Boosting the ecosystem of emerging markets
Broadening and deepening a capital market is one of the keys to accelerating growth and advancing a sustainable development programme.
Today, I am continuing the thinking from my last post on sustainable Asia development by focusing on how countries are creating the conditions in which both the private and public sectors can borrow or raise capital efficiently. This is good for employment and it gives governments more scope for development.
This is echoed by the recent Bond Connect – the Chinese bond trading link that brings the world’s third-largest debt market one step closer to international investors’ portfolios.
This could prove to be big new news for China and international investors if the bonds secure inclusion in global bond indices. In fact, Stock Connect, has helped Chinese equities gain entry to the MSCI’s emerging markets index.
So, it’s good news for China and diversification for international investors with analysts predicting more than USD 1 trillion of offshore bond funds could flow into Chinese debt in the next decade.
No two markets are the same
For every market, there is always a different balance of retail/institutional investors, a different range of issuers and a different mix of assets to invest in.
Early stage markets, naturally, have a more limited offering. Extending the range of financial products, and building liquidity in each one, is important if a market is to attract a more diverse investor base. Oliver Wyman and the World Federation of Exchanges have a great publication on this.
I hear many people say that one of the reasons for low investor participation, particularly in early-stage emerging market exchanges, is the relative lack of and/or unattractiveness of available investment opportunities.
But, what most western investors forget is that the ecosystem of a market needs nurturing just like the ecosystem we inhabit.
For instance, a market that succeeds in deepening liquidity in government bonds and creating a full yield curve can also provide the platform for a parallel market in local government paper. This can potentially transform local government funding.
The case for ETFs and funds
Another example are ETFs. Successfully introducing ETFs – linked in the first instance to a market index – can bring in international investors that might not be attracted to individual stocks or who might not want direct exposure to select markets.
This is not fanciful thinking. My friends at ETFGI tell me the number of ETFs listed on emerging market exchanges more than trebled over the period 2010 to 2015, to 700. Trading in these ETFs now amounts to USD 734 billion in October 2017.
For local markets this is a great opportunity. Coupled with the international structure that we have created, it means ETFs can provide new, and potentially a more liquid, channel of access for international investors. They also boost domestic liquidity through the interplay between the derivatives and the underlying stocks.
The same can go for investment funds. The various international investor quotas in place by countries such as China and India demonstrate how you can secure greater stable investment inflows when you allow international asset managers to access your securities market.
Broadening the range of assets in the shop window is only one element of what makes for a success in building a marketplace that will support economic and social development.
A deeper and more diverse pool of securities coupled with market liberalisation, a sound legal and regulatory environment, an efficient trading and settlement infrastructure – these all play a part when introduced in the right way.
Next, I’ll share some thoughts on how countries getting the support of financial market indices are seeing a world of difference. I’ll also explain how Peru has built a solid foundation for growth through international investment.
My last blog on sustainable Asia development received a lot of interest. I really welcome all your thoughts so please do share them.
Bond Connect launch a high point for international investors looking to access China
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Stephan Pouyat, Euroclear's Global Head of Capital Markets and Funds Services, shares his thoughts on stewardship of capital and the importance of creating an open government bond market.
As Global Head of Capital Markets and Funds Services at Euroclear, Stephan Pouyat cares passionately about aligning the financial sector with moves to accelerate development among the world's emerging economies.
He is a firm believer that the free and efficient flow of capital brings benefits to all, from the promotion of financial reform and social development to the development of new mechanisms that aid market advancement.
In our increasingly interconnected world, local market success is predicated on their ability to secure capital flows and investment in physical and social infrastructure.