Summer 2013

EXCHANGES: Learning the notes

Music sheetsExchanges in the Association of Southeast Asian Nations region look to sing from the same hymn sheet with the establishment of the Asean Exchange Link. Judith Evans finds that operators are sceptical that the link-up heralds a unified capital market.

Trading is underway on an electronic platform set up by stock exchanges in Southeast Asia. It is meant to be the first step on a path to market harmonisation. It aims to make a booming region more accessible to investors, while provide companies with greater access to capital.

But market players say it will be some time before the exchanges sing in perfect harmony.

The Asean Exchange Link, named after the Association of Southeast Asian Nations, is an order routing system set up by Bursa Malaysia and the Singapore Exchange in September 2012; Thailand’s exchange joined the following month.

“Investors now have a single entry-point access to three of the largest equity markets of Asean,” announced Charamporn Jotikasthira, president of the Thai bourse, when his exchange joined. There are ten members of Asean.

“Together, the three markets offer investors easier access to over 2,200 listed companies with a market capitalisation of $1.4 trillion.”

Market operators in the region are sceptical that the link-up heralds a genuinely unified capital market in the near future, despite a stated goal of 2015.

But they say that, nonetheless, the project is one to watch.

“It’s a step in the right direction but I think it’s a bit more political than practical,” says Lee Porter, head of Asia Pacific for Liquidnet, which offers “dark pool” alternative trading platforms.

The broader Asean Exchanges project brings together Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam (excluding Brunei, Myanmar, Cambodia and Laos).

ince the launch, exchange bosses have been holding monthly seminars moving from country to country, aiming to attract retail investors and promote the “Asean stars” – 180 blue-chip stocks that represent the top 30 from each country, ranked by market capitalisation and liquidity.

The trading link aims to boost access to Asean stocks by investors both within and outside the region, while allowing companies to access deeper liquidity.

Using an electronic platform set up by US firm SunGard, the link – which first Vietnam’s two exchanges, then Indonesia and  the Philippines also plan to join – allows brokers to connect with counterparts in the another country.

It lacks a central clearing house or depositary; trades are cleared and settled in the country where the stocks are listed, meaning there is little cost saving for international firms that already trade in the countries concerned.

Because international investors have established trading networks, while many regional brokers allow cross-border trading, Porter notes that “at the moment this is more targeted to the smaller domestic retail broker”, particularly those dependent on offline trading.

Demand for such use appears limited; reports have said trading on the link has been sluggish, and while the participating exchanges are not releasing figures, a spokesperson for the Singapore bourse admits that “the current focus now is to raise investor awareness”.

The group also faces much larger barriers to harmonisation: it draws together countries with varying trading hours and fees, tax and legal systems, and sometimes volatile currencies.

“There's a lot more work to be done before it gains any sort of traction,” says Porter.

Next steps for the link-up include reducing administrative and transaction costs, and enabling the creation of more exchange-traded funds (ETFs) based on Asean indices, exchanges involved in the project say.

FTSE Group already operates the Asean and Asean 40 indices, tracking stocks listed on the five key Asean bourses and underlying a small number of vehicles such as Global X’s FTSE Asean 40 ETF. The exchanges say they aim to collaborate on the issuing of more indices by the end of 2013.

“After that we will develop the ETFs underlying these new indices...  listed either within Asean exchanges or exchanges outside Asean countries,” says a spokesperson for the Thai exchange.

The bourses are working on a system to facilitate cross-listings.

In April, the Singapore Monetary Authority said that issuers offering equity and plain debt securities in more than one Asean jurisdiction would have to comply with only one set of disclosure standards. Malaysia, Singapore and Thailand are the first to implement the scheme.

“There’s a lot of money out there, especially in the Western world, chasing growth, and the exchanges are all working hard at the moment – upgrading their infrastructure, for example,” says Porter. “None of these exchanges wants to be left behind. They’re going to be looking for cross-country listings, foreign firms to come and list on their exchanges.”

It is early days. But Paul Smith, managing director for Asia Pacific at CFA Institute, says the trading link may nonetheless prove highly significant – partly because of the likely development of Asean itself.

Not only are the Southeast Asian countries showing healthy rates of growth – the International Monetary Fund predicts average GDP growth of 6% across the region in 2013 – but Asean as a grouping is showing ambitions for greater joint political and economic clout. The exchanges link forms part of a broader plan for a joint economic community by 2015.

“Depending how you view the world’s development, Asean as a trading bloc is going to be extremely important – so the development is exceptionally interesting,” Smith says.

“Asean is huge – 650 million people. People in Europe have no idea.”

He adds that bodies like the Asean exchanges grouping were “the first step in having regional bodies that can front up to America and Europe over time. I think that’s a tremendously encouraging development.”

In practical terms, for international fund managers, Smith adds: “Asia allocation will benefit. It becomes clearer what an allocator based in London, for example, is looking at. There will be four clear asset allocation buckets: China, India, Asean and the rest, including Korea and Australia. At the moment the smaller countries, the smaller exchanges, tend to miss out.”

In broad terms, investors point to the region’s young population, relative political stability and rapid urbanisation as signs of coming prosperity, with growing middle classes set to boost consumer demand in areas such as telecoms in what are still competitive export-driven economies.

Thailand, Malaysia and Indonesia are set to follow Singapore in moving up the value chain, becoming more knowledge-based economies producing sophisticated goods, found PwC in a September 2012 report, Southeast Asia: Investment Opportunities, Tax and Other Incentives.

In the poorer Mekong Delta region, says Andy Ho, head of investment at Vietnam’s Vinacapital, people are moving from country to city at a rate of 2% to 3% a year, creating “enormous demand for schools, hospitals, food – that’s how we look at it”.

Wing Kin Chow, manager of Eastspring Investments’ Indonesia and Philippines funds, agrees:  “Trade liberalisation, infrastructure links and an increasingly mobile workforce are transforming Asean into a strong economic bloc.”

On the downside, across the region, bureaucracy and idiosyncratic regulation have traditionally been barriers to investment.

Many countries in the Asean region are in dire need of better governance, investor protection regulations, transparency, oversight and qualified finance professionals, says Smith.

With a wide spectrum from developed Singapore towards newly-opening Myanmar, via Vietnam, still seen as a frontier market.

PwC’s report finds, however, that “each country continues to make progress in deregulation, liberalisation and reducing impediments to business operation”.

Those taking part in the exchanges link range in GDP per head from Vietnam’s $1,528 (according to 2012 statistics from the International Monetary Fund) to Singapore’s $51,162, but investor excitement is focused particularly on Thailand, the Philippines and Malaysia.

The initial public offering of Malaysian oil plantation manager Felda was among the world’s largest in 2012, while in the first quarter of 2013, Southeast Asia beat North Asia as a venue for initial public offerings for the first time since before the 1997 Asian financial crisis, according to figures from Dealogic.

Issuers from countries including Malaysia, Indonesia and the Philippines raised $1.9 billion in the quarter, as against $1.4 billion for North Asia excluding Japan.

In terms of broad market index growth, Thailand’s stock exchange was third in the world with growth of 35.8% in 2012, while the Philippine bourse came in fifth with 33%, according to figures from the World Federation of Exchanges.

Positive signs such as these are creating investment demand that has sparked the creation of fresh trading networks and services.

British-based trading technology firm Fidessa, one of the largest in its field, in April announced it was collaborating with regional brokers including DBS Vickers and Maybank Kim Eng to provide a “one-stop-shop trading service” for accessing Asean markets.

Liquidnet, meanwhile – which provides a venue for large-volume share trades without information leakage – on April 29 opened in the Thai market, in addition to its operations in Malaysia, Indonesia, the Philippines and Singapore.

The “dark pool” service can also help to mitigate notoriously high bid-offer spreads in the region, Porter says.

Developments coveted by fund managers such as an Asean passport for Ucits-style collective investment schemes (CIS) still appear distant.

Thailand’s Securities and Exchange Commission announced last year that it would allow Asean CIS to be offered to accredited investors, followed by retail investors. But its exact requirements for such vehicles remain unclear, while lawyers from Dechert say a similar Singaporean proposal likewise lacked crucial detail.

More generally, global fund houses looking to distribute in the region face obstacles including a closed distribution architecture and regulators that prioritise local firms, according to research firm Cerulli.

But as the region takes small steps towards unifying its capital markets, Smith, of CFA Institute, says that “often market infrastructure does lead to greater trading activity.

 “If you make trading easier, if you look at the subregion as one unit and trade it as one unit, that’s absolutely the right thing politically to do. The politics and the economics are coming together for Asean. Whether they can execute is the $64,000 question.”

©2013 funds global asia

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