With capital markets rapidly becoming a preferred financing channel for corporates, many exchanges around the world are experiencing significant shifts in the marketplace. New issuers, new investors and new products are rapidly emerging and changing the way that exchanges interact with both issuers and investors. At SGX, we believe that collaboration, financial education and greater investor information are vital to success for exchanges going forward.
No matter where you operate, it is clear that today’s marketplace is vastly different than it was in the immediate ‘post-global financial crisis’ era. Economies have stabilized, the euro crisis has dissipated and companies are fighting more aggressively than ever before for growth – and the financing they need to drive that growth.
Yet the appetite for credit-driven growth has also started to shift. Indeed, with the cost of capital rising and bank lending policies tightening, many organizations around the world are increasingly looking to equity markets and arrangements to drive new growth.
So-called ‘alternative financing’ options – such as crowdfunding – have provided a partial new source of equity financing, but sums remain low overall (few funds have ever raised more than US$200 million through crowdfunding). The resurgence of demand for equity financing has also driven some growth to the private markets where, arguably, regulatory requirements and pre-listing scrutiny may be somewhat more lax and decisions on higher risk thresholds have to be borne.
But for the most part, it is the regulated exchanges – where fundraising is transparent and orderly, and has to be balanced with investor protection considerations – that have and will likely continue to capture most of the attention of those seeking equity financing.
It’s not just the issuer profile that is changing. So, too, is the investor profile. In Western markets, the massive increase in the use of exchange-traded funds (ETFs) over the past few years has not only catalyzed market activity, but also provided retail investors with a fairly simple and cost-effective way to access the market.
At SGX, for example, we are evolving to cater to a wide range of regional and international investors , including sovereign wealth funds, private banking investors, family offices and multinational asset management companies , all eager to participate in opportunities in Asia and globally.
In Asia, the investor profile is also changing. In part, this is being driven by the emergence of a growing middle-class and younger, more connected populations who are more willing to take risk and are more comfortable using new technologies to manage their investments.
The profile of institutional investors has also continued to shift.
Here, too, we have seen growth in retail investment, though not nearly on the scale now under way in the West. In part, this reflects the lower levels of household incomes across the region, which affect the population’s ability to invest. Nonetheless, this is an important growth segment as the middle class in Asia is expanding rapidly. But likely the bigger challenge facing exchanges in Asia is the lack of financial literacy among the middle to upper-income earners, retirees and the youth segment.
Some of the heavy lifting will fall on the shoulders of the issuers themselves who will need to become much more transparent and open with the new breed of tech-savvy investors now active in the market. Exchanges will also need to play a role in helping drive change through both policy and partnership, particularly with smaller-cap members who may lack the investor relations capabilities or skills necessary to achieve this.
We believe that the future success of exchanges – not only in growth regions such as Asia, but also in the more mature markets of the West – will depend on our ability as a sector to improve financial education and investor communication.
For their part, investors will need to continue to be self-reliant and must be encouraged to ‘do their homework’. But, as more and more retail investors enter the market – whether directly or through ETF-type vehicles – it will also be incumbent on exchanges to help raise the population’s financial literacy and access to information, particularly in Asia where new segments of investors are continuously emerging.
At SGX, we believe that we must take action both as individual exchanges and as an industry. We are taking significant steps towards that goal. For example, we recently launched a free online portal that allows current and potential investors – retail or institutional – to access information on our almost 800 listed companies. The aim here is to help enhance investor education while improving access to company information.
At the same time, we believe there is a strong need for exchanges to invest together to create long-term and sustainable initiatives aimed at improving financial literacy more broadly. The Options Industry Council in the US (a body sponsored by more than a dozen US options exchanges and institutions), for example, has been conducting weekly roadshows across the US for more than four decades and, in doing so, has had a significant impact on both the quantity and the quality of investor.
Best practices, materials and ideas must be shared across the sector; we should not be ‘reinventing the wheel’ over and over again at each exchange.
There is no doubt that individual exchanges in Asia have done a lot in improving financial literacy. The greater impact, however, will come from cross-industry collaboration and partnership in encouraging financial literacy.
The growth of our economies and the role of exchanges is intertwined. The core role of an exchange has always been to encourage public interest in owning businesses. This ultimately leads to job creation and influencing the growth of the larger economy. Increasing financial literacy and awareness of the many different listed businesses will progressively help open individuals to possibilities and opportunities in the dynamic global marketplace.
Lawrence Wong is Executive Vice President and Head of Listings at Singapore Exchange, where he is responsible for developing SGX as an Asian gateway for companies seeking to tap international capital markets. Prior to joining SGX, Mr Wong was part of the senior management team at OCBC Bank and held several senior positions at Schroders Group, including Head of Corporate Finance for South East Asia, Greater China and Head of Financial Institutions Group, Asia Pacific. Mr Wong is a member of various collaboration councils set up by Singapore with Chongqing, Fujian, Guangdong, Jiangsu, Liaoning, Shandong, Sichuan, Tianjin and Zhejiang to promote economic, trade and investment activities.
Jenny Chiam is Senior Vice President and Head of Securities at the Singapore Exchange where she develops their securities market and ensures SGX progresses as an innovative, customer-focused organization. Prior to joining SGX, Ms. Chiam served as the Head of South East Asia Equities and as CEO of Nomura Securities Singapore. Ms Chiam has worked with Asian Equities in Australia, New York and Singapore for over 25 years.
Executive Vice President and Head of Listings at SGX
Senior Vice President and Head of Securities at SGX
Partner, KPMG Singapore
Kok Keong Leong
Partner, KPMG Singapore
By Kok Keong Leong, Partner and Head of Financial Services, KPMG Singapore and Roger Tay, Partner and Head of Capital Markets, KPMG Singapore
The need for exchanges and investors to meet the financial literacy challenge will be heighted in Asia Pacific by the imminent implementation of the ASEAN Economic Community in 2015 which will harmonize capital market standards, particularly for debt securities, disclosures and distribution rules. It is widely anticipated that a more standardized market environment will help drive significant growth in capital flows across the region.
Yet, given the shifts in both investor and corporate profiles, we believe that exchanges will need to become much more sophisticated in the way they educate their investors by ‘segmenting’ them by financial literacy levels and then creating targeted programs that respond to the specific segment’s needs.
As Mr. Wong and Ms. Chiam aptly conclude, improving financial literacy will likely be one of the biggest challenges – and greatest differentiators – for capital markets going forward.