Pitfalls abound for Asian emerging markets

By Sahala Sianipar

JAKARTA (JP): Another remarkable year for the United States equities market. The Wall Street Journal's article on May 29, 1996 reported that American investors poured in US$ 26.35 billion through mutual funds into the equities market.

From January until April 1996, total funds invested in stocks reached $99 billion, almost two-thirds of the total investment in 1995 of $128 billion. Yet a mutual funds conference recently held in California that brought chairmen of Charles Schwabb and Merril Lynch, two biggest sponsors of mutual funds in the United States, summarized that the growth of the U.S. stock funds will continue since "millions of Americans are still unaware" of mutual funds.

Many brokerage firms in the United States have increased their marketing efforts to stay competitive in this dynamic market. Major brokerage firms have introduced on-line trading service through the internet for their customers. Since the usage of internet has become customary among American consumers, these firms have quicker and cheaper way to conduct brokerage services to their customers.

They also introduce various types of mutual funds catering to different of the American public ranging from small-cap growth funds to high-technology funds. As the United States economy gains its growth momentum, the equities market will also experience further expansion.

The spectacular performance of the U.S equities market has certainly contributed positively to Asian emerging markets, such as Indonesia, Malaysia and Thailand. These U.S. fund managers allocate more capital in emerging markets searching for higher returns for their customers.

However the number of emerging markets has increased to include eastern European and ex-Russian Republics in the picture. In addition, many Latin American nations have implemented various deregulation strategies to stay competitive in today's global market. Therefore, Asian emerging markets can no longer sit idle in a changing global market without considering the following issues.

First, the regulatory framework in emerging markets lags behind the market development. Henry Kaufman (1992) in his article, Opportunities and Challenges in Global Capital Markets (a part of the Walter Sterling Surrcy Memorial Series publication, Global Capital Markets in the New World Order), stated that the rapid development of derivative financial instruments have left behind "even specialized institutions (that is regulatory bodies)" in the United States such as the U.S. Commodity Future Trading Commission. Therefore both developed and developing market regulators constantly face the challenge to bring-up the legal framework parallel with the market development.

Second, the range of financial instruments offered in emerging markets is currently limited. Although it is worth noting that the trend to diversify trading instruments has begun to take place in South Korea, Malaysia, and Singapore (that has established the Singapore Monetary Exchange or Simex since 1984). It is critical, however, that the introduction of more sophisticated trading instruments is initiated by the setting-up of a comprehensive legal framework.

Third, it is not a secret that the leading actors in emerging markets are overseas brokerage houses (such as Merril Lynch, Goldman, Morgan Stanley BZW, to name a few). These firms have the extensive network, research capabilities, and certainly capital to succeed emerging markets. Competition will become intense among brokerage as capital becomes more scarce.

Fourth, the existence of equities market in emerging economies is a new episode. Limited number of domestic institutional and retail investors participate in stock funds. The limited participation of domestic investors should open an opportunity for market players especially in high-growth Asian economies such as Malaysia, Indonesia, Thailand, and Philippines. Aggressive campaign will be critical to inform the public to invest in the capital market. At the same time, regulatory framework favoring investment in the market will give an extra mileage.

Fifth, the high volatility of emerging markets' currencies. Governments of Asian emerging economies will invest in high capital projects such as infrastructure, telecommunication, public utilities. These heavy investment projects require capital and more importantly, high value-added products from developed nations. Even as the U.S currency strengthens compared to major industrialized nations' currencies, the U.S will find a niche market among Asian economies. Prudent monetary policy and consistent deregulation to boost export are imperative in emerging economies to maintain their competitiveness.

Sixth, emerging economies will require alternative funding resources to finance their investment activities such as bonds. In the past, these economies rely on export revenues to finance their development programs, but today's global market will require these economies to rely on either equity or debt instruments to proceed with their programs. Again the scarcity of capital worldwide (that is a decreasing role of multilateral agencies in securing soft loans, the increasing number of countries searching for foreign aid) will force monetary authorities to search for additional funding resources.

Seventh, the issue of corporate governance in emerging economies will become more significant. As companies transfer their ownership to the general public (both domestic and international investors), they will enter the new territory of corporate disclosure. Kaufman (1992) stated that the presence of equity investment implicates conditions that might not be comfortable to its recipients. It does not matter whether the company secures off-shore loans or is listed overseas, investors will demand greater information to make their investment decision.

Therefore the road ahead for Asian emerging markets is full of hurdles. Countries are growing more interdependently of each other. If Asian emerging markets wish to maintain its growth momentum, then they have to go through all the hurdles in the changing global market.

The writer is a graduate from Ohio University, Athens, Ohio, United States