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The task of linking Asean bourses

Publication Date : 22-09-2012

 

Over a cup of coffee, an investor spoke about how his son and some of his son's group of friends have been investing in shares. For those who wonder if young adults will have the investment penchant of their parents, such an example gives hope that a new breed of savvy investors are being percolated.

His son is using some of his future inheritance to make investments. But that money was not being used to buy Sime Darby Bhd or Malayan Banking Bhd shares. The young man was investing in Apple Inc shares in the United States, and so were his friends.

The propensity to invest in shares beyond the comfort of home has been a growing trend of late. The proliferation of foreign business news through different media have made young adults and even seasoned investors a lot more financially aware of opportunities on offer.

That growing trend has not been lost on two of the regulators of the two largest stock exchanges in the region Tajuddin Atan, CEO of Bursa Malaysia Bhd, and Magnus Bocker, CEO of Singapore Exchange as they too recall personal anecdotes on just how Malaysians and Singaporeans are investing cross borders.

“Some 70 per cent of my friends are trading in different types of markets. If equities are not moving, they will go to bonds. If bonds are not exciting, they will move to foreign exchange,” says Tajuddin.

Bocker too knows of Singaporean investors who can rattle off financial figures and names of US companies and their prospects at the top of their fingertips.

“You can ask them what they know about Singapore Press Holdings or DBS Bank and they are lost. We have a lot of traders who know the financial markets in the US better than they know the local market.”

It can be seen as a missed opportunity if the stock exchanges did not harness the growing appetite for foreign shares among investors in this region for their own benefit. And that's what they sat down to do 17 months ago they conducted 17 CEO meetings and formed 150 working groups to see how Asean exchanges can work together.

Their mission was simple; the need to lasso investors into the regional stock markets.

“The best thing is that exchanges are working together for Asean,” says CIMB Group Holdings Bhd chief executive Nazir Razak.

Enter the Asean Trading Link

On September 18, Bursa Malaysia and Singapore Exchange kicked off the Asean Trading Link. The Stock Exchange of Thailand is set to join mid-October and together, those three markets offer, on paper, a tantalising opportunity for investors.

Combined, the three exchanges account for US$1.4 trillion in market capitalisation of companies in the seven exchanges in South-East Asia and nearly 3,000 companies for investors to choose from. The large companies in the region are being marketed as Asean Stars, highlighting the 30 largest and liquid companies on the respective bourses in South-East Asia.

It's that diversity and scale that the chiefs of the first two exchanges to join are excited about.

“Investors get more and more used to being able to invest in more and more markets. The competition for the attention of the investors is getting fiercer.

“We see especially the significance of Indian capital markets, Japanese capital markets and Chinese capital markets growing very rapidly and they take a lot of attention for investors,” says Bocker.

The Asean Trading Link also means a change of tactics. For years, these exchanges were competing against each other, trying to build a moat surrounding their markets while offering more products and services for investors to pluck.

That meant being increasingly parochial as markets around the world start dropping their defences, engage in mergers and tie-ups to mutually grow their business and offerings to investors not in their home countries but from around the world.

“From an Asean perspective, it was more of the question of can we be stronger by being more of a united front and provide more information, and see Asean as a market leader, combined rather than for the individual countries.

“A lot of the discussions that we have had among the exchanges is very similar to the ones that the ministers of finances have had in terms of how do we strengthen the region in competition with other regions and in competition for the attention of the investors,” says Bocker.

Levelling the playing field?

As it stands, Malaysian brokers through the likes of Maybank which now owns Singapore's Kim Eng Securities, CIMB Group Holdings Bhd from their ownership of GK Goh and RHB Capital Bhd when the merger with OSK Investment Bank is completed stand to theoretically benefit from greater integration.

Tajuddin estimates the Malaysian investment banks that own brokerages in Singapore account for 40% of the volume of trade out of the republic into the Malaysian stock market.

“Familiarisation is there. The Asean link facilitates trade,” he says.

For the brokers themselves, the gains from the trading link will differ. For the large Malaysian investment banks that already have a regional network, the link is an added channel. The cost of participating in the link is minuscule compared with what they actually make on an annual basis from the trade of equities.

For the medium and smaller-sized brokers, the link itself will avail to themselves an opportunity not present in their business. The access to the other markets can be a marketing point, analysts feel, that can help them in the long run.

“The main people who will benefit will be the retail investors. Let's say, a small broker who has a bunch of investors who are interested in shares in the region can offer access to shares in Singapore and Thailand to such customers instead of losing them to brokers who already have the network.

“In the past, such retailers who want to buy shares in Singapore have to open an account in Singapore and know the rules. With the link, you don't have to. They will just need to know the home ground rules but there is now the currency exposure they have to be aware of.

“For the companies, they now have an alternative to get their shares traded. This is a new way for them. By increasing their profile, marketing and research done on such companies, it can attract investors from outside Malaysia,” says Tajuddin.

While the link will allow access to the region for those that join, the difference will, however, remain in how those customers are served.

The big brokers with their teams of analysts covering companies in the region will be able to offer research and support to their investors. It will be the extra arrows in their quiver in gaining or more importantly keeping market share.

Maybank Investment Bank Bhd CEO Tengku Zafrul Tengku Aziz says the expansion of services by brokers to their clients was inevitable but the issue at hand was how were they going to be serviced?

“They can have the link but how are they going to go about supporting their clients?” he asks, on the need to provide research which the larger brokers have an advantage at the moment.

Will investors bite?

Having the link to buy Singapore and Thai shares is one thing but will investors want to buy shares in countries they are not familiar with at the moment?

The issue will surround the interest among retail investors to buy shares in the region and right now there appears to be very little appetite towards that.

Singapore investors appear to be familiar with shares in places like Hong Kong, London and the United States. Then, there are different interests among investors in Malaysia where it has been said that investors in Penang are interested in Hong Kong shares while those in Sabah and Sarawak will find more solitude in Singapore equities.

“Retail investors generally are not comfortable and unaware enough to be investing abroad,” says an analyst, who adds that retail participation in Malaysia has been poor for years.

“There has not been enough promotional activity. The man-in-the-street investor does not know enough about the Asean exchanges.”

There is hope that the ultra high net worth individuals through their private bankers will be drawn into trading shares in Southeast Asia as the link now makes trading easier.

To generate interest, the exchanges need to do far more promotional activities on stocks in the region and that can be a costly affair, some will say over time will cost more than the link itself.

Who will bear that cost? Will the participating brokers be asked to contribute towards that?

For Tajuddin, the seeds to invest in foreign shares are there and they are for the exchanges to capitalise on.

“The outflow from here goes to the US and Hong Kong. The original objective of the Asean Trading Link is to build a start. It's a building block in trying to understand that as a single exchange, we are not close to any size that commands attention.

“By combining the exchanges, we can command enough attention. That's why people are saying Asean is the next growth decade, but separately we are too small,” he says.

Bocker says the exchanges will only know if the link is a success once the full network effect is there.

“We need to have more markets in. I think it will take time for a lot of the brokers to do things and here you need to think in terms of years.

“It will probably take 3-4 years before you see the real impact of this and by then you will see the back office, clearing and depository effect cooperating better which will take a number of years,” he says.

 

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