The importance of sell-side relationships to investing in regional markets

Singaporre skyline

The importance of sell-side relationships to investing in regional markets
By Mike Powell, CEO Rapid Addition

I had the pleasure of attending the Singapore FIX Multi-Asset Trading Conference 2023 earlier this month. As well as catching up with old and new colleagues, it was an opportunity to hear industry peers discuss current views on regional market challenges and opportunities.

It struck me that a common theme ran throughout the event – the importance of sell-side brokers in helping institutional investors navigate diverse regional markets.

This was refreshing. Over recent years, the focus on execution quality and research unbundling, the shift to passive investing through tracker funds and ETFs, and declining commissions have created a negative dialogue around sell-side firms. However, the reality is that knowledgeable ‘on the ground’ brokers are indispensable to institutional investors.

This is nowhere more apparent than in the ASEAN region – a group of ten countries with a combined population of over 650 million. It is one of the world’s fastest-growing regions and represents a diverse range of economies, cultures, and growth potential, offering attractive opportunities for portfolio diversification. However, trading ASEAN markets comes hand in hand with a variety of challenges, particularly market structure disparities.

Below are some of the key issues as to why an institutional investment firm needs the right sell-side partners:

  1. Market Maturity

ASEAN markets vary in maturity. For instance, Singapore’s stock exchange is highly developed and liquid, while markets such as Vietnam or Cambodia are still evolving, with lower liquidity and fewer advanced financial instruments. Institutional investors need to work with their brokers to understand the liquidity risks for a given market, such as price slippage and the ability to hedge or exit positions.

  1. Trading Hours

Trading hours can differ significantly, and while some markets operate a standard 9:00 AM to 4:00 PM schedule, others have shorter trading hours or specific trading sessions designed for foreign investors. Managing orders and executions across multiple markets with varying trading hours can be logistically challenging.

  1. Market Regulation

The lack of regulatory alignment creates disparities in trading practices and rules. Different listing requirements, circuit breakers, and disclosure obligations can impact how equities are traded between markets. This extends to ownership restrictions and foreign investment rules. For instance, some countries limit the percentage of shares foreign investors can own or require pre-approval for significant investments, impacting portfolio allocation and investment strategies.

  1. Settlement and Clearing Systems

Lack of uniformity across settlement and clearing systems is another issue, with each market having its own central depository and clearinghouse. Differences in operational processes, settlement cycles, and custody requirements can complicate post-trade activities.

  1. Currency Risk

Currency risk is a major consideration for institutional investors. Exchange rate volatility can significantly impact returns. Managing currency risk through hedging strategies is essential, but it adds an additional layer of complexity to investment decisions.

  1. Technology and Infrastructure

Market infrastructure varies considerably between countries. More developed markets have advanced trading platforms and lower latency, while emerging markets may face technological limitations. Investors must consider the quality of market infrastructure when assessing trading strategies and achievable execution quality.

  1. Information Asymmetry

Despite ongoing efforts, there is a lack of consistency in information disclosure and transparency standards among ASEAN countries. Some markets lack the level of information accessibility and disclosure of others, leading to information asymmetry. This includes market data, and investors may struggle to obtain real-time and historical data for less mature markets.

  1. Political and Geopolitical Risks

Changes in government policies, trade tensions, and regional disputes can create uncertainty that quickly impacts business sentiment. A heavy dependency on relations with China means investors must be aware of changing dynamics and potential headwinds with key trading partners.

The distinct market structures across ASEAN countries present a complex landscape for institutional investors. Differences in market maturity, trading hours, regulation, ownership rules, settlement systems, technology, and cultural factors require a deep understanding and adaptable strategies.

It is also a constantly evolving picture; for instance, Vietnam is on the FTSE Russell watch list for reclassification to Secondary Emerging Market status from its current Frontier Market index. Should this occur, it will likely boost liquidity and create trading opportunities.

All of which highlights the need for institutional investors to cultivate valuable relationships with sell-side brokers with the local knowledge, market access, and infrastructure required to help them take advantage of the opportunities and navigate the risks inherent in these high-growth economies.

Rapid Addition is a leading trading technology provider that partners with both sell and buy-side firms to simplify counterparty and market connectivity; build unique, competitively differentiating workflow; and enhance the performance of electronic trading infrastructure.