Friday, April 11, 2014, 10:41
ASEAN eyes single exchange for bloc
By Alfred Romann / Asia Weekly

ASEAN eyes single exchange for bloc

A girl cycles past the Hanoi Stock Exchange. Vietnam’s two bourses have formed links with five other ASEAN exchanges as part of a drive toward integration. (Photo / AFP)

The seven largest stock markets in the 10-country Association of Southeast Asian Nations (ASEAN) are incredibly varied.

In Vietnam, the Hanoi Stock Exchange and the Ho Chi Minh City Stock Exchange (HOSE) are both active but are only now getting their bearings and beginning to turn solid returns. Access is limited.

In the first quarter of this year, the regulator gave approvals to fewer than 400 new investors, about the usual number.

The Singapore Exchange, at the other end of the scale, is a world-class stock market with bond offerings, derivatives and a wide range of products. As of early 2013, it had 776 listed securities and a capitalization of $934.5 billion.

HOSE started operating in 2000 but did not emerge in its current form until 2007. The larger of the two exchanges in the country, it had 301 companies listed by the end of 2013 and a market capitalization of around $40 billion. In 2012, foreign investors accounted for 8.46 percent of the trading volume, or $2.9 billion.

Linking these two exchanges would open doors on both sides. It would give Singapore investors access to a small but fast-growing market and Vietnam investors access to the much more established Singapore market.

Forging links

And that is what the exchanges want to do. It is not just Vietnam and Singapore joining together, but also Bursa Malaysia, the Indonesia Stock Exchange, the Philippine Stock Exchange and the Stock Exchange of Thailand.

The ultimate aim is to create one giant market that would ultimately bring together all the ASEAN exchanges or, at the very least, facilitate trading among them.

That is what the chief executives from all seven exchanges in six countries discussed when they met in Bali on April 4 for the 20th ASEAN Exchanges CEOs meeting.

As gatherings of top financial executives go, the meeting went relatively unnoticed.

ASEAN Exchanges is a grouping of the seven ASEAN exchanges. It was launched in April 2011 and has a market capitalization of around $2.9 trillion and 3,600 companies.

Although fairly low profile, the group has put together a series of initiatives in the last three years including: The ASEAN Trading Link, to allow investors easier access to the linked exchanges; The ASEAN Stars programs, to highlight the bloc’s best performing companies; and an Invest ASEAN retail roadshow.

The ASEAN Trading Link has been in development for several years but took another step forward during the Bali meeting when the exchanges appointed Deutsche Bank, a Germany-based global bank, to provide custody and settlement services.

The link was first rolled out in September 2012 but had a difficult time getting off the ground with investors showing little or no interest in buying in their neighbors’ bourses.

The lackluster interest was, in part, the result of the success of each individual market. Through 2012 and early 2013, some markets in ASEAN were among the best performers in the world.

Markets in the Philippines and Thailand, for example, rose by more than 25 percent through 2012.

Success was also hampered by disparate regulations in a range of areas, from capital movements to foreign ownership of shares. Vietnam, for example, only allows 49 percent foreign ownership at the moment — although discussions to extend that have been ongoing for more than a year.

It did not help that the ASEAN Trading Link was delayed by about two years after its launch, and that investors in one country found it difficult to understand the rules in another.

“ASEAN Exchanges have made significant progress … in our effort to promote integration of the ASEAN capital market,” said Ito Warsito, CEO of the Indonesia Stock Exchange, in a statement.

“We are focused on delivering on our four implementation pillars which are: Driving cross-border collaboration, streamlining access to ASEAN, creating ASEAN-centric products and implementing targeted promotional initiatives,” he said.

Tajuddin Atan, Ito’s counterpart in Malaysia, suggested that meeting the latest milestone was key to providing “streamlined and cost-effective post-trade procedures for cross-border transactions conducted via the ASEAN Trading Link”.

In the wake of the global financial crisis, some ASEAN markets were among the best performers in the world. Thailand, the Philippines and Indonesia were particularly good performers, doubling in terms of market capitalization in the four years after 2008.

Significant benefits

Some of these markets, in particular Indonesia, suffered through 2013 as a result of a series of internal imbalances and a flight of capital as investors considered the possibility of the US Federal Reserve winding down its program of quantitative easing (QE) which has made capital easily accessible to investors.

That capital helped buoy ASEAN markets. The possibility of a tapering of QE had the opposite effect.

Still, the long-term prospects for markets in the region remain rosy and increased links between the seven largest ASEAN exchanges could only help.

“A single entity across the different markets can have clear benefits for the investment community,” noted Deutsche Bank last year.

The bank, which later won the mandate to handle clearing and transactions services for the ASEAN Trading Link, made it clear that the process of integration would not be fast but would be “a journey” in which potential benefits “can be significant”.

A series of capital gains tax exemptions for investors who use the ASEAN Trading Link to buy a limited number of shares in Malaysia, Singapore or Thailand could help.

When ASEAN Exchanges was first created, it only included Malaysia, Singapore, Thailand and the Philippines, and chose to operate though the Philippine Stock Exchange. In turn, the group appointed SunGard Global Trading, a Singaporean firm, to create the infrastructure and software to facilitate trading between the various exchanges.

The trade link was finally rolled out in September 2012.

The push to integrate stock exchanges across ASEAN is not happening in a bubble but is part of a wider initiative to create an ASEAN-wide market.

“Free trade across the various countries is already happening,” says Glenn Levine, senior economist at Moody’s Analytics.

But not everyone is convinced that such a link is needed or would, ultimately, be useful.

Thomas Hugger, fund manager at Asia Frontier Capital, which invests in Vietnam and Thailand, says the link might prove helpful, but implementing it and attracting enough investors may prove to be difficult.

“Maybe it is useful but it is a strange idea. Most of these countries have capital controls,” he says. “How do you get Thai baht if you are in Vietnam?”

And he is not certain that brokers in places like Vietnam would welcome competition from often more sophisticated global players from Singapore.

“I already think there are too many brokers in Vietnam and not many make money,” he says.

Still, opening up stock exchanges across the region may be a boon to markets if regulators and operators can get past the local idiosyncrasies.