You seem to have refocused your business on Asia and away from other emerging markets. Is the bottom line that you have become very bullish on Asia again?
Coull: We've had a positive outlook on the region for a while. The focus of global investors is back, selectively, on Asia.
Presumably, this has had a very positive impact on your broking revenues?
They're up and down. The most important figure we watch is market share, and this has continually gone up in all markets for us. That's due to the closure of other brokers, and to the style of brokerage we are, which has come back into fashion. The concept of separating the brokerage and research process from the investment bank as we've done from the beginning is now more desirable than it was before when the IPO and new issue business were really strong.
The revenues that flow from higher market share are up and down depending on volumes. In the past couple of months, volumes have started to fall in a few major Asian markets but our market share has been steadily growing. So fundamentally we're very happy with the structure of our business. We have to be very careful to match costs with the revenues that flows through.
How long have you been mulling the decision to close down in Latin America and Eastern Europe and to refocus purely on Asia?
We've looked at doing this once a quarter for the last year. We never really found a model in Eastern Europe that gave us a sensible return. It was nothing to do with the people, it was just the model. The markets are active for short periods of time and then give way. There isn't a sustainable flow of business like there is in Asia that you can build around.
In the absence of getting it right, we saw it as a weak link in our platform. When we realized Eastern Europe was unlikely to work for us, we took a hard look at Latin America and asked if that made sense too. We've taken a tough decision and closed them down. We are still doing macro-coverage of all the emerging markets and selective sector coverage, but our focus is now back on Asia, where we see a lot of opportunities.
For example, we're going to be in the first batch of foreign firms setting up joint venture investment banks in China, and we will be keen to underwrite A shares in the future. We bought out our local partner in Indonesia and now own 100% of that business; we've acquired the investment banking and broking team in the Philippines from Jardine Fleming and we've upgraded to a full seat on the Thai stock exchange.
Does it come down to the maxim that it is always easier to make money closer to home?
The big problem is that the time zones are so incredibly different. When you're running a relatively small operation - we have around 800 people - your layers of management in one region are thinner. You have so many people contributing every day to your success, without even knowing about it - you have ad hoc meetings with people on the stairwell; or in the lift.
What I really underestimated three years ago, was the extent to which our business had been successful based on the daily interaction of people outside of the formal business process. When you have formal meetings on a quarterly or nightly basis, they are less successful than the intangible, informal stuff that happens every day.
We were never able to recreate that in LatAm and Eastern Europe. The people worked hard, but we couldn't capture the spark we have in Asia.
At the outset (in 1997) I couldn't see why the CLSA formula wouldn't work in the new region. Within Asia-Pacific there's no real commonality between say, Korea and Taiwan and India. They have different cultures and are at different stages of economic development, with different regulatory environments. Nevertheless, we managed to have some success in each. I didn't really think adding a Turkey, a Russia and so forth would be that difficult.
However, in Asia there is a commonality of the investor base, and that's why Asia has been successful for us as a regional business; but this isn't the case for the other emerging markets. A lot of it is ADR-oriented, and that plays into the hands of the US firms.
As an aside, I feel it is really tragic that governments in Latin America have exported their capital market to New York. Domestic capital markets are a big provider of jobs in Asia and are very value-added to the economy. This element of Latin America has been swamped by US investment banks primarily through the debt business, and the equity new issue market for large companies. Most of the fees and public listings have gone to the US. It's crazy. These government realize this now, but in a funny way, the protectionism of individual governments in Asia 'of their markets ' I used to think was retarding development, but now, on balance, it's probably been a good thing. Asian markets have an identity of their own, and allow Asian companies to jointly tap international as well as domestic markets - for both debt and equity. In Latin America, if you want to do anything you have to go and check with the guys in New York. That's where the liquidity, the research, and the people who really call the shots are.
Do you have a sense that Asia has gone through the crisis, benefited and is now in boom market conditions again, relative to the rest of the world?
The most important thing for Asia is that inter-regional fundamentals are very strong. There's a shift away from Asia being a warrant on world trade to Asia being an internal growth story which will do well whether or not OECD world does well. It's a domestic consumption story and it has been mooted for quite a while. And you see more and more evidence of greater regional trade.
The reason Asia is getting more attention, from the perspective of the US media, is that our markets got hammered a lot and are clawing their way back. This recovery is more durable than before because the composition of the Asian economies is changing and as a result the growth will have more longevity.
There will be a number of waves of liquidity coming into play in regard to the Asian story. Foreign direct investment remains strong for China, as well as Southeast Asia. Secondly, you see a new feeling among young people in Asia and business people that tomorrow is going to better than today. People in Beijing, Delhi, Bangkok and Seoul feel that. They are upbeat. They don't have to focus on 9/11 or corporate governance in the US. They're not worried about the next Enron - the things that are knocking Wall Street and middle America for six.
As a result, I feel there is a feeling among Asians of the real dawning of the Asian century. It wasn't the last century; it's this one. There's so many anecdotal and statistical ways to show that's right. So I believe there will be waves of money coming in. The global emerging market universe is now largely overweight Asia. New institutional money is coming in from international fund mandates to buy the best international companies, whether they are in the emerging markets or not. That money has been going into the SK Telecoms and UMCs and so forth.
That flow has dominated the region over the past 18 months. More recently, there is a little bit of individual money coming back from retail in Korea, Taiwan, Malaysia and Thailand.
There is going to be a wave of Japanese money, and European money is not yet fully here, but it will return via the dedicated Asian fund managers and private banks. And as the economies improve and the outperformance becomes clear there will be new mandates for country-specific funds.
These funds will come during a period of rising economic fundamentals, rising GDP, rising consumption and rising profitability and of course, rising market caps.
Which markets do you think are cheap?
The Korean market looks cheap against its earnings forecast. So cheap, it looks like an out and out buy. However, Korea has the habit of surprising some people on the downside.
I feel the Hang Seng index is cheap, even though Hong Kong is in dreadful shape. I know there's a wall of money in Hong Kong that is lurking offshore and is waiting for a catalyst. Whenever that happens the Hang Seng Index will go up in a straight line. I have a couple of standing bets with a couple of people in the office that the Hang Seng Index will end the year at 15,000. I have people trying to get more money with me on that bet every day, but I've filled my limit!
We have a very strong call on Singapore, calling it up 50% through the end of next year. That's not an obvious call right now.
But there are plenty of stories that big investors can put big money in if they understand the new paradigm of Asia, which is a warrant on new domestic consumerism.
There are very few times in history where you get a chance to buy really interesting companies in an environment of accelerating profit growth, at prices that are being held down by the moves in the US, which are sentiment rather than fundamentally driven.
That's why we've got more aggressive investing in our own business in Asia.
You're going open in Australia, which is fiercely competitive. What's the rationale behind that?
We have no intention of adding to capacity in Australia. There are a lot of good brokers down there. What we'd like to do is team up with someone and share research on a non-equity alliance structure - which is similar to what we have with CIBC. This will allow institutions we speak to see the Australian product and Australian institutional investors to see our Asian product. When there are big switches between Asia and Australia, we want to be able to take advantage of that.
Finally, why are you opening in Japan? Is this based on your view that Japan has finally hit bottom?
My very strong conviction is whatever happens, it is going to happen in the next couple of years. Whether it's a final capitulation or some sort of magic wand resolution I'm not sure.
In Japan there is a role for what we do. We are able to analyse the food chain between Japan, Korea, Taiwan and China. We are also good at looking at newer, small and medium-sized companies. Our parent bank, Credit Lyonnais already has a seat on the exchange but doesn't do the foreign institutional cash business. So it's not going to cost us a lot to get set up. And we've been talking to a lot of high quality people about joining us - they've had enough of the bigger firms and are looking for a new challenge.
Actually, more broadly speaking, we've been upgrading positions around the group and there are a lot of people around now from big firms that are looking for a different platform. I'm not saying it's only CLSA, but we are certainly one of the new competitive platforms. Before, these people were looking for the brand name, but that cycle has turned and it's in favour of the independents like us.
I believe we will do well, as will some of the other Euro-style brokers such as Barings. Some of the names from the past may come back to set up firms. I think it could get very lively. It is clear that fund managers want quality, integrity and independence on the sellside, and they will support independent regional firms and possibly some quality start-ups. You'll also have less spectacular investment banking new issue business, which was what drove analyst salaries through the roof. Perhaps this trend has peaked and costs overall can get back to more sensible levels.