Major hurdle of blockchain/crypto tech is integration into orthodox capital market structures: Oriano Lizza, CMC Markets
Oriano Lizza, a Singapore-based sales trader in Singapore with financial derivatives dealer CMC Markets, shares his perspective with Venture Views on: the effect of the US-China trade war on capital markets; the impact of greater connectivity among stock markets and its effect on liquidity; as well as the role of blockchain and cryptocurrency on capital markets.
Amid growing supra-regional and international competition, the SGX is riding a derivatives boom. Asked what was required to deepen and sustain the strength of this particular element of Singapore capital markets, Lizza noted that this increase — specifically in the last quarter — was rooted in increased market volatility.
This has necessitated “diversified risk management related investments to come to the forefront of institutional investors’ portfolios”, while also driving investors away from traditional investments such as equities and fixed income.
In order to mitigate this, Lizza notes that “continued partnerships with global financial exchanges” are vital in increasing the global footprint of the SGX, as well as its exposure to international product offerings.
Meanwhile, with the US-China trade war affecting regional capital markets, even as Asian markets and ASEAN pursue their own trade agreements, Lizza observed that ASEAN is the “most sensitive and exposed region to the U.S. — Sino trade wars”, which has seen obvious impacts on the performance respective benchmarks across stock markets in the region.
He shares: “This could continue to impact the bourses within the region in the short to medium term. Continued attempts to establish free trade agreements in the interim such as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and Regional Comprehensive Economic Partnership (RCEP) have found traction.”
“Additionally countries with multiple locations have begun to move aspects of manufacturing to their locations, which are not impacted by the tariffs. An example of this is Toshiba Machine Co and Mitsubishi Electric who have moved operations to Japan/Thailand.”
“These agreements will limit the downside to capital markets as the performance of these major entities will be somewhat protected but the general slowdown of global growth is the overarching problem,” he adds.
Stock market links
In a June 2018 exchange with Singapore Business Review, Lizza discussed the impact of the suspended Bursa Malaysia (BM) — Singapore Exchange (SGX) trading link.
Revisiting this development — the link was supposed to come into play by the end of 2018 — Lizza observed: “The trading link hasn’t managed to gain any further momentum in terms of its resumption. The MAS has questioned Securities Commission Malaysia to clarify its position on the matter as far back as June without response.”
“The only vague deadline that has been provided points towards the end of the year, which is fast approaching. Since putting SGX under review Bursa Malaysia has been strongly linked to the wider ASEAN region, with Malaysian Finance Minister Lim Guan Eng citing opportunities for better market capitalisation opportunities with the wider region and not just Singapore.
Notably, despite the ASEAN Trading Link being discontinued in 2017, KL seems more interested in an ASEAN Connect. Lizza notes this as an intelligent move, particularly when accounting for the growth of the bourses in emerging economies like Vietnam and Thailand.
Beyond it sidelining the SGX-BM link for the foreseeable future, he argues that it could “propel the region into the spotlight against its U.S. and European counterparts” due to the room for growth being expansive.
Meanwhile, in July 2018, discussions between the National Stock Exchange (NSE) and SGX restarted. With reference as to who has the upper hand in negotiations — the NSE is reportedly working on a structure to resolve the matter — Lizza opines that the NSE is set to lose out more than the SGX should the proposed agreement go ahead, explaining: ”Outside of the obvious clearing capabilities of the SGX, the liquidity migration from the offshore Gift City set up is a concern for the NSE, which is the primary reason it removed access from all international bourses.”
“This particular move along with the pending court case comes as a defensive move from the NSE, who are exhibiting signs of a defeatist attitude. Advocates against the ban such as the MSCI announced that an emerging superpower should always be open for business and that its countries classification could be at risk unless the measures were removed.”
Stock connectivity playbook
With the establishment of the London-Shanghai Connect — argued to be a symbolic development rather than a substantive one in terms of market — it also is a risky exercise, particularly for the London bourse.
Commenting on its possible progression and structure, which will see large-cap firms permitted to issue global depositary receipts (GDRs), Lizza highlights that obvious issues emerge from the “time zone and the likelihood of access to one another’s exchanges”.
“I am sceptical of the amount of uptake as it seems there are very specific companies that can really benefit from the partnership major concern for the Chinese capital markets will possibly be the capital outflows, which could further enhance poor benchmark performance for indices from the mainland.”
“As there is already a connection in place between the UK and Hong Kong, I’m not convinced the uptake will be substantial. The major hurdle will be the current capital controls and whether this will help large Chinese companies shift capital outside of the country remains to be seen.”
“The use of GDR’S as the main form of investment limit the offering to a small number of companies and make barriers to entry are very high. Not to mention the highly levered environment with Chinese corporates as well as a rising rate environment,” he adds.
In relation to the SGX’s own pursuit of international partnerships — whether via trading links vis-a-vis the suspended SGX-BM Connect and stock connects structured after the London-Shanghai Connect —Lizza sees the Singapore bourse as being focused on building a network of small-scale exchanges it deepens collaboration with and benefits both retail and institutional investors.
“Looking at SGX-BM Connect first, the pre-existing history between previously attempted partnerships definitely puts this proposition on the back foot. The red tape surrounding the SGX-BM partnership seems a lot less than that of the London — Shanghai Connect.”
“With BM as an emerging market, I applaud the aggressive approach within the ASEAN region. I can’t say the same for London-Shanghai connect, where the limitations to purely institutional investors substantially reduce the exposure to the blue-chip stocks of the respective countries.”
He adds, “From a bourse perspective, It can’t be dismissed. London and China are superpowers of the global economy. And based purely on reputation, the bourses will be enhanced. The SGX-BM [partnership] is taking a different tact by establishing a larger array of smaller-scale relationships with local and international counterparties to establish their footprint. From an investment standpoint, the SGX-BM takes on a more ‘close to home approach’, which encourages a mix of institutional and retails investors.”
Meanwhile, as London seeks to retain is financial hub status amid Brexit uncertainty over Brexit, it is already seeing the effects. BrokerTec, considered to be Europe’s largest short-term financing market — it traded US$240 billion of short-term finance instruments per day in October — is relocating to Amsterdam.
Additionally, the stock market link to Shanghai sees London coming off at a disadvantage. WSJ notes that under existing stock markets links between Hong Kong and the bourses of Shenzhen and Shanghai, overseas investors are already able to trade Chinese shares via counterparties in Hong Kong. Meanwhile, mainland Chinese investors can trade Hong Kong stocks within certain daily quotas.
By comparison, the London-Shanghai link permits U.K.-listed large-cap firms to issue Chinese depositary receipts (CDRs) based on existing shares in Shanghai, which in turn permits these Chinese companies to issue GDRs based on both new and existing shares in London.
There is also the question of investor appetite and interest; there is seemingly minimal appetite among Chinese investors for British stocks and vice versa. While British firms may arguably explore issuing shares through the London-Shanghai Connect as move as a marketing exercise, they arerestricted in their ability to raise capital. In comparison, Chinese enterprises can raise funds in London without similar constraints.
Commenting on whether stock connects with Hong Kong, Singapore or Sydney made more sense given the current geopolitical and market volatility worldwide, Lizza opined: “Taking London’s current situation and political instability into consideration, a Shanghai link increases their risk exposure. Many see a connection to China as a benefit but its current susceptibility to trade wars leave it overexposed.”
“In the short term, a connection to one of the aforementioned countries could be a safer move. However, one thing to consider is their exposure to the world’s second largest economy and the immediate impact. In a July 2018 OCBC report, ”Trade tariffs & its impact on ASEAN”, both Singapore and Hong Kong featured heavily with respect to their exposure to China.”
OCBC research noted: ”While Myanmar, Laos and Vietnam are most dependent on China for trade, China’s closest neighbours, namely Japan, Korea and Hong Kong, are most vulnerable to a US-Sino trade war because they export mostly intermediate goods to China.”
SGX strategy, tech listings & liquidity
At a higher level, the Hong Kong Stock Exchange (HKEx) is often compared to the Singapore Exchange (SGX), both of which possess different strengths. However, the rivalry has heated up following comments earlier this year.
One perspective is that the SGX is ‘more than a securities market’, pursuing a long-term multi-asset strategy and partnership strategy that is has the potential to bear fruit in the coming years.
Since forging a co-listing partnership with the NASDAQ in October 2017 that permits companies to explore serial and concurrent initial public offers (IPOs) on these bourses, it has inked similar collaborative listings with the Tel Aviv Stock Exchange (TASE) and New Zealand Exchange (NZX).
Lizza observes: “I must commend the manner in which the SGX has taken more of a strategic approach to its offering. One argument that can be forged and is regularly raised is the lack of liquidity within the STI or example. This leads to a lot of equity and IPO’s looking to more active indices such as the Hang Seng. “
“The risk that the SGX runs is that it becomes a ‘Jack of all trades master of none’ whereby it does not specialise and attract the types of deals currently on its books. A major win for Hong Kong markets is last year’s 17 companies based in Singapore that decided to go public in Hong Kong instead Singapore.”
“The international partnerships mentioned are key in establishing that global footprint but like previous connect discussions a concern is that liquidity completely dries up to other countries exchanges,” he adds.
Liquidity — a perennial concern among stakeholders of Singapore’s securities market in recent years — saw the Singapore Business Federation (SBF) call for the use of capital from the city-state’s pension fund, the Central Provident Fund (CPF), in its 2016 position paper, “Position Paper for a Vibrant Singapore”.
Bursa Malaysia has liquidity underwritten in part by the Employees Provident Fund (EPF). Moreover, the Japanese government pension fund and Bank of Japan have significant equity allocations for index funds in their equities market, while Australia’s stock market is underwritten by a $2.5 trillion superannuation pool.
In an interaction with The Edge Markets earlier this year, James Posnett, ASX Ltd’s senior manager of listings business development, credits this growth in tech listings and the proliferation of small-cap and mid-cap floats to US$2 trillion under management there in the pension market — the fourth largest pool in the world after the US, UK and Japan — which grew following Canberra mandating compulsory superannuation in 1992.
The majority of this is allocated to ASX-listed stocks. In comparison, the total market capitalisation of listed companies on the ASX was estimated at A$2 trillion in August 2018.
However, despite its emergence as the ‘Nasdaq of the Asia Pacific’ and robust growth of its tech sector, unicorns like Atlassian still seem to prefer New York and its more established bourses (i.e. NASDAQ and NYSE).
This wave of tech listings has also seen the ‘land-grab capitalism’ of Silicon Valley — where investors tolerate losses to drive market share growth , as in the cases of Uber, Alibaba and Airbnb — spread to the ASX investment community. For instance, despite questions of Uber Technologies ever making a profit, investors continue to display an appetite for loss-making tech stocks, with Amazon being the best example.
Posnett says, “The selling point of ASX is really small and mid-cap tech companies, and by that, I mean those with a market cap of US$1 billion and below. If you look at companies in that size range and do a [comparison] with those on Nasdaq or other markets, we actually stack up extremely well in terms of liquidity and valuation.”
In an interview with Venture Views, Tham Tuck Seng of PWC Singapore’s Capital Markets had opined: “Perhaps from the government’s perspective, they wish for the market to find its own equilibrium, rather than relying on being underwritten by public funds.”
According to information from Willis Towers Watson, Singapore’s sovereign wealth fund GIC (US$359 billion), pension fund Central Provident Fund (US$269.1 billion)and state investment firm Temasek Holdings (US$230.3 billion) are among the top 20 global asset managers as of 2018. Meanwhile, its central bank, the Monetary Authority of Singapore (MAS), has official foreign reserves reported at US$398.06 billion as at September 2018. Cumulatively, the Singapore government has access to at least US$1.256 trillion in assets, based on publicly available information. At least a portion of this could be allocated to supporting the local securities market.
Lizza suggests that the government’s rationale — the Singapore government adopts a conservative approach to managing its reserves — may be centred on “concern over clients’ money and the risk profile of citizens money”.
“Unlike the Australian stock market where the superannuation makes up a large percentage of holdings on the ASX, the Singaporean government internalises a lot of its investments through government funds GIC and Temasek. The government seems intent on not over-investing in riskier assets, with a concern that the population is ageing,” he elaborates.
Noting the case of the United Kingdom, where the pension pool is diminished and the government continues to increase the age of retirement and access to pension funds, Lizza says, ”This is not to say that CPF is not invested. A protectionist approach was outlined whereby the government pools all of its funds from CPF, Special Singapore Government Securities and land sales in order to create a buffer in front of CPF should returns diminish.”
Blockchain & cognitive tech in capital markets
In the technology domain, Lizza notes the technology partnership between the Nasdaq, SGX, Deloitte and MAS, which will utilise the blockchain for settling tokenised assets, as well as its links to Project Ubin — placing the Singapore Dollar on the blockchain — will encounter friction as capital market participants adapt to its integration in their business operations.
“Adaptability of the technology has been the longstanding argument ever since cryptocurrency burst onto the scene. This is the focus of the MAS; for long periods now the government and linked authorities have been pushing to be a leader globally in the Fintech space. It’s focused on streamlining payments. The major hurdle it will face is whether capital market structures and its participants are willing to integrate the technology.”
Lizza notes that attempts to integrate the technology into “a very rigid and longstanding structure” will have doubters, especially as concerns over the validity of the technology remains untested. However, he believes that the Delivery Vs Payment solution suggested in the partner will assist in faster settling of payments for security transactions.
Another aspect of the blockchain likely to affect capital markets is the growth in the trading volumes of the Ethereum (ETH) cryptocurrency, which has grown to rival the trading volumes of major stock exchanges.
Despite the potential of crypto-tokens to be integrated into firms, as well as the benefit of increased liquidity to issuers, Lizza remain skeptical of incumbents tapping this and integrating them into traditional market structures.
He says, “It really requires the backing of legitimate partners and reputable companies before people are willing to integrate the technology and in this case the liquidity. The transparency would be one of the biggest selling points to investors but the structures we have in place as it stands I feel keep the banks and exchanges in control. OTC and Dark Pool liquidity set ups always give the upper hand to the market maker. In a nut shell I see it as a power struggle which the current incumbents aren’t willing to give up on.
Commenting on the use of automated reporting on financial earnings — an aspect of cognitive technologies slowly transforming capital markets —and its ability to augment stock coverage and market liquidity, Lizza notes: We cannot ignore the impact that AI is having on a number of industries including the financial sector. The main issue as already discussed is the lack of liquidity, which was reported increased by 11% on average.”
“We must look at both sides of the coin and from a trading perspective allowing a robot to make investment decisions can lead to catastrophic outcomes in the case of algorithms. Taking this approach allowing AI to produce financial statements obviously increases productivity but a question of accuracy remains to be seen, especially if the effect is so significant in terms of average traded volumes.”
“Asia is a chief adopter in the AI space so I feel that opportunity would be plentiful within the reason, but similarly to blockchain it requires buy-in to implement.”
Also Read:
Tech sector to see significant competition in APAC capital markets: Tham Tuck Seng, PWC
The London-Shanghai Stock Connect: A Risky Proposition
AI’s and algorithms still can’t beat humans in a fundamental analysis: Alex Frino
Analysis: Greater automation, stronger ETF cluster will augment SGX’s prospects
