2 converging investment opportunities for 2017

2016 had been a year of surprises; conventional wisdom had been turned on its head. The year started with the crash of the Chinese stock market which the authorities had assured wouldn’t happen for a third time.

In June 2016, British voters went against the mainstream advice to separate from Europe. It created political and economic uncertainty for Britain and cast a shadow on the fate of the European Union. The year was also scarred by notable terrorist attacks from Bangkok to Berlin and cyber security attacks such as the theft of US$81m from Bangladesh Central Bank.

The most important event would be the stunning rise of Donald Trump as the 45th President of the United States against favourite Hillary Clinton. As investors, we are neutral. We put our money where we think the growth would be and here are some possible investment themes for 2017.

1. Exciting opportunities for US banks
The Federal Reserve had raised rates last December and its effect had reached Singapore in terms of higher interest rates. The Singapore dollar is also expected to weaken. Economists had downgraded Singapore’s growth rate for 2016 and 2017 to 1.4% and 1.5% respectively. As Singapore is an open economy, the lacklustre global economy and protectionist Trump administration may push Singapore into a recession.

In this weak domestic environment, we can look at the financial stock in the United States that can benefit from the rising interest rate environment and the strengthening US dollars. President-elect Donald Trump had also made election promises to repeal the Dodd-Frank regulations which forced banks to store US$1.9t of excess cash at the Fed.

As regulations ease, it would make it easier for banks to lend out this excess cash and at higher interest margin. Both factors would make a strong case for earnings of US banks. Another important point would be to look at US banks that are relatively freed from regulatory entanglements such as JP Morgan.

2. Indian microfinance companies
India is the fastest growing major economy in the world at 7.4% in 2016. This is faster than the 6.6% expected of China. One of the hottest sectors in India right now is the microfinance sector which serves the broad base of 223m poor households. They are financially excluded with no bank accounts and loans to improve their lives.

Source: EY

Microfinance institutions (MFI) started as self-help groups in the 1970s, but it has hit a growth wave in 1991 as the Indian economy opened up. In 2005, investors started to pour money as MFIs started to mature into profitable loan organisations.

Poor Indians used these funds to create income-generating businesses in the first and second cycles. As they produce income and repay the loans, they start to qualify for consumption-related loans (e.g. housing loans). These sustainable loans started to grow in scale and reach in India. Year 2016 had been a crucial breakthrough year for MFI as more rural Indians started to share in the tremendous economic growth.

Today, large Indian MFIs are starting to register themselves as small banks and they had developed reliable systems to acquire these poor customers that are beyond the reach of traditional banks in India. They have a large customer base to access which can help them to dominate the market in the next decade. However, the bad news is that there is no easy way to access them as they are not at the stage where they can be publicly listed.

Conclusion
You can spot some similarities in both opportunities. The most obvious point is that multiple factors are supporting growth in both US banks and Indian MFIs. The second similarity is that both had been building up their strength over the past years.

US banks have been strengthening their balance sheet under the supervision of US regulators. Indian MFIs have been improving their whole value chain from funding, customer acquisition to repayment. They had their fair share of regulatory issues in the 2006 government crackdown over high interest rates and 2010 Andhra Crisis over coercive debt collection methods.

Yet, it had not stopped them from getting banking license in 2014 starting with the biggest MFI by asset, Bandhan. Both are like dry powder ready to burst into the scene. It would be interesting to see what year 2017 would bring for us ahead.