Ant Group (Part 6) - Decoding the Success of a Miniscule Behemoth (Investment Markets Edition B)
This is a continuation from Part 5 of the Ant series, where we explored China's investment markets and analyzed the factors that contributed to Ant's success in the industry. In Part 6 here, we take a look at current and future macroeconomic trends affecting the mutual fund and money market fund (MMF) markets, and discuss what the future might hold for Ant.
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Macro Trends Shaping the Industry
In this section we discuss the macroeconomic trends that are shaping and will continue to shape the future of China's digital investment services platform industry and InvestmentTech.
China Will Continue Getting Richer
As discussed in Part 4, the Chinese people are expected to continue getting richer. Personal disposable income is projected to keep increasing, as well as personal investable assets. Olivery Wyman predicts that personal investable assets in China will reach RMB287 trillion by 2025, up from a level of RMB160 trillion in 2019.
Oliver Wyman also finds that the ratio of cash and deposits as a percentage of personal investable assets in China is very high at 58%, compared with the level in other G20 countries such as 53% in Japan, 40% in Germany and 12% in the US. As such, the demand for mutual funds is expected to grow, not only because the Chinese people are getting richer, but also because they will still have the need to diversify their cash into non-cash forms of investable assets.
Chinese Investors are Becoming More Sophisticated
As the Chinese people get more exposure to the investment markets, it's expected that there will be more and more investors diversifying their assets into the mutual fund market. Moreover, as the internet penetration rate increases, there is expected to be increasing adoption of digital finance platforms, with newjoiners primarily being from rural and lower income areas. This segment of the population will benefit greatly from financial inclusivity (i.e. lower minimum investment thresholds and lower transaction fees), as well as the convenience of having an online platform.
There is also a generational shift in China where the young people have embraced digital finance and are eager to diversify into less traditional forms of investments via online platforms, whereas the older generation tend to feel more comfortable with traditional savings accounts, fixed term bank deposits, or other personal finance products offered by banks that they can seek out in physical branches.
More Stable Stock Markets Will Result in Less Volatile Mutual Fund Performance
Even though a certain degree of volatility will naturally persist, the Chinese stock markets are expected to be more stable than they were in the past. Apart from market manipulation driving volatility in stock prices, the Chinese stock markets also shot up steeply in response to quantitative easing (QE) measures in 2008 and 2015, which was further inflated (and unsustainably so) by speculative margin trading until the off-site ban in 2016.
This is the evolution of the Shanghai Stock Exchange (SSE) Composite Index. There are two peaks in 2008 and 2015 coinciding with the government's implementation of QE measures. The sharp, unsustainable increases were triggered by the QE programs and fuelled by speculative margin trading, leading to subsequent crashes.
We don't foresee any steep, unsustainable rises in the stock markets given that the Chinese government has stated that they will not pursue further QE policies. Moreover, the central government is working in the direction of opening up the domestic markets to foreign investors, in addition to broadening access to both debt and equity financing for emerging Chinese companies (read more here). The success of these policies rely heavily on a healthy market structure and stable stock markets, and we expect the Chinese government to promote the fulfillment of such objectives. Consequently, mutual fund returns should be less volatile in China than they were in the past.
A Low Interest Rate Environment will Continue to Drive Investors Away from MMFs
Although the People's Bank of China has stated its intention to not lower interest rates further or adopt negative interest rates (see here), there is still no sign of interest rates rising in the foreseeable future. Consequently, money market yields are expected to remain low and investors are predicted to continue switching out of the MMF markets to other riskier but higher return investments, such as personal finance products offered by banks. These personal finance products are typically 80% invested in the bond markets, while the remaining 20% are usually invested in a similar manner to MMFs (i.e. certificates of deposit or repurchase agreements).
Yu'ebao's 7-day yield is shown in blue. The initial yield was quite high partly to attract new customers to the Yu'ebao platform, but later on declined to levels that are more in line with the MMF markets. A quantitative easing program was launched in 2018 which drove interest rates lower and reduced MMF yields (read more in Part 2).
We expect that Chinese investors will still rely on Yu'ebao to a certain extent for convenience and liquidity services due to its integration with Alipay, but Yu'ebao would not be an area for growth in the future. Moreover, since the majority of the funds on the Yu'ebao platform are invested in MMFs by Tianhong Asset Management, which Ant is a majority stakeholder of, and Yu'ebao still ranks as the largest MMF in China with RMB1.26 trillion in AUM as of Q1 2020, it is expected that there will continue to be significant regulatory pressure to prevent Tianhong Yu'ebao from growing too big due to systemic risk implications (see Part 2 for a recap of how regulatory pressure has affected Yu'ebao over the past couple of years).
Increasingly Competitive Mutual Fund and Money Market Fund Markets
Both the mutual fund markets and MMF markets are becoming increasingly competitive as the Chinese financial industry continues to mature.
Mutual Fund Markets
Ant's InvestmentTech platform (excluding Yu'ebao) does face threats from competitors, including Ping An Insurance's Lufax, East Money and the smaller Snowball Finance. However, InvestmentTech does have a significant advantage in terms of its ecosystem with Alipay, where new investors can be introduced to the mutual fund markets. In contrast, Ant's competitors primarily target existing investors who are already familiar with and have some knowledge of mutual fund investing, by serving as a financial information provider to more sophisticated investors. Since there is a large potential for new entrants into the mutual fund markets in China, we believe that InvestmentTech should be able to maintain its growth.
Money Market Fund Markets
Although we expect Yu'ebao to remain attractive to Chinese digital finance users due to its integration with the Alipay app and convenient liquidity services, Yu'ebao does face a threat from WeChat's Lingqiantong, an MMF offered by WeChat that is integrated with WeChat Pay, an equally popular digital payment platform. Other internet companies and asset managers have also launched their own MMFs, while banks are competing with their personal finance products as discussed above.
Where Does InvestmentTech Stand Now?
To understand what the future might hold for InvestmentTech, we first look at how the business is doing now.
Fewer Users, Higher AUM
The number of InvestmentTech users as a whole has declined, where there were 600 million investors in Yu'ebao alone in 2018 compared with 500 million investors in the entire InvestmentTech platform in 2020. However, the amount of AUM enabled through the InvestmentTech platform over the same time period increased from RMB2.71 trillion in 2018 to RMB4.10 trillion in the first half of 2020.
An interpretation of this is that Ant is losing smaller users who had little bits of money deposited in Yu'ebao, while benefiting from larger investors who are entering the mutual fund markets. This explanation is consistent with the ongoing macro-level trends where the Chinese people are getting richer and becoming increasingly sophisticated, thereby diversifying their investable assets into mutual funds, while money market funds have become a less attractive investment choice due to the low interest rate environment and consequences of regulatory pressure.
Stable But Not Explosive Growth
Ant's prospectus reveals that InvestmentTech's share of Ant's total revenues remained the same from 2017 to 2020, at a level of 16%. In contrast, InsureTech's share of total revenues increased from 3% to 8% and CreditTech's share of total revenues increased from 25% to 39% over the same time period. This data indicates that while InvestmentTech still has growth potential, it's only growing at the same rate as the company's average growth rate, while CreditTech (discussed in Parts 3 and 4) and InsureTech (discussed in Part 7 forthcoming) have higher potential for rapid business expansion.
The growth of CreditTech is largely align with the objectives of the Chinese government to increase reliance on domestic consumption and broaden financing access for SMEs. Both the investment and insurance markets in China have potential for sustained growth over the next five years at the very least, however Ant does hold more of an edge with its InsureTech platform in the insurance sector than with InvestmentTech in the investment industry. This is because there are far fewer competitors in the insurance markets, with main competitors being insurance companies that have a tainted reputation due to their sales teams having a history of misrepresenting contracts to customers, in comparison to the investment markets where there are many other reputable platforms. Moreover, Ant is a pioneer as the first digital insurance services platform provider in China, an industry that is much younger than the digital investment services equivalent, so Ant still retains a first-mover advantage.
So What Does the Future Hold for InvestmentTech?
Ant hasn't released any official statements about its future plan for InvestmentTech.
However, we do believe that:
InvestmentTech will continue to grow along with the predicted growth of the Chinese investment markets
Most of this growth will come from mutual fund product offerings rather than money market fund products, as investors will continue to steer away from MMFs in light of the current and future expected economic climate
Competition will continue to increase in both the mutual fund and MMF industries, forcing Ant to continue to innovate its InvestmentTech platform
Ant's key strength is its integration with Alipay and the Alibaba ecosystem, where it can garner vast amounts of user data to enhance product development and foster cross-selling
InvestmentTech will remain an important component of Ant's business, but probably won't offer extensive growth opportunities compared with the company's other lines of business
Check out the entire Ant Group series here:
Ant Group Updates:
Investing in China (Equities)
Investing in China (Fixed Income)
Glossary of All China-Related Terminology:
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