Asian Equities: Soaring Returns, Surging Trading Volumes - And More Growth Ahead?
( Greenwich Associates )
(February 20, 2007)
Tuesday, February 20, 2007 Greenwich, CT USA - Buoyed by outsized returns and driven by an influx of hedge funds, equity market trading volumes surged throughout Asia in 2006, and institutional investors remain bullish about the region's prospects for the coming year.
Greenwich Associates' 2006 Asian Equity Investors Study reveals that the amount of equity commissions paid by institutions based in Asia to brokers on trades of Asian (ex-Japan) shares jumped to $1.2 billion last year from $900 million in 2005. At the same time, equity commission rates remained largely unchanged for the market as a whole, though the region's largest and most active traders managed to squeeze their average commission rates lower.
"The fact that overall institutional commission payments rose so sharply while rates were flat or falling indicates that trading activity increased dramatically last year," says Greenwich Associates consultant John Feng. "Since our data shows that institutions expect robust market returns for 2007, there is widespread optimism that this growth will continue over the coming 12 months."
Nearly one quarter of the brokerage commissions paid on cash equity trades of Asian shares last year were generated by a relative newcomer to the region's stock markets: hedge funds. "As recently as 2004, hedge funds accounted for no more than 5% of the total institutional commission spend in Asia," says Greenwich Associates consultant Jay Bennett. "The increasing presence of hedge funds is influencing regional equity markets in several important ways. In addition to driving up overall trading volumes and commission payments, hedge funds are also affecting sell-side strategies in Asia through their preferences and spending patterns, and could help speed the spread of electronic trading throughout the Asian countries."
A Boom in Equity Returns and Commissions
Institutions in Asia have historically taken a cautious approach when it comes to setting their expectations for equity market returns. Typically, institutions have reported expectations in the 8% to 9% area for most regional markets, topping out at 14% to 15% for the markets they viewed as the strongest. For the past several years, actual stock market returns have often proven that Asian institutions have erred on the conservative side. "After multiple years of this pattern, institutions are much more bullish this year," says John Feng. "Expected returns for 2007 range from a high of 22% for Singapore and Hong Kong to a robust 18% for China and India."
As equity trading volumes rise in step with this robust performance, Asian institutions are altering their own practices in order to keep up. The typical Asian institution has expanded the number of research providers it uses from 14 in 2004 to 15 in 2005 to 17 in 2006. Over the same period, the average number of brokers used for Asian equity trading rose from 15 to nearly 17 between 2004 and 2005 and jumped to 20 this year.
Hedge Funds Drive Growth in E-Trading
Hedge funds are at the forefront of electronic trading adoption in Asia. These funds currently execute 9% of their Asian-share trading volume electronically and expect that share to jump to nearly 30% by 2009. Nearly half of hedge funds now use some form of electronic trading strategies (as opposed to 34% of Asian institutions overall), and hedge funds that do so direct 19% of their total trading volume electronically (as opposed to just 14% among all users of electronic trading.) Looking ahead, more than 85% of hedge funds expect to be using electronic trading strategies for 33% of their overall trading business in three years' time.
"Hedge funds are staffing up in Asia, and in many case they are transplanting traders from New York or London to Hong Kong or Singapore. Those who have been accustomed to trading electronically will naturally pull some electronic knowledge into the Asian marketplace," says Greenwich Associates' hedge fund specialist Karan Sampson.
Despite the current modest use of electronic trading, other Asian institutions are likewise quite sanguine about the direction in which the channel is headed. Overall seventy percent of Asian institutions expect to be using self-directed electronic trades by 2009, and expected users plan to be directing a quarter of their trading volume to these systems by that time. Sixty-three percent of institutions overall expect to be using algorithmic trading strategies for 16% of total volume within the next three years. "Taking into account expectations for growth in these systems and portfolio trading, Asian institutions predict that the share of their trading volume executed through traditional 'high-touch' trades will decline to just 72% by 2009," says John Feng.
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