The increase in investment into Asia naturally led to greater emphasis on the region's economic fundamentals. Many overseas institutional investors, especially those from Europe and the US, almost always purchase stocks on the basis of fundamentals. Further, stock price movements correspond to the activities of foreign institutional investors. However, another concern of investors regards conditions other than the actual purchase of stocks. For example, emphasizing fundamentals means that it is essential to have information to evaluate, so research becomes important. Moreover, investors want to be sure that proper settlements of accounts and deliveries of shares occur in rapidly moving, fluid markets once sales are made. Reform of securities transaction systems, nurturing of securities brokers, and fluid creation are keys to attracting foreign investors.
The expansion of the stock market accompanied preparations for the market's institutionalization. The countries of Asia looked to build systems that would use market mechanisms to further economic growth, and one of the principle means was stock markets. The reform of stock markets was speeded by the strong influence of policymakers. The first step in reform was preparing the markets' hard systems, but computerization of exchanges developed quickly, not through the country's autonomous development, but through the purchase of system packages. Figure 1 outlines the market preparations conducted in the three countries. From the late 1980s through the early 1990s, automation of transactions and development of settlement of accounts systems were completed in new systems that surpassed those of Japan, and work on electronic transactions is also progressing.
An important feature of stock markets in every Asian country is the speed of their development. One reason for this rapid pace is the backing of policymakers, whose projects are implemented in top-down fashion. Another is that computerization can be achieved at relatively low cost by using existing foreign technology. System packages can be purchased, for example, and there are numerous personnel who have been trained overseas. Moreover, overseas investors and securities brokers have had great influence.
The strategy of overseas institutional investors is to spread their investments globally. They resolutely pursue this strategy in order to make efficient use of limited capital. What is important here is fundamentals. Through their active investment, Western institutional investors have purchased a share of the economic growth capabilities of Asia. Domestic investors in Asia tend to be individuals while domestic institutional investors do not function as institutional investors, so a situation is created where it is difficult for stock prices to reflect fundamentals. The increasing participation of overseas institutional investors in securities markets will exert a positive impact on stock price formation.
The increase of foreign investors will bring a very welcome inflow of foreign capital, but there are dangers if certain limits are exceeded. One is that foreign capital is free and unpredictable. Pursuing profits with their capital, overseas institutional investors frequently shift investments, and those shifts can be expected to bring severe price fluctuations to the small stock markets of Asia. Another concern is that increased investment from overseas can end up shifting control of domestic firms into foreign hands. For this reason, even Singapore, where restrictions are few, has established limits to foreign ownership of shares in some firms. There are limits to foreign ownership of 30 percent in Malaysia and 49 percent or less in Thailand, and in both countries even lower limits may apply in the case of particular firms. If foreign investors reach the ownership limits, shares in those firms are traded on floors restricted to trading by foreigners, and premiums are often charged. The limits on foreign ownership are effective.
Because of the importance they place on fundamentals, overseas institutional investors do not just amass and analyze information on their own, but evaluate research as well as purchasing and selling capabilities when they select securities brokers. In Asia, where securities markets are still developing, local securities brokers are still small-scale and have limited research capabilities. The advance of overseas investors has exerted a strong impact on securities brokers. The demands of overseas investors for research brought a strong response from overseas securities brokers experienced in gathering and analyzing information. However, there were limits to the degree to which foreign institutional investors could participate in local markets, and in Malaysia and Thailand it was not possible for foreign securities brokers to serve as members of stock exchanges because of the restrictions on shareholdings. In Singapore, however, seven companies (four of them Japanese) participate in the stock exchange as international members.
Figure 2 shows the responses of overseas institutional investors to a survey asking them to evaluate the research and trading abilities of securities brokers for the Singaporean, Malaysian, and Thai stock markets. There have been a number of surveys of this type conducted but the important feature of this one is that American and European securities brokers occupy the top levels of the rankings. Although Japan's big four securities firms have joined the stock exchange in Singapore, no Japanese brokers appear in the top rankings of that country.
Because overseas securities have superb research capabilities to meet the demands of large investors, they have, by working through local brokers, come to conduct much of the securities business. This process has furthered the growth of local brokers and promoted the development of research departments in the major securities brokers. The growth and maturation of the securities brokers has promoted the production of information on the stock market as well as the efficiency of its dealings. This will bring improvements to pricing in the stock market.
Overseas investors welcome the development of the securities markets of Asia because the advance of the overseas institutional investors expands the possible frontiers for their global investment strategies. On the other hand, viewed from the standpoint of local markets, the influence of overseas institutional investors has negative as well as positive aspects. However, at the present stage, the Asian economies are continuing to grow steadily, and rapid shifts of capital are not occurring, so the more negative aspects are not very evident. On the contrary, based on the rapidly developing stock markets' hard systems, the participation of overseas institutional investors has brought both quantitative and qualitative development of stock markets. The overseas institutional investors' global investment strategy of emphasizing fundamentals has rendered pricing in stock markets more efficient. The growth of overseas institutional investors fostered the expansion of the securities business, but it was the overseas institutional investors who closely matched the demands of overseas institutional investors. Commanding a wealth of experience of informational capacities, they are able to compensate for the weaknesses of the local securities brokers. In this manner, local securities brokers steadily honed their capabilities. However, this was also a result of the restrictions placed upon the market participation of overseas institutional investors and overseas securities brokers. The restrictions on institutional investors and on securities brokers slowed the penetration from overseas, and made possible the domestic nurturing and growth of the domestic securities businesses. However, there are concerns about the international competitiveness of domestic institutional investors and securities brokers during a time when the domestic markets are expanding and demands from overseas for liberalization of stock markets are growing stronger.
Finally, let us examine the kinds of activities being by Japanese institutional investors and securities brokers in Asia. Figure 3, Foreign Equity Investment in Singapore 1987-1994, by the Department of Statistics in Singapore, shows trends in portfolio stock investment in Singapore.(1) Among neighboring countries, Hong Kong has conducted the most investment since the 1980s. US and European investors have increased investment into Singapore since the late 1980s, and investment had increased even before the rapid surge in stock prices of 1993. On the other hand, the notable feature of Japanese investment into Singapore is that it peaked in 1993. Further, Western and Japanese investment displayed contrasting patterns following the peak, as the former did not fall off, while the latter rapidly declined. In short, Japan's investment into Asia displayed a transitory nature in riding the price surge, and it is hard to believe that this investment was conducted from a global perspective.
As previously stated, Japanese securities brokers do not rank highly in any of Asia's stock markets. Japan's Big Four securities firms have taken four of seven international memberships in Singapore. The reason that the Singapore Stock Exchange (SES) allowed Japanese firms to claim a majority of the memberships was that it expected that Japan's huge capital reserves from pension funds and other sources would flow to Asia within the chain of global investment. It was also believed that it was customary for Japan's institutional investors to use Japanese securities brokers. Apart from 1993, however, matters worked totally differently from the SES's designs. With little capital coming from Japan, the local offices of the four securities firms are engaged in a fierce struggle for brokerage business in Singapore.
Many of the Japanese institutional investors wishing to manage assets in Singapore are free of the corporate ties binding them in Japan, and they do not hesitate to choose American or European securities brokers with superior research and operational capabilities. This reflects the fact that the Japanese firms follow domestic practices and do not improve their performance.
Maru Junko, "Kikan toshika no kino" [Functions of institutional investors], Shoken Keizai Kenkyu No. 6, Nihon Shoken Keizai Kenkyusho (March 1997).
Maru Junko, "Kokuei kigyo no mineika to kabushiki shijo e no eikyo -- Shingapooru-Mareeshia-Tai no keesu" [The privatization of state-owned firms and the influence on stock markets: The cases of Singapore, Malaysia, and Thailand], Musashi Daigaku Ronshu 45, No. 1 (June 1997).
Maru Junko, "Toshi shintaku no keizaiteki kino saiko -- Honkon-Shingapooru-Mareeshia-Tai no toshi shintaku no hikaku kara --" [Rethinking the economic function of institutional investors: From a comparison of investment trusts in Hong Kong, Singapore, Malaysia, and Thailand], Shoken Keizai no Kenkyu, No. 8, Nihon Shoken Keizai Kenkyusho (July 1997).
Musashi University, Department of Economics
1) The stock market consists of more than just the shares listed on the stock market exchange, but the general trend of investment in stocks can be inferred.
