Capital Market Integration in South Asia: Realizing the SAARC Opportunity

Capital Market Integration in South Asia

Realizing the SAARC Opportunity

Sourajit Aiyer

Table of Contents

Cover image

Title page

Copyright

Dedication

Disclaimer

About the Author

Chapter 1. Introduction

Abstract

Chapter 2. Where SAARC Is Now: Products, Corporates, and Correlation

Abstract

Chapter 3. Where SAARC Can Reach: Showcasing its Main USP

Abstract

Chapter 4. General Precursors for Regional Financial Integration

Abstract

Chapter 5. Observations Specific to SAARC: Precursors to Consider

Abstract

5.1 Country-Drivers Like Demographics, Consumption, Production, etc.

5.2 Getting Around the Geopolitical Mistrust

5.3 Building Awareness and Getting Acceptance for a SAARC Asset Class

5.4 Growing Interest Into Equities, From Both Institutions and Retail

5.5 Local Markets’ Maturity Hold Challenges, but Opportunities Too

5.6 Regulations, Governance, Disclosures, and Protection

Chapter 6. Potential Products and Activities

Abstract

6.1 SAARC Master ETF with Country-Wise Dual Feeder/Investment Funds

6.2 SAARC Asset Class—SAARC CDCF Portfolio Basket Idea

6.3 Thematic Publications, E-Books, Investment Frameworks, and Roadshows on SAARC

6.4 SAARC International Financial Center SEZ (Within SAARC or Singapore)

6.5 Medical Tourism Insurance Product

6.6 Mutual Fund Passporting Scheme

6.7 Solar Energy Bonds

6.8 SDR Cross-Border Listing (or IDR Listing)

6.9 Cross-Country Index Futures (SAARC/Bilateral Indices)

6.10 Turnkey Consulting, Training and Education for New Products/Markets

6.11 Trading Link Between SAARC Exchanges

6.12 Incubation for Start-ups in SAARC for an SME Listing Platform

Chapter 7. Recent Examples of Integration—ASEAN, MILA, Hong Kong–China, Singapore–China, and East Africa

Abstract

7.1 Association of South East Asian Nations (ASEAN)

7.2 Latin America Integrated Market (MILA)

7.3 Mainland China–Hong Kong

7.4 China–Singapore

7.5 East Africa

Chapter 8. Initial Role for Stakeholders: Regulations, Awareness, and Engineering

Abstract

Chapter 9. Conclusion

Abstract

Appendix

Bibliography

Index

Copyright

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Dedication

This book is dedicated to the memory of my parents, Soma and Ranajit.

Disclaimer

This content is written purely in personal capacity, and all views and opinion expressed by the author are entirely personal. It should not be taken to represent those of any other organization or individual whatsoever; including Motilal Oswal Financial Services Ltd, India (including any Group companies, Directors, or any employee associated thereof).

This content is meant purely for information purposes solely and does not construe to be an investment advice or solicitation for any financial instrument whatsoever. Readers should rely on their own investigations. Any action taken by the readers on the basis of the information herein would be their responsibility alone, and not of the author, or any organization, or individual whatsoever.

The circular hand image in the cover page is courtesy of Octopus Team, India. Conception and compiling of the entire cover page image is done by the author himself. This image is only for pictorial purposes and does not represent any formal integration project, per se. Any sentiments or feelings hurt as a result of this cover page image is deeply regretted; however, the author or any related organization is not liable in such situations.

Currency symbols denoted in the cover page may not be official/authorized symbols for some of the countries. These should not be construed to represent official symbols. These have been used only for pictorial reasons, to showcase local monies in an illustration. No other motive is intended, and readers should look at it as such.

© Sourajit Aiyer

Mumbai, July 2015

About the Author

Sourajit Aiyer has ~10 years work-experience. He currently works as AVP in investor relations and corporate planning with Motilal Oswal Financial Services, Mumbai, a leading Indian capital markets company. Prior to this, he worked in equity trading operations with UBS Investment Bank, London, UK; in financial analysis with Reliance Broadcast, Mumbai; and in financial research with Evalueserve, Gurgaon.

He has completed internships with Tata Motor Finance, Delhi and Grameen Bank, Dhaka, Bangladesh. The Grameen Bank project involved field visits into rural districts of Bangladesh. He also met the bank’s Founder, Nobel Laureate Dr. Muhammad Yunus, for his inputs.

He has written on over 65 unique topics in over 35 publications across 13 countries, including India, Switzerland, England, USA, UAE, Pakistan, Singapore, Malaysia, Qatar, Canada, Germany and Bangladesh. It includes Huffington Post, Al Jazeera, Yahoo, Straits Times, Foreign Policy News, Network18 Firstpost, Financial Express, Euromoney EM, EU Foreign Affairs Journal, Jang Media Group, All India Management Association, Eurasia Review, etc. Topics were on finance, economy, business, socio-economic & geo-politics in Developing Asia, focusing on impacts, challenges & solutions. Articles have been shared by OPIC (US Govt.’s development finance arm), Yahoo News, two universities of Pakistan, Bangladesh’s Defense College and Bangladesh’s TV industry; while others got good feedback from a senior IMF economist, the Indian P.M.’s Office and the Bhutan P.M.’s Office.

He is the author of the E-Book, Flying with the Winged Elephant: Niche opportunities for global businesses that may emerge in India, published by Libertas European Institut, Germany and available on www.Amazon.com.

Born and brought up in Delhi, he is currently based in Mumbai. He can be reached at sourajitaiyer@gmail.com.

Chapter 1

Introduction

Abstract

This chapter is an introduction, using an observation of Lee Kuan Yew, the father of modern Singapore who is widely credited for converting Singapore into an economic success, to describe the ASEAN market. The section says that the same observation holds true even for the SAARC region today and makes a comparison of the challenges being faced in the other regional economic groups today. It discusses the basic objective of this book to create closer interlinkage of SAARC’s capital markets, and the ideas, which include both conventional and unconventional thinking. It stresses that India benefits from the returns and low correlation of the SAARC’s frontier markets, while those markets benefit from India’s size. Thus, a SAARC asset class portfolio can increase the upside from multiple growth/return enablers, while minimizing the downside risk due to the low correlation of its constituents.

Keywords

Lee Kuan Yew; ASEAN; SAARC; South Asia; economic bloc; integration; economy; frontier market

Lee Kuan Yew, credited for converting Singapore into an economic success, once described ASEAN, the South-East Asian group, as Unpromising Start, Promising Future. This apt phrase can also describe SAARC, the South Asian group. SAARC has seen few successes, but geopolitical issues slowed progress. Global institutional investors are using acronyms for groups of developing countries which are homogeneous in stage of development and outlook—BRICS, MINT, Next-11, CIVETS, along with the existing regional groups—ASEAN, GCC, East Europe, CIS, Pacific Alliance, East Africa. But all is not rosy with these groups, which can impact their economic outlook. China’s slowdown is impacting commodity exporters like Brazil, social issues are creating rifts in South Africa, Russian geopolitics is impacting East Europe, Turkey’s proximity to Syria is a disruptor, Nigeria and Kenya are seeing terror threats, Chinese activity in South China Sea sandbars is raising hackles in Vietnam and Philippines, Thailand’s economy has slowed since the coup, GCC states have power-tussles with Egypt and Iran, while some of ASEAN’s fast growing economies comprise only a small proportion of its aggregate.

At a time when the outlook of various regional groups seems uncertain, SAARC does not look so bad. SAARC is a unique combination of sizable Emerging (EM) and Frontier (FM) markets, which have low correlation to each other. Return on Equity and Margins of top companies in Pakistan and Bangladesh has improved relative to those of India, while Sri Lankan companies have seen buoyant topline growth. This should help counter volatility or cyclical growth of single-market exposure. Investors may argue why they should look at SAARC asset class, and it is better to look at India or FMs separately. India benefits from the returns and low correlation of SAARC’s FMs, while the FMs benefit from India’s size. Thus, a SAARC portfolio can increase the upside from multiple growth/return enablers, while minimizing the downside due to low-correlation constituents.

SAARC’s economic growth from 2014 to 2020 will outpace all the regions mentioned earlier, as per IMF estimates. The incremental size it will add to its economy is next only to BRICS and Next-11. SAARC ranks high in savings growth, savings rate, and aggregate savings, as of 2020. Savings has a direct bearing on investment flows. Capital market penetration is quite low in SAARC, so depth can increase further. Income is more evenly distributed in SAARC except for East Europe, so investor breadth can widen. SAARC has young demographics with a near absence of social benefits, i.e., a longer earning life with the need for long-term, inflation-beating investments. Incremental capital formation is amongst the highest in SAARC, indicating creation of economic activity, jobs, income, and savings. Not only is SAARC a large consumer base, it is building production capabilities in both factory and knowledge sectors. Proximity of the SAARC countries to each other gives it a locational advantage for regional value-chain opportunities. Companies in SAARC countries excluding India may need this even more, since there are very few large-sized companies in those countries, which limit investable opportunities. If the corporate sectors in those countries expand, it will lead to further scope for market activity in those countries.

Objective of this exercise: As this economic story unfolds, it should ideally translate into a financial story. This exercise discusses possible capital market Products/Activities regional stakeholders could explore to create closer interlinkage of SAARC’s capital markets, which could help realize the economic opportunity set to unfold in this region. Given the current state of maturity in the region’s markets, some ideas may be implementable now; while some may be implementable in the future as the markets mature further. However, the objective is to start deliberation on even the ideas of the future, since even that takes time. This exercise also looks at the economic projections of SAARC versus other regions (which is its main unique-selling point), their recent corporate performance, extrapolation of market indicators, and cases of integration in peer regions. Purpose of these ideas is to bring the region’s savings into local investments, instead of it moving overseas; evince retail and institutional interest through scope for diversification, yield, and risk mitigation; build product portfolios of the smaller markets; and reduce information opacity to ensure efficiencies in pricing.

Ideas include Conventional and Unconventional thinking: Conventional ones are typically used in integration, like funds, futures, global depository receipts (GDRs), cross-listings, passporting, etc. Unconventional ones try to convert SAARC’s unique challenges and opportunities into ideas for capital markets, i.e., how SAARC’s current state of demographics, socioeconomics, healthcare, investor, and knowledge maturity can become opportunities. Specific rationale are written with each idea why it makes sense for institutions and investors—be it large savings pool for funds, access to a diverse bouquet of sectors, access to multiple products to generate volume/assets, local brokers’ expertise in local stock coverage (especially in high-potential midcaps), access to a broader set of investors helping in valuation, liquidity, and low latency for cross-listings. Products also have to be viable. Hence, a clear focus is on how to deepen awareness of new products and new markets with local investors and institutions for products based on regional securities. Only when this happens, the asset flows should increase—thus, aiding viability.

Dual-currency conversion (to/from US$), double taxation of returns/dividends, sharing of brokerage among local and foreign intermediaries, and collection of market data from all the markets need to be addressed. Compliance with international accounting standards and dual-regulatory approvals gives comfort to investors in cross-border products. Separating the product structure at the country level can reduce the risk perception.

Any integrated product has to take into consideration the ground realities. Bringing an anchor partner can help counter implementation challenges in a geopolitically sensitive SAARC—from a country that has bilateral interests with SAARC members individually and is looking to earn returns from overseas investments. Such an anchor may also hold some sway with the SAARC members, which may enable disagreeable members to reach resolutions and agreement faster as they may not want to anger their larger bilateral partner. The anchor’s motivation would be the investment returns from SAARC’s opportunity and not really interfering in its internal affairs. That is easier said than done. But then, achieving consensus on SAARC projects from all its members has been the region’s challenge, and creating the economic motivation of investment