Dawning of Asean cross-border trading

Institutional investors and big brokerages may be the obvious beneficiaries of the Philippine Stock Exchange’s (PSE) move to link up with the planned Southeast Asian network for stock trading, but there are expectations that gains will trickle down to smaller players.

The creation of a common trading venue initially for four Southeast Asian nations—the Philippines, Malaysia, Singapore and Thailand—brings advantages that extend from investors to brokers to listed firms, although it also ushers in new challenges. Philippine investors can put their money in shares of listed companies from the three other countries while investors in those countries can invest in listed Philippine stocks.

Good for investors, brokers

PSE president and chief executive Hans Sicat said investors would benefit from easier cross-border trading and the consequent increased competition among listed companies and brokers.

“The linkage immediately expands the investment horizon particularly of small investors as they can now execute cross-border trades with ease through their local brokers,” Sicat said.

“The convenience in cross-border trading brought by the Asean link also opens up listed companies—and presumably brokers—to increased competition. These corporations will be thrust into a larger playing field where they will have to compete for investors,” he said.

Luring global funds

The electronic interconnection of the four Southeast Asian countries is scheduled to start operations next year. Indonesia and Vietnam are expected to join later.

The scheme is envisioned to make the region more attractive to global portfolio investments. Based on the plan, selected stocks representing each market’s 30 biggest and most liquid issues would initially be brought for cross-border trading.

All exchanges will benefit from increased liquidity, especially as main and sector indices from the Association of Southeast Asian Nations (Asean) are created and demand for their underlying stocks increase.

Some analysts are wary, though, that small individual investors may not be able to participate in cross-border trading if they can’t have the benefit of information on foreign-issued equities. As such, only the large or institutional investors and their brokers, which have regional presence, are emerging as sure winners.

“I don’t think anybody will want to just buy a stock in, say, Singapore that he has never ever heard of. Investors will have to course their orders through probably somebody who has the research capability to do so, and that will fall under large institutional brokers,” said Jose Mari Lacson, head of research at local stock broker Campos Lanuza & Co.

Market concerns

It remains to be seen if smaller local brokers would invest to get in the loop, or if they would band together and pool resources to strengthen their research capability and compete with larger houses, Lacson said.

Then, there are fears that the common trading platform may later on lessen the listings on the local bourse as companies opt to list on the other exchanges.

Bigger markets may also draw some investors away from the smaller Philippine market.

But listed companies likely to be affected by the planned Asean trading link are unfazed.

“We welcome this,” said SM Investments Corp. chief finance officer Jose Sio. “In the case of SM Investments, the foreign shareholders own 24 percent of total stock and these are the bigger shareholders, fund managers. In the case of SM Prime, foreigners own about 25 percent so we are already ready for that.”

“In the broadening of the trading world, one of the biggest advantages is increasing awareness on the Philippines,” said Jollibee Foods Corp. CFO Ysmael Baysa. “The only time (global investors) will understand your strengths and know how good you are (is when) they really give time to you and talk to you, and you’re able to explain yourself. This will possibly put us on their radar and give us opportunity to give a good share of words so we can express ourselves and others will know us better.”

Sicat suggested that the Philippines’ comparative advantages would make it difficult for global investors to ignore the country.

“The Philippines has specific sectors that are unique—mining and tourism-related plays and services,” he said.

Indeed, the looming cross-border trading has direct and indirect benefits—even to small investors.

Competition

The increased competition arising from the creation of a regional trading platform “will be primarily beneficial to investors, as companies must make themselves more competitive—it could be through expansion or M&A [merger and acquisition]—if they wish to contend with the other firms. The creation of a broader investible market will also help achieve synergies across production factors such as pricing, costs and technology transfers,” Sicat said.

The major concerns relate to effective cross-border enforcement and prosecution, as well as dispute resolution.

There are also concerns about regulation. The Securities and Exchange Commission (SEC) said the exchange needed to flesh out whether foreign issuers would be made to go through the same registration procedure as the local issuers.

SEC secretary Gerard Lukban said the corporate watchdog was open to exempting foreign issuers from registration. The commission is also keen on doing away with the registration of the regional trading link as an exchange, given that it is merely a platform that will facilitate trading on issues that are already registered and traded in other markets.

Lukban stressed that there must be safety nets against defaults.

“That’s why we’re encouraging brokers to enter into memorandum of agreements. Foreign brokers will have sponsoring local brokers here that would make compliance and enforcement of our laws easier,” said Lukban.

The exchange is trying to anticipate as many issues that will crop from the launch of the Asean link.

“The main risk is that cross-border trading is new for Asean countries. There could be some issues that have not been foreseen,” Sicat said.