Emerging Asset Classes: Emerging asset classes to gain further traction

This article first appeared in Wealth, The Edge Malaysia Weekly, on December 28, 2020 - January 10, 2021.
Emerging Asset Classes: Emerging asset classes to gain further traction
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Investors seeking opportunities and higher returns in an unprecedentedly volatile year caused by the Covid-19 pandemic are casting their nets wider afield. As a result, there has been a noticeable increase in demand for alternative asset classes such as equity crowdfunding (ECF), peer-to-peer (P2P) financing and cryptocurrencies.

In the next normal, after the virus and economic storm blow over, these alternative assets will likely remain on the radar screen of many investors.

Kashminder Singh, co-founder and chief investment officer of ECF platform PitchIn, says the pandemic has caused investors to realise the potential of investing in the early stages of fast-growing digital start-ups, or “new winners” in the market.

Evidently, PitchIn saw its biggest crowdfunding campaign after the Movement Control Order (MCO) was implemented in March. In November, the platform announced that it had crossed the RM100 million mark in terms of funds raised, with almost half of it in 2020 alone.

“During the height of the pandemic, investors realised that the future is digital. Many reports have found that digitalisation has accelerated this year, which means companies that are already positioned to be digital are reaping the benefits,” says Kashminder.

“By their very nature, many of the small and medium enterprises (SMEs) that sought financing on ECF platforms like PitchIn are fast-growth digital start-ups. So, they are attracting investors to this space.

“One of our issuers — insurtech company PolicyStreet — ran its campaign during the MCO completely online. The start-up closed its campaign earlier than scheduled, after achieving more than 500% of the minimum requirement of RM1 million, making it one of the largest sums to be raised via an ECF platform in Malaysia.”

Another factor that has helped boost the ECF industry this year is the Malaysia Co-Investment Fund (MyCIF). Administered by the Securities Commission Malaysia (SC), the fund co-invests with the crowd in either an ECF or P2P financing campaign to encourage investments on the platforms. MyCIF has raised its contribution from 1:4 to 1:2 this year, meaning that it will invest RM1 for every RM2 raised, instead of RM4.

“The fund matching ratio will go back to 1:4 by year end, but it has been instrumental in bringing companies faster to their end goal. It has definitely encouraged investors to back more deals this year,” says Kashminder.

Wong Kah Meng, CEO of Modalku Ventures Sdn Bhd, which operates P2P financing platform Funding Societies, says investor demand remains resilient and is growing this year despite a slowdown in the second quarter. “There were uncertainties back then. Investors were unsure about how badly SMEs would be impacted. We also had a deferment programme to help issuers navigate the tough time, so we did not actively try to acquire new users.”

Under the deferment programme, issuers will still pay the interest to investors. However, they will be able to defer the payment of the principal, which is the bigger chunk, for three months. Other P2P financing platform operators have their own programmes to help their SME issuers, having observed signs that a slowdown could occur since the middle of last year.

When economic activities resumed post-MCO, investors returned to make new investments, says Wong. “Case in point, our average crowdfunding duration recovered to pre-pandemic levels in October, to about an hour per crowdfund. This is despite October being our highest disbursement month to date.”

Of the other alternative asset classes available in Malaysia, P2P financing is among the newest, having been around for only four years. The awareness of this asset class is still low, even in urban areas, he says.

“I think more investors will participate as the awareness of the P2P industry improves over time. It is an asset class with comparatively high net returns of 6% to 9%, compared with money market funds at 2% and bonds at 3% to 6%. It has a relatively short tenure, provides fixed returns and has a low initial outlay. We are constantly innovating to come up with new investment products to cater for investors with different risk-and-return objectives,” says Wong.

Meanwhile, the bitcoin rally this year has turned investors’ attention to the cryptocurrency space. Kelvyn Chuah, co-founder of digital asset exchange (DAX) platform SINEGY Technologies (M) Sdn Bhd, says there has been a lot of excitement in the bitcoin space this year, thanks to the “halving” event and a strong outlook.

(Photo by Low Yen Yeing/Edgeprop.my)

“Halving” is a quadrennial phenomenon where the block reward — or the number of bitcoins miners get by successfully mining a block of the cryptocurrency — falls to half its value. This year, it fell from 12.5 to 6.25 BTC. After the last two halvings (in 2016 and 2012), bitcoin saw short price corrections followed by a prolonged bull run that lasts between 6 and 12 months.

This seems to be the case in the recent round of halving as well. The day after the event, the BTC price fell slightly to US$8,788 before plateauing at about US$9,000 to US$10,000 in the following months. However, the price has risen dramatically since October,  trading at around US$22,000 at press time.

“We saw the highest account sign-up this year at our launch in April. After that, it tapered off a bit until last month, when we saw a huge jump in sign-ups, resulting in a number similar to what we recorded in April. We also saw a jump in trading volume, something I believe was also observed by other DAX platforms,” says Chuah.

SINEGY market research and compliance officer John Sidoli says a lot of interesting things have happened in the cryptocurrency space this year. For instance, there has been greater institutional investor interest.

Digital asset management company Grayscale Investments, which allows institutional investors to buy digital assets, announced a few months ago that it had seen an increase in assets under management (AUM) of US$1.6 billion in the first six months of 2020. By comparison, the company only had AUM of US$1.8 billion at end-2019.

Another example is a move by Nasdaq-listed business intelligence company MicroStrategy Inc. Despite not being in the cryptocurrency business, the company announced on Aug 11 that it had purchased bitcoins at an aggregate price of US$250 million. In a press statement, its CEO 

Michael J Saylor said the investment reflects the company’s belief that bitcoin is a dependable store of value and an attractive investment asset with more long-term appreciation than cash.

“There have also been other bitcoin proponents this year, such as prominent hedge fund managers Stanley Druckenmiller and Paul Tudor Jones,” says Sidoli.

(Photo by Haris Hassan/The Edge)

The way ahead

Moving forward, there are two things that PitchIn’s Kashminder says investors can look forward to in the ECF space next year. First, the SC announced in April that it had allowed platforms to operate a secondary market.

“There are certain restrictions, however. For example, investors can only trade the shares of the companies issued on their respective platforms. Cross trading between platforms is not possible. We believe we are in a prime position to open a secondary market, given that we have helped more than 80 companies,” says Kashminder.

He adds that PitchIn is looking to apply to become an Initial Exchange Offering (IEO) platform operator as well. On Oct 28, the SC’s revised Guidelines on Digital Assets came into force, opening up applications for licences to operate IEO platforms. “We look at it as a natural next step, as an IEO is very similar to ECF. Next year, we are looking to become a more rounded player with the ECF secondary market and IEO plan,” he says.

Funding Societies’ Wong says he is cautiously optimistic about the first half of 2021 when it comes to P2P financing. While there has been positive news on vaccines, the timing of its availability is uncertain. Hence, he thinks most growth will only happen in the second half of next year.

“We have observed strong investor demand for secured and collateralised investments driven by consistency of returns. So, we will be doubling down on dealer financing notes and offering a variety of investment notes with principal and/or interest guarantee elements by the first half of 2021. We will focus on notified invoice financing backed by large corporates or the government,” says Wong.

“Globally, this is the first economic crisis faced by the P2P financing industry, which arguably is as bad as it can get, given the outsized impact on SMEs. Post-Covid-19, I foresee that investors will be more confident in this asset class, especially in platform operators that have been able to manage defaults and delinquencies well during this period.”

On cryptocurrencies, Sidoli says the outlook is very bullish among some prominent thought leaders in the space. A bitcoin analyst that goes by the pseudonym PlanB, who created the widely known stock-to-flow (S2F) model, for instance, is expecting BTC to reach US$100,000 by December 2021.

The S2F model attempts to predict the long-term price trend of bitcoin by evaluating its supply. It takes into consideration its fixed supply and the block reward halving. The theory behind S2F is that as the supply of bitcoins decreases over time, inflation will continue to rise. These two factors could theoretically amplify BTC’s uptrend, explains Sidoli.

However, Chuah asserts that investors should not allocate more than 5% of their portfolios to digital assets, reminding them that a good conservative strategy is to adopt dollar cost averaging. “They should never bite off more than they can chew,” he adds.

Chuah hopes to see more institutional investors in Malaysia in the cryptocurrency space, following the trend in Western countries. “We allow corporate accounts. It is actually one of our unique selling propositions. We hope to receive more queries from institutional investors, which will help the cryptocurrency space to thrive in Malaysia,” he says. 

Cryptocurrencies benefit from the move to cashless economy

The Covid-19 pandemic has accelerated the global trend towards a cashless economy. While cash and ATM usage have declined sharply in many countries, the use of electronic payment instruments such as cryptocurrencies has increased notably.

According to the 2020 McKinsey Global Payments Report, the share of global payment transactions conducted via cash as at end-2020 is projected to decline by 4% to 5% from the 69% recorded in 2019.

While the use of cash may have declined, the global cryptocurrency market experienced very strong growth in the fourth quarter of this year. The market capitalisation of bitcoin had expanded 83% at the end of November to US$361 billion from US$197 billion at the beginning of October.

Bitcoin prices surged by more than 80% during the period, surpassing its 2017 high to reach almost US$20,000 at end-November.

DBS Research’s Update on Digital Currencies: December 2020 report found that the daily average trading volume of bitcoin reached US$620 million in October and November on vetted exchanges, about 80% higher than was recorded in July to September. The ongoing surge could be attributed to factors such as the entry of large companies like PayPal into the crypto space and the growing interest in bitcoins among institutional investors.

As an investment, bitcoin recorded a massive annual return of about 150% at end-November. On a risk-adjusted basis, the cryptocurrency began to outperform the S&P 500 and gold in mid-November. It is worth noting that bitcoin-to-S&P 500 and bitcoin-to-gold correlations remained weak at less than 0.5, but higher than their long-term averages.

Meanwhile, Ethereum’s market capitalisation expanded strongly to US$69 billion as at end-November from US$40 billion at the beginning of October. The price of the digital currency surged more than 70% during the period, buoyed by the Decentralised Finance craze earlier this year and the launch of the Ethereum 2.0 network.

The cryptocurrency ecosystem saw increased participation of large financial institutions and other companies. Japanese investment bank Nomura, for example, launched its cryptocurrency custodian service in June through a joint venture with two cryptocurrency start-ups. Fidelity Investments launched its inaugural bitcoin fund for affluent investors in August.

In September, the Singapore Exchange announced the listing of its first cryptocurrency indices, namely the iEdge Bitcoin Index and the iEdge Ethereum Index. More recently, payment giant PayPal enabled its customers to buy, hold and sell cryptocurrencies using their PayPal accounts.

There have also been developments in central bank digital currencies. In October, the People’s Bank of China (PBoC) held a lottery to distribute RMB10 million worth of its new digital currency to 50,000 people in Shenzhen. Over 47,000 consumers in Shenzhen spent RMB8.8 million at the 3,389 designated shops during the digital currency’s week-long run.

Some major state-run commercial banks were reported to have begun large-scale internal testing of digital wallet applications for use with the e-RMB. The PBoC is working with lifestyle apps such as ride-hailer Didi Chuxing and food delivery company Meituan to make the digital currency available for online transactions.

Meanwhile, the European Central Bank (ECB) launched a public consultation and experimentation on the digital euro in October, describing several scenarios that could induce the Euro system to issue the digital currency. It explained that the digital euro should achieve the objectives related to core central bank functions and foster formulating general economic policies of the EU, apart from discussing its risks.