New era for Asian exchanges
New era for Asian exchanges
By Sahala Sianipar
JAKARTA (JP): The movement of capital across national borders has increased significantly thanks to the acceleration of the free trade area in the Asia Pacific region. Last November, leaders of the Asia Pacific Economic Cooperation (APEC) reached agreement in Osaka on several economic areas although the process will be done according to each member's capability.
Following the APEC summit, members of ASEAN met in Bangkok to discuss on the future of ASEAN Free Trade Agreement or AFTA. ASEAN has set the course to achieve a free trade area in the region by the Year 2003, an ambitious target date for such a diversified group. The objective of AFTA is to prepare its member economies for the target dates of 2020 where countries in the region will have to dismantle their protective measures.
The point here is that countries in the Asia Pacific region are currently challenged to evaluate their current and future position in the regional market. At the heart of the changes in today's global market is the capital market industry. The capital market industry serves as an alternative entry door for both domestic and foreign investment in a country. Policymakers in the region have to address the issues regarding their economies' competitiveness that will essentially help to provide a conducive environment for investment activities.
The intensified process toward the free trade area in the region contributes to the recent drives by regional exchanges to reposition themselves in the global market. One example is the measures introduced by the Stock Exchange of Singapore (SES) and Kuala Lumpur Stock Exchange (KLSE) aiming to attract more potential overseas firms. The SES introduced new regulations to ease the listing process for overseas firms and infrastructure projects in the foreign board. Furthermore, in late 1995 Minister of Finance of Malaysia Anwar Ibrahim issued several deregulation measures aiming to position KLSE as the financial center in the Asia Pacific region that would attract fund managers, brokers, and banks from Singapore and Hong Kong.
In the last three years, we have witnessed a strong surge of private capital flow into emerging markets such as Kuala Lumpur, Bangkok, and Jakarta in the form of portfolio investment.
According to the report prepared by the International Monetary Fund (IMF) in 1995, the private capital flows in the form of portfolio investment reached US$37.1 billion, a tremendous increase of 7,320% from $0.5 billion in 1990. True, foreign direct investment (FDI) still dominated the type of flows into APEC developing economies with $39.5 billion in 1995 which was an increase from $12.1 billion in 1990 (226%). While FDI takes place through sovereign borders and government, the movement of capital in the form of portfolio investment does not recognize any sovereign borders. Information technology along with the increasing competition for capital between emerging exchanges contribute to the rapid growth of portfolio investment among emerging economies of APEC.
The new era faced by Asia Pacific exchanges is characterized by the continuous and unrestricted flow of capital across national borders thanks to the information technology products (e.g. Internet, teleconference system) that help to accelerate the flow of information among decision makers worldwide. Furthermore the establishment of the World Trade Organization (WTO) that will oversee the implementation of free and non- discriminative trade and investment practices worldwide helps to shape the new era.
What does the new era bring to emerging exchanges? One thing for sure is the need for emerging exchanges to improve upon their competitiveness as investment vehicles in their respective nations. In developed nations where the majority of people invest in the capital market either through unit trusts, pension funds, or mutual funds, the drive to increase the market's competitiveness as an investment vehicle can result in more complex products (i.e. futures funds, index funds) without spending too much effort on educating the public about the capital market. This is not the case in many developing countries where the majority of people have not embraced the idea of allocating their savings to the capital market. Essentially the minimum involvement of domestic investors contributes to the slow growth of emerging markets unless there is a heavy intervention from foreign funds.
As mentioned previously, the flow of portfolio capital across national borders does not recognize national borders which contributes to the uncertainty and volatility in many emerging markets. It is highly imperative to have strong support from domestic investors as a prerequisite for sustainable growth among emerging exchanges. However in many emerging exchanges, there is a gap in terms of knowledge and perception of the capital market among the public in developing countries.
Therefore it is a challenge to shift people's savings mode from traditional time deposits to mutual funds or other investment vehicles in the capital market. Realizing the great difficulty in mobilizing domestic resources, government of developing countries have taken the initiative to introduce various incentive schemes aiming to boost the domestic capital market. An example of the well-focused strategy to boost the domestic market is Malaysia and Singapore.
Besides the compulsory employment provident funds, domestic investors can allocate their savings through unit trusts and mutual funds. In fact, one of the world's largest investment banks, Morgan Stanley, has recently introduced a mutual funds aiming at retail investors in Singapore where the funds will basically be invested in selected markets in the region. Mutual funds or unit trusts in Malaysia and Singapore began with an aggressive educational and marketing campaign using the mass media. Permodalan Nasional Bhd, a Malaysian government agency in charge of unit trust, launched its first unit trust in the late 1960s with a comprehensive educational campaign covering both urban and rural areas in Malaysia. As the result, in 1992, Permodalan Nasional Bhd, managed more than M$ 14 billion. One of the funds called Amanah Saham Nasional had 2.460.977 unit holders in 1990.
The key to success in Malaysia and Singapore lies on the effective collaboration between the government and capital market players in developing the domestic market. The privatization program of state-owned enterprises prioritizes the domestic market through various incentive schemes given the existence of unit trusts and mutual funds in both countries.
So what is the challenge in the new era for emerging exchanges in the Asian Pacific region? The challenge is to embrace an effective cooperation between market participants to mobilize domestic resources as the prerequisite for sustained domestic markets. At the same time, information needs to be disseminated to encourage greater level of awareness and participation in the domestic market. Today's information technology products should help to accelerate the learning process among domestic investors.
A comprehensive communications campaign should be embraced to disseminate information effectively to the public. All market participants should cooperate to execute the campaign that incorporates the mass media and information technology products. At the same time, the role of the government will be more critical in providing the conducive investment atmosphere for existing and potential investors. This is the homework for many emerging exchanges in the region if they wish to emerge as winners in the year 2020.
The author is a graduate from the International Business and Communications from Ohio University, Athens, Ohio, United States.
Window: Therefore it is a challenge to shift people's savings mode from traditional time deposits to mutual funds or other investment vehicles in the capital market.