Stock Connect dominates Asian equities at turn of year
Stock Connect, dark liquidity, Japan's reflationary bid and Beijing's policy direction dominated the Asian equity landscape in 2014 and set the stage for 2015.
The fragmented nature of the Asian equity markets – with their own important domestic and international drivers – means a coherent picture of market activity is often elusive.
However, as we head into a new year, certain key trends stand out as influential in Asian equity, occupying the minds of market practitioners all over the region.
| It will bear watching as it unfolds next year for evidence that new players are gradually taking part as the kinks are ironed out
Mark Austen, CEO of the Asia Securities Industry and Financial Markets Association (ASIFMA), says the Shanghai-Hong Kong Stock Connect initiative was the most significant development in Asian markets in 2014.
The Stock Connect increases ties between the Shanghai Stock Exchange and the Hong Kong Stock Exchange by allowing trade in both directions through mutual market access.
“Its consequences will make themselves felt not just over the coming weeks and months but years, as investors around the world steadily start allocating into equities of the world’s second-largest economy,” says Austen. “It will bear watching as it unfolds next year for evidence that new players are gradually taking part as the kinks are ironed out.”
Nick Ronalds, ASIFMA’s managing director and head of equities, says his organization has invested an enormous amount of time and energy into Stock Connect this year, talking to all the players, exchanges, regulators and vendors.
“There have been so many market participants involved in this,” says Ronalds. “It has required a big effort to get to everyone and include everyone.
“As far as readiness was concerned, everyone was ready. The brokers were ready. The exchanges were ready. The only sense in which people maybe weren’t as ready as they would have liked was the brokers needed time after having all the details to get paperwork to their clients, because the client documentation needed updating. But they didn’t have the full picture on taxes until the day before launch.”
However, Ronalds tells Euromoney he has seen the launch of many products throughout his career, and success isn’t measured by the first day’s trading, but is almost always a long-term process.
“Of course, readiness is important,” he continues. “If traders come and say ‘let me try this’ and they encounter unexpected operational or other problems, they’ll go away and the chances are good they won’t give it another try at least for a while. But when you have a new product or new platform, an enormous amount of education is necessary.
“We’ve got to remember that the potential customers for Stock Connect is every stock trader in the world. It’s going to take a while to get to the potential users and explain to them how it works and allay their concerns. It’s by its nature a long-term process. And there are some operational anomalies in the scheme, such as the pre-trade delivery requirement, that still need to be addressed.”
|Nick Ronalds, ASIFMA’s
According to Ronalds, another noteworthy trend in the Hong Kong market is around the use of dark liquidity. “There was a consultation in Hong Kong on dark liquidity, which they called alternative liquidity pools,” says Ronalds. “And pretty soon the Securities and Futures Commission (SFC) should be coming out with its final conclusions. When that comes out, then implementation will be required.
“It looks like they are going to prohibit retail participation, which we find disappointing, because it’s good for markets to have alternative venues and good for customers, including retail. You want innovation in a market. You want alternative models and different ways of satisfying liquidity. That helps make a market more vibrant. It attracts more participants. It attracts more firms for listing.”
He adds: “Hong Kong is already a small market and constraining it unnecessarily could quash its potential.
“We would hope to work with the SFC and other stakeholders, if it turns out that retail is prohibited, to see if anything can be done to satisfy their concerns about retail participation.”
A project to link equity exchanges in the Asean region, bringing those markets closer together, was something that had widespread support further south in Asia in 2014. Ronalds adds that ASIFMA would like to see more linkages in Asian markets because fragmentation raises costs.
“It’s expensive in man hours and expensive in other resources,” he says. “You often have to have different IT systems. You have different sets of regulations. The Asean link hasn’t been as operationally smooth and efficient as people hoped. But in principle, the idea is a good one.”
The rollercoaster in Japanese equities, moving to the beat of shifting sentiment towards the government's efforts to reflate the economy, has been another big theme for 2014.
“Japanese equities enjoyed a boom in the first half of 2013, but then hit a ceiling it hasn’t been able to break through, until the past two months,” adds ASIFMA's Austen.
“The Japanese stock market is now double what it was less than two years ago. There are obviously many questions and concerns about the Japanese economy, but the market seems to have decided it has turned a corner.”
Finally, as ever, sentiment towards China is crucial for the regional equity outlook, and Beijing's policy direction will occupy the minds of many market practitioners in 2015.
“The big question is China’s direction: will the recent stimulus measures have the hoped for effect, stabilize property prices and loosen credit for SMEs, or will continued weakness in China ripple out to the rest of Asia Pacific, and the world?” says Austen.
“A more important question for investors is whether Chinese stocks – at half the valuations by usual metrics of some other Asian markets, not to mention some developed markets – have discounted the bad news already.”
He concludes: “The dynamic not only of the Chinese economy relative to its neighbours but of equity market performance relative to economic growth, will be an interesting story next year.”