Impoverished Myanmar wants its own stock exchange. Cambodia’s just started trading its first local stock. It’s not clear either country should bother. Creating a national bourse, once seen as a must-have for any developing country, is counterproductive in a world of borderless investing. Markets too sleepy to lure foreign capital, or give local savers stable investments, can hurt development more than they help.
Take Vietnam. Twelve years after opening, the Ho Chi Minh Stock Exchange has almost 250 stocks with a total $31 billion market capitalisation. Hong Kong added that much in new listings in 2011 alone. Foreign funds often avoid such small markets, since their trades cause huge price swings, which means liquidity is thin. Trading in Ho Chi Minh remains paltry, and citizens don’t see it as a home for their investments. They favor property, gold and U.S. dollars over equities.
That hasn’t stopped Mongolia, Cambodia or Laos, whose two listed stocks have a combined market capitalization of just $640 million, according to Vietnam-based brokerage Dragon Capital.
Exchanges can achieve economies of scale in small, rich countries, like Singapore or Hong Kong. They can also work in big, poor countries like India. But for small, poor economies, there is little point. Low liquidity makes trading more expensive, so stocks on smaller markets tend to trade at a discount to those in larger markets. Electronic trading has also made physical bourses less relevant. Mammoth exchanges like NYSE Euronext are moving toward borderless operations.
Myanmar and other emerging economies would get more from sending companies and investors to larger exchanges nearby. Singapore would be an obvious target. It not only offers a larger pool of capital, but sophisticated mechanics and regulation. Other regional exchanges, like Kuala Lumpur, Bangkok, Manila, Jakarta, Ho Chi Minh and Hanoi – already have plans to link trading to Singapore, to foster greater economic integration.
The trend towards bigger regional pools of capital is likely to continue. Assuming it does, building local backwaters is a rite of capitalist passage Asia’s smaller economies can afford to skip.