Greenwich Associates announced in its 2007 Asian Equity Investors Study on Wednesday that although the rest of the financial world may have been preoccupied with the global credit crisis throughout the summer and fall of 2007, equity markets throughout Asia were in the middle of an unprecedented boom.
According to the study, the amount of commissions paid by Asian institutions on Asian (ex-Japan/ex-Australia) cash equity trades rose 55% to nearly $1.9 billion in 2007 from $1.2 billion in 2006. Over the same period, the average commission rates paid by large institutions on Asian single-stock agency trades declined slightly, with bigger drops reported in rates on electronic and portfolio trades.
“The fact that total commission payments increased so sharply while commission rates were falling illustrates just how strong the growth in overall market activity has been,” says John Feng, consultant, Greenwich Associates.
The firm reports that the growth in Asian equity markets can be partly attributed to the fact that there are more institutions operating in the region, particularly hedge funds. As recently as 2004 hedge funds accounted for no more than 5% of total equity commission payments in Asia. In the past 12 months that figure has jumped to nearly 40%, up from 22% in 2006. Such a formidable hedge fund presence not only drives up trading volume and commissions, but is also spurring growth in low-cost execution alternatives.
The study reports that investors’ primary attraction to Asia is due to returns averaging well into the double digits for virtually all Asian equity markets in recent years. Investor sentiments remained bullish as of the third quarter 2007, projecting average returns of 15% to 20% in the region for 2008, ranging from a high of 20%-plus in China to 14% in Singapore.
“Investors’ interest continues to broaden across Asia,” says Jay Bennett, consultant, Greenwich Associates. “In addition to the major Northern Asia countries, ASEAN markets and India, about 55% of institutions expect to be active in Vietnam within two years, and 40% plan to invest in Pakistan,” he adds.
The study also found that Asian equity electronic trading is enjoying a long-anticipated pick-up in volume. Compared to their counterparts in the U.S. and Europe, institutional investors in Asia had been slow to adopt self-directed electronic trading into their equities business in any significant way. 2007 saw the end of this as institutions executed 11% of their total trading volume through single-stock electronic trades, more than double the share sent to electronic trading systems in 2006.
“Institutions expect to be executing some 23% of their total equity trading volume via self-directed electronic trades by 2010,” says Bennett .
Greenwich Associates found that hedge funds doubled their usage of electronic trading to 20% of their total trading volume in the 2006-2007 period and predict that they will be executing 35% of their volume in this manner within three years. By comparison, long-only investment managers in Asia trade, on average, just 4% of their business through self-directed electronic trades but plan to more than triple that figure to 14% by 2010.
“The growth of e-trading in Asia is now at a pace that is more consistent with other large regional markets such as Europe and Japan,” says Feng. “Clearly the U.S. is far ahead of all other regions in terms of electronic trading adoption. But if institutions’ projections hold, Asia will be at a level that begins to approach where the U.S. is today by the end of the decade,” he remarks.