Abdul Jalil Abdul Resheed
ASEAN Financial Integration
Importance of infrastructure for financial integration
“Besides just looking at ease of buying and selling stocks and the flow of money, a lot of thought must be given into building up an infrastructure behind it. We always think about the ‘front office’, there is a need to think about the middle and back office,” said Abdul Jalil. “There is a lot of process, there is a lot of procedures and hurdles that needs to be fixed. So my view is that we need to be realistic about this,” he added.
Regional, quality companies are driving interest to ASEAN
Abdul Jalil believes that it is the good quality companies who are managing their businesses well that are driving interest in ASEAN. “I think a lot of the interest has been grown by the fact that there are some very well-run companies. Not just from an ASEAN context but from an Asian context,” he said. These companies are quite regional in nature, he added. “You’ve got the likes of CIMB, for example. The UOBs, OCBCs; you know, all regional in nature. So if you can get the investors to think of ASEAN as a grouping rather than just a region where there’s just good quality stocks, that would probably be a good step,” he remarked.
Extracts from the Q&A session
CARI: Today I’m going to ask a series of questions on ASEAN’s financial integration and the process so far, as part of the discussion earlier and your remarks in the plenary session. There are a few sceptics or reservations the panel and yourself had on financial exchange, integration, the ASEAN link and the ASEAN monetary union or single currency. We’d like to hear your views on that.
ABDUL JALIL ABDUL RASHEED: I’m not against an ASEAN integration. I think ASEAN as an economic grouping or a bloc will bring a lot of benefits. What my concern is, is that is has to be very realistic. We need to ask ourselves some questions like “What are we integrating? Are we integrating an economy? A combination of economies? Or are we integrating capital markets?” For this to happen, one point that I made first, yesterday, was that it has to have a strong leader to push this agenda through. And you’re not just talking about any leader; you’re talking about a political leader. As much as we look at ASEAN as an economic bloc, before economics is always politics. Politics drives economy, no matter what you say. So there must be a clear will between the ASEAN leaders that we must do something. And after they have decided, they have to decide what they’re going to integrate.
With regards to financial markets, I think the ASEAN trading link is a right step, is the correct step, but it’s not going to solve the problem. If you look at it, an ASEAN trading link will benefit the smaller investors. If you’re a small investor in Malaysia, for example, and you want to buy a stock in Thailand, then ASEAN Trading Link will be beneficial because you use the same broker who was buying you Malaysian stocks to buy you Thai stocks. Will it change the game for an institutional fund manager? No it won’t because that institutional fund manager already has a relationship with brokers in Bangkok, in Jakarta, in Singapore, in KL. It won’t. So in terms of additional contribution, it will not be large. But it will get more interest in the economy. There was also an idea that has been posted a few years ago about one common ASEAN exchange. And I don’t think this will happen. We have seen this everywhere in the world; SGX and ASX proposed merger is a good example about how nationalistic governments can be. It is a valid, it’s a realistic point. It is not going to happen. Collaborations will happen; but not full-fledged integration.
Besides just looking at ease of buying and selling stocks and the flow of money, a lot of thought must be given into building up an infrastructure behind it. We always think about the ‘front office’, there is a need to think about the middle and back office. It is very, very critical that when you buy your stock —sitting somewhere in ASEAN and buying a stock somewhere else in ASEAN— that you actually get your money within that stipulated days. And there is a lot of process, there is a lot of procedures and hurdles that needs to be fixed. So my view is that we need to be realistic about this.
CARI: On the flip side, do you think the big corporates, or even the medium ones, there are some who have done dual listings between the Stock Exchange of Thailand and SGX. Do you think they have an interest in seeing an ASEAN Exchange?
ABDUL JALIL ABDUL RASHEED: Well I think if they…I think dual listings happen because you want to attract a different investor base. If you look at how many companies dual-list, their dual listing will always take place in different kinds of markets. For example, if you are listed in Malaysia you have the benefit of tapping the money from the Malaysian institutional investors who are very ‘cash rich’. And we have seen that with a lot of the IPOs in Malaysia this year; it’s been oversubscribed. And people ask “Why is it oversubscribed?” Because it’s such a solid, cornerstone investor base. There’s a lot of people ploughing in money into those stocks. But Singapore is a different market. You have a much more international base of investors. So for a company that is aspiring to do a dual listing, they would want to list in Malaysia because they are a Malaysian company, for example, and also maybe tap the more international investor base in Singapore. So that’s usually the logic. And also, listing has become somewhat of a ‘branding’ tool. If you are a Thai company with a large business in Malaysia, there is probably some sort of sense to do a Malaysian listing; if for anything, for branding. So that people are more familiar with the brand and can relate to it. So there’s no one clear answer to why people do it. Some do it for branding, some do it for different investor base and some do it to raise more money from a different market.
CARI: Shifting gears a little bit, there’s been a lot of interest in ASEAN; foreign interest from the United States and China. And a lot of investing money is coming here because interest rates elsewhere are pretty bad. Do you think ASEAN can ride off this sort of momentum? Because the markets here, it was said yesterday, are emerging, undeveloped and frontiered. So there’s a lot of opportunities here; do you think ASEAN can ride off this sort of interest and try to cooperate their exchanges more, in that sense?
ABDUL JALIL ABDUL RASHEED: I would say rather than think about cooperative exchange, I would say in order to attract flows you need to have a proper benchmark – a proper ASEAN benchmark. Again, coming back to the point I made yesterday, about how investors perceive regions, when you go to Europe or the United States, they will always talk about Asia-Pacific Equities, or Asia Equities, or global emerging markets or frontier markets. That’s because the index providers or various firms have come together and put an index; have somewhat merged these countries into one brand – into a brand that’s called ‘frontiered’ or a brand that could be called Asean. Until that brand is not done, it’s very difficult for investors to look at it. Because if you’re an investor looking at ASEAN, you need to create your own index, your own benchmark and that’s a very costly affair. So you’ll say “OK, maybe not. I’ll just invest in Singapore, or Indonesia or Malaysia rather than ASEAN”. So there needs to be more done on creating that ‘brand’ ASEAN, at least from a benchmark perspective.
In terms of money coming in, there’s much much more interest. I would put the interest down to the fact that ASEAN was the worst-hit region 15 years ago, at the Asian financial crisis. And one thing that we did well was we learned from our lessons. So the banks have gone from being very over-geared have become very conservative, risk-averse but they have grown; and they have grown sensibly, rather than haphazardly. And we find very good quality companies here that have decently managed their business. So that is what is driving interest in ASEAN; because of the quality of companies not really the region. Of course there are some investors who are attracted to the macroeconomics story of Indonesia, for example. But I think a lot of the interest has been grown by the fact that there are some very well-run companies. Not just from an ASEAN context but from an Asian context. They are not just country-centric companies; they are quite regional in nature. You’ve got the likes of CIMB, for example. The UOBs, OCBCs; you know, all regional in nature. So if you can get the investors to think of ASEAN as a grouping rather than just a region where there’s just good quality stocks, that would probably be a good step.
CARI: Right. Let’s go back to the benchmark you were talking about. The lack if an ASEAN benchmark, do you think then that ASEAN should produce one? This also works with credit rating agencies. It’s been said that the current agencies are a bit biased towards ASEAN, so it’s extra low. So when the sovereign ratings cap –the corporate ratings- it damages how the region is perceived. Then do you think ASEAN should get together and produce this benchmark, produce their own credit ratings?
ABDUL JALIL ABDUL RASHEED: Yes, I think they should. They should think about that quite carefully and perhaps give it more thought. It will probably make a lot of sense to do something like that. Of course not all fund managers swear by the benchmark. We don’t, as fund managers. We tell investors we are ‘benchmark aware’ but not ‘benchmark driven’ fund managers. But benchmark is the tool used to measure you. It is the tool used to say this is where I’m going to invest and these are the countries I’m going to be invested in, and these are the investible stocks. So when you have established that, it becomes very easy for the investor to buy into the idea. So yes, we should.
CARI: Good to hear. And it could even be driven by corporate and political leadership. You mentioned quickly about Indonesia’s macroeconomics growth story and that has been dominating headlines before. And there’s also growth now in Indonesian private equity. My question is, is this sustainable? Will it continue to grow? And how does it look throughout the rest of ASEAN in terms of fund managing and new PE firms popping up?
ABDUL JALIL ABDUL RASHEED: We like to look at investments from a bottom-up perspective rather that looking at it from a top-down, macro perspective. Indonesia’s macroeconomic story has been phenomenal, the last two years. But Indonesia has problems on the ground. Being bottom-up fund managers we kick the tyres, we’re on the ground two, three, four times a year visiting companies. And the reality of it is that Indonesia needs to do a lot of work on the ground. Rule changes for example, infrastructure -the country is in chronic need of infrastructure. That needs to be addressed as well.
With regards to the PE firms popping out, well PE are PE and their job is to suss out investments at a very early stage and cash-out later. Indonesia is a great market for these PE companies. But we look at it from a bottom-up perspective. Indonesia needs to do a bit more work. There is probably a bit of disconnect between the macro and micro story in Indonesia. You get a very nice economic story of nice growth, middle-class population that is growing, people are getting richer. But on the ground, you see there are still perhaps issues on governance, for example. There are still issues on land laws. And issues on how the division of power between the federal and provinces are. So you know those are some of the challenges.
CARI: I guess this can be said about other countries. Thai political risk premium was mentioned yesterday. I guess it can be said about all the countries.
ABDUL JALIL ABDUL RASHEED: Yes, but there is one common misconception that a lot of investors or clients make is that they think there is a correlation between GDP and stock market. There is absolutely no correlation. Studies have shown it and we’ve done this internally as well, to show that when the market rises, that doesn’t generally lead to GDP rising and vice versa. So you will get countries like Germany, for example, is classic example of a country with good stock market growth but poor GDP growth. And then you get China, with a good GDP growth with a poor stock market growth. So there is no correlation there.
CARI: Thank you for taking your time to speak with us today.