The Developing Asian Capital Markets

The Developing Asian Capital Markets

Is GDP growth correlated to equity returns? Source: Bloomberg Data

GDP growth is not correlated with equity returns in Asia Unlike what we saw in the US, in Korea from 1990-2005, GDP rose 3.5x while the KOSPI was flat Source: Bloomberg Data

Market Capitalization: 1950 Japan 9% Other 6% Europe 26% U.S. 59% US + Japan = 68%

Market Capitalization: 1988 Other 14% Europe 17% Japan 40% U.S. 29% US + Japan = 69%

Market Capitalization: 2012 Europe 23% Japan 7% U.S. 34% Source: Bloomberg, 10/4/2012. Other 36% US + Japan = 41%

Percentage of Population in Asia s Middle Class Malaysia 2014 China Thailand Indonesia Philippines India 2009 0% 10% 20% 30% 40% 50% 60% 70% Sources: Euromonitor; World Bank; CLSA Asia-Pacific Markets / 2010

Growth of the Middle Class Number of Households (Millions) with Annual Incomes at Least US$10,000 240 200 China/India 160 Western Europe 120 80 40 United States Brazil/Russia 1900 1995 2000 2005 2010 2015 Source: Economist Intelligence Unit; Citi Investment Research and Analysis

India s Developing Middle Class Percent of Total Population by Age 100% 80% 60% 5% 14% 31% 46% Wealthy Middle Class 40% 20% 2000 Source: Eurostat (EU27 projections) 2008 2020 2030 Aspiring Middle Class Impoverished

Bank Source: Bloomberg, 10/4/2012. Top 10 World Banks - 2012 Ranked by Assets (US$ Billions) Country Total Assets Market Cap 1 Deutsche Bank Germany $2,840 $39 2 Ind & Com Bank of China China $2,690 $207 3 HSBC Holdings U.K. $2,650 $177 4 Mitsubishi UFJ Financial Grp Japan $2,650 $66 5 Barclays U.K. $2,560 $44 6 BNP Paribas France $2,490 $62 7 JPMorgan Chase U.S. $2,290 $159 8 Crédit Agricole France $2,280 $19 9 Royal Bank of Scotland U.K. $2,220 $47 10 Bank of America U.S. $2,160 $101

Institutional Investor Base for Non-investment Grade Loans Banks CLOs Hedge, distressed and high-yield funds Prime rate funds, financial and insurance companies 100% 80% 60% 40% 20% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Sources: S&P LCD, JPMorgan (4/12/2010).

Equity Market Cap to GDP (2011) 160% 120% 80% 40% India Taiwan U.S. Source: The World Bank, Wind, CEIC, FCLAS (CLSA Investors), ( Primed for Reform ) Japan South Korea China (A+B+H) China (A+B only)

Corporate Bonds to GDP (2011) 35% 25% 15% 5% U.S. Japan Source: Wind, CEIC, FCLAS (CLSA Investors), ( Primed for Reform ) Taiwan Hong Kong China India

300 250 200 150 100 50 0 Bank Assets as Percent of Debt & Equity Sources: IMF, BIS, S&P and Milken Institute April 2012

Composition of Financing in China Others Non-financial corp equity Corporate bonds Bank loans 100% 80% 60% 40% 20% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Sources: Bloomberg; Dow Jones VentureSource; FCLSA, ( Primed for Reform )

Chinese small businesses are the engine of growth, but large enterprises get the lion s share of bank loans 100% = ~5.1 million 770 million $4.9 trillion $5.0 trillion Large enterprises 10% 2% 23% 35% 61% Midsize enterprises 88% 33% 30% Small enterprises 44% 35% 22% 17% Number of enterprises Number employed GDP Bank loans Source: McKinsey.

Comparison of Raising Funds 100% 75% Loans 50% 25% Bond U.S. Equity India China Sources: Bloomberg; Dow Jones VentureSource; FCLSA, ( Primed for Reform )

Most Chinese bond issuers are rated A or higher 2011 Share of all bond issuers 35% 30% 25% 20% 15% 28.7% 18.6% 24.6% 18.9% 10% 5% 0% 6.1% 1.8% 0.50% 0.34% 0.34% 0.06% 0.06% 0.03% AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB- Sources: China Central Depository and Clearing Co., China CITIC Bank.

Negative real deposit rate in China: Households and businesses are searching for yield One-year deposit rate minus inflation rate, percent 4 3 2 1 0-1 -2-3 -4-5 -6 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: DataStream, National Bureau of Statistics, People s Bank of China.

Average Expected Return Assumption 9% 8% 7% 2002 2003 2004 2005 2006 2007 2008 2009 Sources: EuroStat, HUD, Milken Institute.

200 180 160 140 America Goes to Work U.S. and Fortune 500 Employment New financial technologies are fully implemented U.S. = +62 million jobs 120 100 80 60 70 Modern capital markets begin 75 80 Fortune 500 = minus 4 million 85 90 95 00 Index 1970 = 100

Asian private credit: Attractive risk/reward Asian private credit investments are expected to provide an opportunity to capture growth and entrepreneurial value creation in the region while both earning a recurring income stream and protecting capital Returns are typically structured to provide a combination of fixed income return and profit share or equity warrants Credit quality frequently enhanced through collateralization Loans secured by hard assets, operating company shares, etc. Potentially provides investors with higher returns than public markets Target strong covenants that potentially trigger ahead of operating company debt Target seniority in capital structure Different jurisdictions often require specific regional legal and investment expertise Tax and legal issues related to investment and repatriation of capital offshore Expertise of local bankruptcy processes Unlike US, defaults are more common, necessitating workout experience Weigh sponsor quality against collateral enforceability Intense monitoring of sponsor s other business interests

Asian private credit vs. US mezzanine structures Note: The information is based on market standards

The Developing Asian Capital Markets