Global banks to play major role in Saudi capital markets development, HSBC exec says

Emerging markets present major growth opportunities in equity and bond markets

Banks will play a major role in the capital markets of developing economies, including Saudi Arabia, where bond and equity market caps are significantly lower in terms of their percentage of gross domestic product when compared to developed countries, said an executive of HSBC, the world’s seventh biggest bank.

The market capitalisation of the Saudi Stock Exchange, or Tadawul, as the Arab world’s biggest bourse is known, is close to $500 billion (Dh1.8 trillion), about 80 per cent of the country’s $700bn GDP, Samir Assaf, the chief executive of HSBC’s global banking and markets, told delegates on the second day of the Future Investment Initiative (FII) summit being held in Riyadh. The market cap of China, the world’s second biggest economy and one of the largest emerging markets, is 38 per cent of the country’s GDP.

“You compare it to the US [equity market] that is about 141 per cent of the GDP, and you compare it with the UK, which is 120 per cent of the GDP,” Mr Assaf, who is also a member of the HSBC management board, said on Wednesday. “You see that in emerging markets there are still growth opportunities to find equities.”

The $80bn size of the bond market in the kingdom, the biggest Arab economy, is almost 10 per cent of the GDP. However, compared with any other developed country or even in some of the emerging markets, it is multiples of the GDP of that country, he noted.

The role of banks has changed, specifically after the financial crisis a decade ago, with requirements to retain more capital to support balance sheets and deleverage according to new global banking standards. The banks continue to support economies through lending but they are assuming the role of facilitator, allowing borrowers and investors to raise capital through both equities and fixed income markets.

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“So what banks will be doing, actually, will be using less of our balance sheets and more of helping investors and issuers to bridge through … and find sources of financing and investments [in capital markets] including in Saudi Arabia,” Mr Assaf said. “Banks will play a major role in developing the [bonds and equities] markets”

The emergence of local currency borrowing within emerging market economies has widened the pool of liquidity for issuers and investors, Mr Assaf said, citing examples like Panda bonds in China and Samurai bonds in Japan. The rapid development of sustainable financing as a new asset class within the past few years, he said, and another area where banks can help both issuers and investors.

In the short term, HSBC is still positive on global economic growth. However, it sees US-China trade frictions and higher interest rates as risks to global and emerging market economic growth.

“If we see inflation creeping high in the US, the Fed will probably go higher in interest rates. That would put a bit more pressure on the US economy,” Mr Assaf said. “It will put more pressure on the emerging markets, specifically on the countries with external deficits or countries counting a lot on foreign debt.”

In the long-term, HSBC expects real economic growth in world economies, driven by emerging markets, especially those in the Middle East and Asia.

In the next five years, about 2.6 billion people in Asia are expected to become middle-class, defined as urban households that earn between $9,000 and $34,000 a year, pushing the total wealth in Asia to more than the total wealth in North America by 2021.  By 2030, the Asian middle class population is also projected to earn double what they are earning presently, Mr Assaf said.

The question is “how developed countries can benefit from the growth of these countries and keep the global economy up and running”.