Research Foundation Briefs 24 May 2021
The Emerging Asia Pacific Capital Markets: Challenges and Opportunities
Asia-Pacific emerging and frontier markets continue to evolve rapidly. With insights from authors based in 11 local markets, this publication offers insights about regulatory developments, market structure, and financial history in the region.
The Emerging Asia Pacific Capital Markets: Challenges and OpportunitiesRead the brief (PDF)
Emerging and frontier financial markets in the Asia-Pacific region have experienced significant changes in recent years in areas affecting regulation, market participants, and products. This collection presents perspectives from authors in local markets who provide their analysis of the history, current development, and future outlook for 11 countries: Bangladesh, Cambodia, India, Indonesia, Malaysia, Mongolia, Pakistan, the Philippines, Sri Lanka, Thailand, and Vietnam. The brief should be particularly valuable for prospective investors interested in learning about regulatory developments, market structure, and financial history in the region.
Many have argued that the 21st century will be the Asian Century. And yet many capital markets in Asia, particularly emerging markets, remain a mystery to much of the outside world. We hope this brief will help to fill that knowledge gap.
The MSCI Emerging Markets Asia Index, launched at the beginning of the century, includes nine markets today. The relatively large and liquid capital markets of China (A shares), South Korea, and Taiwan are better known in global markets partly because of the international success of local tech giants. This brief covers the remaining six markets in the index—India, Indonesia, Malaysia, Pakistan, the Philippines, and Thailand—plus five other up-and-coming Asian markets—Bangladesh, Cambodia, Mongolia, Sri Lanka, and Vietnam. In each chapter, local authors review the history, current characteristics, and challenges and opportunities of their respective capital markets.
The selected countries exhibit certain economic and financial similarities. Having traveled to the majority of the covered countries, we believe they also have another important attribute in common: hope. These countries witnessed how neighbors such as Japan, South Korea, Singapore, and, more recently, China have improved living standards for their people since the 1960s. Their citizens share a strong belief that hard work will pay off. So, despite conditions that many from developed markets may find challenging, throughout these countries you can hear the upbeat tone in the voices and see the smiles on the faces of people going about their business.
Still, these markets are substantially different in many ways. We venture three differences here to highlight the practical value of this brief:
Countries such as India, Malaysia, Pakistan, the Philippines, and Sri Lanka inherited a legal system influenced by the British system. Some even had exchanges set up centuries ago. Because of their history, their capital markets are more consistent with expectations formed from investing in the US or UK markets. In contrast, Mongolia and Vietnam were part of the Soviet area of influence after the Second World War. Their regulatory systems are now in transition toward Western standards.
The size of these economies varies greatly. Based on data from the World Bank, in 2019, India’s GDP was USD2,875 billion and Indonesia’s was USD1,119 billion. On the other end of the spectrum, in 2019 Mongolia had a GDP of USD13.9 billion and Cambodia of USD27.1 billion. GDP per capita in 2019 ranges from USD1,285 for Pakistan to USD11,415 for Malaysia. This disparity is of course an important consideration for institutional investors because the economy is the foundation of capital markets and the main driver of their growth. Asian economies in general have experienced healthy growth in recent decades, and so have many of the covered countries, other than those that witnessed political turmoil. Consistent with these economic differences, the size of capital markets differs greatly among the 11 countries covered.
Market maturity is an important factor to consider when investing in emerging and frontier markets. More-mature markets offer increased levels of information disclosure and tend to experience less dramatic swings in prices. Where data is available, authors report the share of institutional ownership in a market and other indicators of market maturity.
History buffs may find it easy to understand why in some markets banking channels play a more important role in financing, whereas in others capital markets are more important—although market maturity also has some bearing on this.
The concept of the Asian Century was not without controversy from the beginning. Whether you are a believer or a skeptic, we sincerely hope that this research brief will help you identify new opportunities and navigate risks in the Asian emerging and frontier markets.
About the Editors
Larry Cao, CFA, is senior director of industry research at CFA Institute. He conducts original research with a focus on investment industry trends and investment expertise. Mr. Cao’s current research interests include multi-asset strategies and fintech. He frequently speaks at industry conferences on these topics and has more than 20 years of experience in the investment industry. Mr. Cao started his career at the People’s Bank of China as a US dollar fixed-income portfolio manager. He has worked at HSBC as senior manager for the Asia-Pacific region; Munder Capital Management, managing US and international equity portfolios; and Morningstar/Ibbotson Associates, managing multi-asset investment programs for a global financial institution clientele. Mr. Cao has been interviewed by a wide range of business media, including Bloomberg, CNN, the Financial Times, South China Morning Post, and the Wall Street Journal. He pursued graduate studies at Harvard University and was a visiting scholar at MIT.
Dr. Luis Garcia-Feijóo, CFA, CIPM, is an associate professor of finance at Florida Atlantic University (FAU), where he teaches investments and international finance. He is also a co-founder of Economic Index Associates (EIA), LLC. Professor García has served as associate editor of the Financial Analysts Journal since 2012 (currently serving interim managing editor) and he is also a research director for CFA Institute Research Foundation. Prior to joining FAU, he worked as director, exam development at CFA Institute and was an associate professor at Creighton University. Professor García’s research interests include factor investing, monetary policy and asset returns, and behavioral finance, among others; his research has been published in leading academic and practitioner journals. He is co-author of the book Invest with the Fed: How to Maximize Portfolio Performance Following Federal Reserve Policy. Professor García holds a PhD in finance from the University of Missouri-Columbia. He actively served on the Board of Directors of the CFA Society of South Florida from 2009 to 2014 and has been an active volunteer for CFA Institute since 2009.