Asian liquidity rebounds from summer lull

Liquidity returned to Asian markets in August, marking a departure from what had looked like a traditionally quiet summer period when agency broker ITG's monthly Asia Pacific Liquidity Barometer dropped by around 15% in June.
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Liquidity returned to Asian markets in August, marking a departure from what had looked like a traditionally quiet summer period when agency broker ITG's monthly Asia Pacific Liquidity Barometer dropped by around 15% in June.

Based on preliminary figures, the ITG's index of liquidity levels across the region's equities markets was up by an average of 5% on a monthly basis in August and flat compared to August 2009, due to higher turnover that rose 4% from July (although 13% down from August 2009 levels). Japan was the exception with average daily turnover dropping through the summer to just below US$14 billion, its lowest in 12 months, on the back of the yen appreciation.

“June and July were extremely low in terms of turnover in a lot of the markets, such as Australia and Hong Kong because investors were sitting on the sidelines with the markets directionless, moving back and forth. It's now becoming harder to sit on the investment sidelines and people are starting to come back in so we're seeing an increase in trading activity,” said Ofir Gefen, ITG's head of analytical products and research, Asia Pacific.

Nevertheless, Hong Kong recorded relatively weak turnover in August with daily average of US$5 billion, down 24% from August 2009 levels but 10% higher than July's levels.

ITG's latest Asia Pacific Liquidity Barometer also incorporates new research showing net trading inflows of US$258 billion and US$48 billion into Asian equities in 2009 and 2010 to-date respectively. Fund managers have also been net buyers of US equities throughout the same period. In contrast, Europe experienced net equity trading outflows of US$41 billion and US$10 billion in 2009 and 2010 respectively due to the slow rate of recovery from the global financial crisis.

The figures indicate significantly more buys than sells of regional equities during the period, with Asia Pacific experiencing the largest ongoing net acquisition of equities through 2010.

“In Asia, it definitely looks like new money is coming into equities,” added Gefen. “In Europe, you've got net outflows. We're not measuring all the funds across the whole universe, but we believe it is a good proxy covering a universe of more than US$14 trillion of turnover and representative of what's been going on, given the economic climate.”

ITG's global peer universe of trading data incorporates information from more than 200 large fund managers and measured more than US$14.6 trillion of equity trading activity between January 2009 and August 2010.

Initial data for July-August also shows a slide in weighted average transaction costs (as measured against an implementation shortfall benchmark) across the region from 51 basis points in June to 34 bps in July and 47 bps in August. While the pronounced fall in July seems to be an anomaly, the downtrend trend in transaction costs remains intact. In the summer of 2009, weighted average transaction costs were around 60-66 bps. The July-August data is subject to revision but based on trading activity for these two months, Q3 2010 transaction costs are currently notably lower across the markets covered by the data – Australia, Hong Kong, Japan, Singapore, South Korea and Taiwan.

“Over the longer term, we're seeing trading costs continuing to trend down gradually in Asia Pacific,” said Clare Rowsell, ITG's head of client relationship management & marketing, Asia Pacific.

In Australia, changes in regulatory structure resulting in the impending entry of Chi-X Australia, the launch of ASX's low-latency platforms and introduction of new order types already appear to be having a positive impact. Trading costs have so far dropped to 20 bps in Q3 against 31 bps in Q2.

The introduction of Arrowhead in Japan, entry of Chi-X Japan and reduction in tick sizes earlier this year have also helped to promote a more competitive environment and contributed to a reduction in trading costs in Japan. After a steep rise to 50 bps in Q2 2010, trading costs have fallen to 28 bps so far in Q3, reestablishing the downward trend apparent in Q1, when costs fell to 31 bps from the previous quarter's 48 bps.

“We've seen some of the alternative venues in Japan starting to pick up slightly in terms of volume,” noted Rowsell. “Overall it's still quite small in terms of overall Japanese market share but some of the alternative exchanges say they are doing more than 1% of total market share for the first time. Volumes across all these alternative exchanges are rising as new venues are coming in.”