May 9, 2012
Regardless of how one feels about J.P. Morgan (NYSE:JPM), and recently Tangent Capital’s Chris Whalen called them a ‘monopoly’ on CNBC’s Squawk Box eliciting stunned silence, they are a force to be reckoned with in any market they work in. While first quarter revenues, company-wide, were off slightly their business in Asia is becoming a core growth center.
Having restructured their fund business under one global rubric with new divisions specifically set up for the U.K. and Brazil, J.P.Morgan is looking to streamline its global introduction of new fund products more efficiently. It sounds like there was a lot of competition between divisions; fiefdoms that would hoard knowledge inhibiting overall performance. It is their stated goal to double their global share of the fund market to 4% over the next three to five years.
However, their Chinese Investment Trust, split almost equally between Chinese, Japanese and Hong Kong issues, has underperformed its peers in the last year and trades at a significant discount to NAV; highlighting a possible shift away from traditional funds towards ETFs. The iShares MSCI China 25 Index ETF (AMEX:FXI) traded within 0.5% of its NAV 48% of the time in the first quarter of 2012. Since the Shanghai index bottomed in December 2011, the JPM Chinese IT has gone from trading at a 5% premium to a 9.7% discount. NAV has dropped 13.7%
Anemic volume and capital outflows suggested that retail did not partake in 2012’s U.S. equity rally which just ended with a resounding thud. It is going to be a hard sell to North American investors, struggling to buy gas or fund their bankruptcy, to buy a non-liquid fund when the ETF provides similar exposure, better returns, lower costs and more personal control at $7 per trade.
How J.P.Morgan grows in the Asia-Pacific region and, specifically in China and Vietnam, will be determined by how those two markets go through their liberalizations. Recent moves by the PBoC to open up the IPO, dividend and joint-venture rules are a good indicator of things to come. This is what will fuel their Deposit Receipt (DR) business for Chinese companies looking to list abroad, especially in Hong Kong and Singapore as well as multinationals wanting to list in Asia. In 2011, while there were a lot fewer DR IPO’s, 39 vs. 93 in 2010, they were, individually much larger issues, $5.9 vs. $7.9 billion.
J.P.Morgan has a minor presence in Vietnam having mostly been involved with a handful of marquee stocks like Vinamilk and Masan Group through the local dominant player, Vietcapital. But, beyond that they do not have much of a presence or influence.
Both countries are coming out of the worst part of their property bubbles and have begun a loosening cycle, though Vietnam’s situation is still very fragile. The signs are there that the worst is past: an improving bond and interbank market, a first quarter trade surplus and rising foreign exchange account. The real test for Vietnamese equities comes as the VN Index approaches the 500-510 region, which will determine if investors there are convinced the turn-around is sustainable or a good place to get out flat.
The Shanghai Index is running into similar territory at 2500. And J.P.Morgan’s own economists expect China to be back on an 8+% growth path by the 2nd half of 2012; though it will not be pretty as price drops in real estate have already resulted in public unrest. In the end, J.P.Morgan’s Asia strategy will succeed on how well they can work within a rapidly-evolving landscape where local players like HSBC dominate.