Asian GDRs in fashion, LSE says

Asia’s presence on the London Stock Exchange has grown to one third of its international offering – and there is no sign of a slowdown, according to LSE’s head of equity and derivatives markets, Nicolas Bertrand.

Asia’s presence on the London Stock Exchange (LSE) has grown to one third of its international offering – and there is no sign of a slowdown, according to LSE’s head of equity and derivatives markets, Nicolas Bertrand.

The exchange has 600 stocks from 115 countries listed on its International Order Book (IOB), trading almost US$1 billion of value a day, with 200 of the global depository receipts (GDRs) being Asian.

“This sector of the market is developing,” Bertrand said. “If you look at the IOB most of the trading activity in the past few years has concentrated on Russian stocks. 

“What we’ve seen in the last year is that it’s becoming more diversified and the Asian stocks are increasing in trading volume.”

Bertrand said Asian GDRs weren’t as visible in the past, but the LSE has been actively promoting the IOB in Asia. He also highlighted the re-birth of the initial public offering (IPO) business.

“Over the last two or three months, we’ve been doing three or four IPOs a week,” compared to about one a week before then, he said. Taiwanese shipping company Wisdom Marine Lines was the tenth and most recent Asian company to list at the LSE this year, coinciding with the exchange’s Asia Capital Markets Day last week.

Bertrand said GDRs, a listing of a foreign company on the LSE in US dollars, gave investors the opportunity to trade Asian shares, while using London’s infrastructure and market.

“The IOB provides efficiency, lowers your cost of trading and it could also be a way to arbitrage different markets.” 

Bertrand said London was perfectly located between Asia and the US, allowing investors to take advantage of trading Asian and American stocks at the same time. 

“Samsung is the most evident case,” he said. “[Volume] is up 53% in the last two years and it’s trading 15% of its volume globally on the London Stock Exchange.”

He said there has been a lot of appetite recently, pushing the South Korean company’s GDRs into the top 50 most-trades stocks listed on the LSE, alongside local giants such as Tesco and Vodafone.

Investors wanting to do a Samsung-Apple arbitrage are driving the increase, Bertrand said. “The exchange is open in London and Apple is available in the US, so there are a couple of hours of simultaneous trading. It has been particularly active in the first quarter of this year.” 

Still relevant

However, speaking at LSE’s Asia Capital Markets Day, Hamish Crumley, head of global emerging markets sales trading, Europe, at Barclays, said overall GDR volumes are lower than in the past due to the number of global asset managers that have set up shop in Asia.

At the LSE, the IOB reached a high of more than US$35 billion turnover in August 2011, but has since fluctuated and was about US$15 billion in October 2013.

“They’ve become more international and their funds invested in Asia have grown significantly as a result of trading directly into the region – a lot of European firms having trading desks in the region,” Crumley said.

“The ability to sort out qualified foreign institutional investor status or local status in India, Korea and Taiwan, is now significantly easier.”

Regardless, Crumley said he believed GDRs were a great option for not only institutional investors, but also arbitrage and retail investors.

Stanislas Beneteau, global head of GES/DR Sales at Deutsche Bank, said there was strong growth in liquidity and investment in the GDR business, driven by investors’ diversification of portfolios.

“We still see GDRs as an extremely convenient tool for global investors for many different reasons, including convenience, time zones, and economies. The GDR is very much a viable instrument.”

Further growth

The LSE’s Bertrand also expects to see further growth in the Asian derivatives market, although the exchange has yet to complete plans to expand.

“With regards to Asia, I’m more focused on the equity cash market at present because that’s were we see demand come from.” When it comes to derivatives, Bertrand said the exchange is more focused on Russia, where it already offers trading in Russian derivatives.

“But we’re looking at and working on Asia. We see potential there because if trading activity develops in the underlying cash market, then there will be a need for derivatives as well,” he said.