizing the threat from neo banks, traditional banks have since evolved – offering digital banking services that can be accessed via desktop, mobile, phone and automated teller machine. COVID has further reinforced that the trip to the brick-and-mortar bank branch is no longer needed.
However, financial banking decisions cannot not always be made across a screen. Human-enabled services that enrich the client experience – versus that of a “quick thinking” robot – is still required. While automation can replace repetitive tasks related to brute force calculation, we still need the high touch approach and soft skills of Relationship Managers to provide consultative, data-driven insights for certain client segments. Likewise, superstar Fund Managers are valued over computers and algorithms for their ability to generate alpha.
Rauf: Given that Asia is a fragmented region, how, how do you see Asian firms competing in the current environment?
Baig: My view is that large firms with impressive balance sheets and reserves tend to drive the mom and pop stores out of business, resulting in homogenization of services at cheaper pricing. There are also start-ups that do not aspire to become the next unicorn but prefer to be bought over by the big players. This thinking creates anti-competitive behavior and lessens competition in the regional marketplace.
On the other hand, countries will protect national champions, thus restricting market power to only a few big players in the region. Another silver lining is that there is a chapter on digital services in RCEP [The Regional Comprehensive Economic Partnership], implemented on November 2020. With this, there is a possibility that a uniform regulatory treatment may be applied across borders to create a potentially level playing field for big and small firms. Multilateral deals that bring some degree of transparency on how firms operate in the regional marketplace is helpful to address market fragmentation.
Rauf: What are your thoughts on the future of offshoring to low cost centers and outsourcing in the wake of COVID?
Baig: Comparative advantage will not disappear with COVID or digitalization. In an increasingly interconnected world, firms operating in a country where labor is expensive can and will seek quality labor elsewhere. Countries with well-trained English-speaking labor pools will continue to draw outsourcing investments. There may be some tendency to keep some work closer in the home country to build resilient supply chains.
For firms that are concerned about cost, offshoring creates a local flavor. For example, DBS Bank has international presence everywhere and by setting up branches in India, the bank is seen as DBS India, not necessarily a Singapore firm with business interests in India.
My view is that a firm can only achieve long-term success through scale – growing intelligent business and building harmonious relationships with shareholders, stakeholders and societies. From this perspective, “low cost centers and outsourcing” are considered dirty words that epitomize cost-obsessed CEOs. Let’s instead think about the synergistic approach to outsourcing – it’s not just about cost, it’s about finding expertise. When put together, the outlook for moving some operations to a different location is smart business sense that can be a win-win for all.