Southeast Asia’s Emerging Securities Market Breaks Down Barriers for Investors but Presents Own Challenges
Although the ASEAN (Association of Southeast Asian Nations) region still goes somewhat unnoticed outside of Asia, these days a lot is brewing for investors in the region — comprised of the 10 nations, including Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. As part of their capital market integration efforts, stock markets in Southeast Asia have taken a big leap forwards as investors in Malaysia, Singapore, and Thailand can now trade in each other’s market with very little effort.
The foundation for this development was laid in 2004 when the ASEAN member countries created a forum of market regulators, the so-called ASEAN Capital Markets Forum (ACMF). During a presentation at a recent conference held in Bangkok, Jamie Allen, secretary general of the Asian Corporate Governance Association (ACGA), explained that ACMF initially focused on harmonization of rules and regulations before shifting towards more strategic issues to achieve greater integration of the region’s capital markets under the AEC Blueprint 2015. The AEC Blueprint 2015 is an implementation plan that is described as a“coherent master plan” for the ASEAN Economic Community 2015, also referred to as AEC 2015. AEC 2015 marks the realization of the ultimate goal on economic integration across ASEAN — to establish ASEAN as both a single market and a production base, with free movement of goods, services, investment, capital, and labor (more details can be found in South East Asia: Investment Opportunities Tax & Other Incentives, which was recently published by PwC).
With regards to capital markets, the ambitious goal is to achieve significant progress in building a regionally integrated market where (within the region) capital can move freely, issuers are free to raise capital anywhere, and investors can invest anywhere.
In short, anyone would be able to trade capital market products freely in any ASEAN market at a competitive fee from a single access point, similar to the way investors can trade in capital markets in Europe (a more detailed outline of the implementation plan can be found in The Implementation Plan Proposed by the ACMF).
The ASEAN Trading Link was launched in September 2012, initially with the stock exchanges in Singapore and Malaysia offering cross-border trading as a major step towards integration. One month later Thailand joined. Charamporn Jotikasthira, president of the Stock Exchange of Thailand, shared what the launch meant for the ASEAN capital market: “For the first time ever, with Bursa Malaysia, Singapore Exchange, and now the Stock Exchange of Thailand connected, investors now have a single entry-point access to three of the largest equity markets of ASEAN. Together the three markets offer investors easier access to over 2,200 listed companies with a market capitalization of USD1.4 trillion, which accounts for nearly 70% of the total market capitalization of ASEAN.”
Nowadays an investor sitting in Bangkok, for example, can easily buy stocks in Malaysia without going through the hassle of dealing with a broker in a different country, who may have difficulties communicating to a Thai market participant. All this investor would have to do is instruct a broker in Thailand which stocks to buy on the Bursa Malaysia. The broker in Bangkok would then route the order through an elaborate system to a broker in Kuala Lumpur, who would execute the order and arrange the settlement of the trade. Trades are settled in the local currency, which in the case of our example would be the Thai baht. (An insightful, technical description of how securities orders are processed can be found in “The ASEAN Trading Link Explained.”)
Decision makers at participating stock exchanges are optimistic about the benefits that can be expected through securities market integration in the ASEAN area. CEO Magnus Böcker of the Singapore Exchange noted that the participation of individual ASEAN markets through the ASEAN Trading Link would help the region compete with bigger markets and economies (press release issued by Bursa Malaysia). As capital flows to and within this region increase, companies benefit from deeper liquidity pools to finance business expansion. Investors would also gain from access to more investment opportunities, Böcker remarked. Obviously, this would have a positive effect on regional economic growth.
But all of these benefits do not come without challenges. As Datuk Ranjit Ajit Singh, chairman of the Securities Commission of Malaysia, pointed out, there are a variety of issues which means integration efforts will require strong political will to reach the desired goals. For example, the value of regional integration remained unclear to some participants. Other issues include the presence of capital controls, exchange restrictions, differences in tax regimes, uneven development, portfolio restrictions on institutional investors, differences in product range, large differences in regulatory regimes, and market infrastructure.
Besides these macroeconomic challenges, ACGA’s Allen identified several important corporate issues when he emphasized the differences in corporate governance standards. This may have an impact on the investment culture in the ASEAN region, as rules which are designed to protect investors, such as corporate disclosure regulations, differ between countries. For example, while listed companies in the Philippines, Singapore, Thailand, and Malaysia have to effectively disclose holdings of 5% and more, there is no such requirement in Indonesia. At the same time, although investors in Indonesian stocks enjoy strong pre-emption rights, this is not the case in Malaysia, the Philippines, Singapore, or Thailand. A further harmonization of corporate governance practices may well be expected as capital markets continue to move towards a more integrated platform.
At this moment only three out of the seven stock markets in the ASEAN area have decided to join the ASEAN region trading platform (the Philippine Stock Exchange, Indonesia Stock Exchange, and Vietnamese exchanges in Ho Chi Minh and Hanoi are planning to join at a later date). Going forwards, however, much can be expected for the development of the ASEAN securities markets. As is clear, there are many challenges lying ahead for ASEAN capital markets’ integration. But a promising start has been made; since issues have been recognized, there is reason to be optimistic about the establishment of a region-wide securities market that would benefit the ASEAN economies in the not so distant future.