Asean countries share a mission: they want to increase their collective capital-market clout.
The Association of Southeast Asian Nations (Asean) represents more than 600 million people, and the countries within it possess a combined stock market capitalisation of US$2.1 trillion. That may sound a lot, but it pales in comparison to the US$3.6 trillion of the Tokyo Stock Exchange, which serves a local populace of 128 million, or the US$2.5 trillion enjoyed by the bourse of Hong Kong, a city of only seven million.
Asean’s members believe that they can gain more international investor capital as their economies enjoy promising growth prospects after years of painful restructuring. And circumstances appear to be playing into their hands: global fund managers are seeking new opportunities at a time when regional powerhouses China and India have seen hiccups in their double-digit gross domestic product (GDP) growth, persistent problems plague the eurozone and the US is only slowly regaining health.
The small size of the region’s individual stock markets has been a major disincentive to international stock buyers putting more money to work in Southeast Asia. But Asean’s bourses have a potential solution: Bursa Malaysia, Ho Chi Minh City Stock Exchange, Hanoi Stock Exchange, Indonesia Stock Exchange, The Philippine Stock Exchange, Singapore Exchange and the Stock Exchange of Thailand intend to pool their resources and present themselves as a single trade and investment bloc.
This group is known as the Asean Exchanges, and its first goal is to launch a ‘trade link’ this month. The link has used the necessary IT software and infrastructure to connect the engines powering Southeast Asia’s exchanges. The aim is to synchronise the trading and settlement processes of individual markets, allowing for the creation of listed products across exchanges using standardised rates and region-specific indices.
This would enable the exchanges to create Asean exchange-traded funds (ETFs), indices and research tools, which the group anticipates will attract more attention from diversification-hungry global investors.
The exchanges backing this notion claim that the link will foster many healthy developments for Asean’s equity markets. This includes standardising rates, creating a central point of contact for brokers, formalising listing protocols and harmonising disclosure and corporate governance standards. With this, the Asean Exchanges hopes to lure more regional and international stocks, which will deepen the market and strengthen its global competitiveness.
Yet delays and questions regarding the markets’ maturity and disjointed processes have cast a shadow on the scheme.
“Conceptually it’s an amazing idea but implementation is precarious,” says one Asean head of client trading at a global investment bank. “This is a big ask because you’re dealing with a number of very differently structured markets.”
Even more worryingly, some equities traders and investors question the link’s worth even if it succeeds. Southeast Asia’s stock exchanges have scepticism to overcome if they are to truly attract a global investor audience.
The creation of the link is the culmination of 15 years’ work to improve and safeguard Southeast Asian financial markets.
The 1997 Asia financial crisis was a hammer blow to the region. By its end in 1998, Singapore’s GDP had shrunk 1.4%, Malaysia’s fell 6.2% and Indonesia’s dropped 13.5%, while the Malaysian ringgit, Thai baht and Indonesian rupiah fell 39%, 40.2% and 83.2% respectively against the US dollar.
In response, Asean heads of state set in motion a strategy to protect themselves. They jointly announced the goal of making Southeast Asia a “prosperous and highly competitive region” by 2020, and set five goals to be attained by 2015: a free flow of goods, services, investment and skilled labour, and a freer flow of capital.
The trade link is a step toward this broader financial unity. And it has a welcome side effect: it offers the Asean Exchanges critical mass.
The largest exchange in Asean by market capitalisation is Singapore’s, with US$638 billion as of May 2012. Yet it is the 22nd largest exchange in the world, according to the World Federation of Exchanges. Malaysia is 23rd with US$406 billion; Indonesia 25th with US$385 billion; and Thailand 27th at US$299 billion.
The bourses’ relatively small individual sizes limit their potential; offshore investors like to invest in exchanges with liquid stocks and lots of capital.
The Asean Exchanges intends to overcome this restriction.
“We see trends globally of emerging market exchanges getting together and promoting as a group,” says Veerathai Santiprabhob, chief strategy officer of the Stock Exchange of Thailand (SET). “In Central and Latin America, the MILA [Integrated Latin American Market] group started with Peru, Columbia, Chile and now Mexico has joined. Gulf Cooperation Countries and Eurasia exchanges are working towards some grouping.
“We in the Asean Exchanges are working together to promote Asean equity as an attractive asset class and also developing the Asean trading link to lower access cost.”
If the seven exchanges link up, their combined market capitalisation would rank them eighth in today’s global ranking, with 3,000 stocks.
Such a pool offers many opportunities, not least acting as an appealing marketing mechanism for the region.
“We do ‘Invest Asean’ roadshows and seminars for institutional and retail investors in Asean and outside Asean. We also are working with a global index company to develop a range of Asean indices,” says Santiprabhob.
As part of efforts to attract international investor attention, the Asean Exchanges are developing blue-chip Asean indices with the top-30 performing stocks of participating countries. The Exchanges also signed a contract with FTSE to develop Asean research and analytics.
One team, one dream
A key goal of the Asean Exchanges’ plans is for investors in one Southeast Asian country to easily buy stocks in another.
This has not been easy until now. For example, a Thai investor wishing to buy a stock on the Singapore Exchange would have to go through three steps, first calling his brokerage in Thailand, which would require a communication channel to a Singaporean brokerage, which in turn sends the order to the Singapore Exchange.
But the Asean trading link means the Thai investor’s local brokerage could send a direct order to the Asean trade link to access the Singaporean stock.
The SET’s Santiprabhob avers the link will improve efficiency and eliminate the structural problems and human error associated with regional equity investing.
“If there are too many hubs, institutional investors fear that people will know about flows if there’s a large transaction, and they’re afraid of being front-run on their deals,” he says. “This is an economies-of-scale project: the exchange invests on behalf of the brokers instead of having all the brokers create their own spider web of relationships in other countries.”
The link is also poised to help investors close transactions at exact spot prices, an historic difficulty.
Intra-regional trades often take place in US dollars due to a lack of rate standardisations between Southeast Asian currencies. For example, a Thai investor seeking to buy a Vietnamese stock would typically transfer baht into US dollars, and convert those into dong to pay for the stock. That takes time and adds currency risk to transactions, particularly in currency pairings with thin liquidity.
“The Indonesia rupiah into Vietnamese dong is not a big currency market and it’s less liquid than the dollar market, so investors typically swap to dollars,” says Andrew Yates, head of international equity sales at Asia Plus Securities in Bangkok. “But if you have to go through the dollar every time you do a trade, the commission is going to be higher. Freer trade between markets will require more currency trading, and that is a problem that will have to be resolved.”
Get this wrong, and it undermines the appeal of a combined market.
A Singapore-based equities trader recalls a recent scenario: “Within the last two weeks, institutions sold Indonesian stocks and needed to convert their rupiah into US dollars and then repatriate the US dollars back into Indonesia. But complications arose because Bank Indonesia tightened its US dollar stash, which prohibited these institutions from converting their dollars at spot price. Instead they paid 3%-4% higher.”
The link eventually aims to make inter-exchange trading instantaneous, and will better regulate currency exchange rates too. This would help international investors, who often have trouble settling deals at desired spot prices. If the link has the clout to influence rate standardisations, it would impact the broader FX Asian markets, potentially an even greater coup for the Asean bloc.
This is a long way off, however. Santiprabhob says the group will not directly address currency issues at the outset, but once the trading platform is fully assembled the Exchanges will link up post-trade services. Post-trade linkage is intended to improve efficiency and reduce clearing and settlement costs. Plus there are plans to standardise several rules across participating markets even before the trading platform is assembled.
A question of maturity
The Asean Exchanges concept sounds promising, but it will only work if executed well. And implementation has already been plagued with complications.
The link was announced in June 2011 and was meant to launch by the end of last year. But process delays initially pushed the target back to June this year, and a spokeswoman for the Exchanges at the time of going to press says it will launch in late July.
Back-office technology processes need to be synched and this is particularly difficult in Asean, where stock exchanges have varying levels of sophistication and infrastructure.
Vorapol Socatiyanurak, secretary general of Thailand’s Securities and Exchange Commission, explains that the Asean Capital Markets Forum (ACMF), which represents Asean securities regulators, is converting Asean market standards into international ones. The ACMF’s accomplishments include Asean disclosure standards for equity and debt securities, pan-Asean corporate governance rankings and mutual recognition schemes for cross-border products.
“Asean exchanges have to make sure that their listed companies have good quality of corporate governance and maintain the efficiency of their disclosure system,” Socatiyanurak adds.
The difficulty of bridging these differences means that only three exchanges are ready to join this year: Singapore and Malaysia are slated to link up by end of July, while Thailand will join in August.
Exchange participants believe that these three countries – which account for more than 70% of total market capitalisation of all Asean exchanges – will be sufficient to launch the scheme.
“People ask why just three countries will be part of the link to begin with. It’s because these countries are ready to join with a similar stage of IT development, investor protection schemes and brokers,” says Santiprabhob. “We will open to other countries when they’re ready.”
The Philippines and Indonesia are expected to seek entrance in 2013, while the Hanoi and Ho Chi Minh City bourses will work towards admittance from 2014. The Philippines has said it will hold off joining until it updates its digital trade system.
Indonesia could be even further off. When asked about the Indonesia exchange’s role in the link, a bourse spokesperson said: “This is a process between other exchanges now. We’re just listed on the [Asean Exchanges] website.”
Asked about the difficulties of synchronisation, the Asean Exchanges spokesperson only said it would take time to iron out.
“Thailand, Singapore and Malaysia have already moved to reconcile disclosure and securities distribution rules under the ‘Asean and Plus Standards’ programme,” the spokesperson said. “Each country exchange is at a different developmental stage and market maturity. We need to allow each exchange the time needed to implement the necessary infrastructure, tools and harmonised capital-market rules and regulations in order to get connected on to the link.”
Executives from the Hanoi, Ho Chi Minh, Indonesia and Philippines exchanges declined to comment, and only a spokesperson responding on behalf of the Singapore and Malaysian exchanges was authorised to respond to Asiamoney.
Questioning the value-add
Even if these technological difficulties are resolved, foreign investor participation is far from guaranteed.
International fund managers face problems with differing levels of transparency between exchanges, a lack of secondary-market liquidity in some, the lack of currency standardisations and differences between the bourses’ regulation and settlement standards.
Fund managers complain there is a lack of breadth in Asean equity research too. Added to this, a number of regional companies prefer launching initial public offerings (IPOs) on Asia’s more liquid exchanges, such as Hong Kong.
“Though it may be easier to get a company listed on these exchanges, the secondary liquidity is not enough for the listed company to raise follow-on equity financing or for large shareholders to conduct block trades to sell down their shareholding post-IPO,” says Joseph Chang, the Hong Kong office head of SCM Strategic Capital Management Asia.
Most damningly, global investors question whether an Asean trade link will materially affect their operations. Most international fund managers have accounts at large investment banks that already access the individual exchanges.
International fund managers are sceptical.
“This [the Asean Exchanges’ link] will not have a large impact for us because we’re set up to deal with these countries’ exchanges. This exchange looks to be targeting the person on the street,” says Hugh Young, managing director of Aberdeen Asset Management Asia. “A singular exchange that has a broad impact on the global equities market seems aspirational and would be lovely if everything does come together, but there’s a lot of detail to sort out.”
The consensus is that until the link accumulates deep flows, it will be most relevant to regional brokers that invest on behalf of retail investors.
“This linkage would give retailers a much bigger scope to invest, and it’s valuable to mom-and-pop investors and day traders, but all of this comes at a fee,” explains a Singapore-based equities trader at an investment bank. “Doing this will be twice the fee of what investors would typically see – one time is the retailer paying the broker and the second is the broker paying the technology provider.”
The link will not attract institutional investors until it has deep daily trading flows. But it cannot build such flows until such investors participate. It’s a classic chicken-and-egg situation.
Search for relevance
For all this, representatives for the exchanges are proud of their progress. Nobody will say it aloud, but there’s a sense that the link is designed to test the waters ahead of greater ambitions.
Asiamoney asked all the bourse representatives it spoke to whether the ultimate goal was to create a truly integrated international stock exchange such as Euronext. None would deny this as an objective, but they could not comment on how long such a development could take.
But the singular exchanges seem averse to pushing for a fully combined stock-market entity too quickly. Instead they seem to see the link as an example of cooperation, not an engine of real change.
But if the link fails to bolster regional equity volumes, statements about it being a testament to intra-regional cooperation will not hide what it may be: an expensive folly.
This is a danger. Fail to make the link work and any momentum towards more intimate cooperation will be stunted. Why, the argument will run, should the exchanges work together at a more unified level when they couldn’t even get their trading link to work?
So the bourses should take the link’s development seriously. And key to making it work will be for participating exchanges to make it cheap and simple to use – and support it with a top-notch FX platform.
Foreign-exchange woes are the top frustration of Asean investors, so they may well use the link if it seamlessly provides FX currency trading between all currencies and US dollars.
Equally, clearing and settlement would need to be hassle-free, and backed by strong counterparties.
From there it would be easier to create indices and stock baskets based on the most liquid stocks in each country, offering investors useful Asean indices from which to create new funds.
If the link can achieve this, the Asean Exchanges may yet gain the momentum it needs to drive regional stock liquidity, which would in turn foster closer ties.
Fail and global investors will be right to ignore it, grand statements of Asean cooperative intent or not.