The early periods of development in Asia were launched by government-led economic planning and by basic industries and infrastructural development. As domestic savings were usually inadequate to provide the capital necessary for economic development, many countries relied on foreign loans through overseas development assistance, guaranteed by public organs. Moreover, domestic financial systems were constructed around commercial banks, including national banks. As the economy grew, the foreign direct investment which accompanied foreign technology transfer increased as well.
Stock markets did not play an important role in this process. In countries such as Singapore and Malaysia, which were former British colonies, stock markets existed from early on, but they had almost no capital procurement function. Further, in the case of Thailand, the World Bank recommended introducing market mechanisms into the financial system as a condition for borrowing funds from overseas. To implement the advice, Thailand began to nurture its stock market. So in what way does the stock market promote economic development? Below, we will examine the development of stock markets through the cases of institutional investors in Singapore, Malaysia, and Thailand.
Figure 1 shows per capita GDP as a ratio of real per capita stock market value at the same time. It can be seen that economic growth is accompanied by expansion of the stock market. This relationship does not hold true for Europe, but in Asia economic growth fosters growth of the stock market. Economic growth progressed in Singapore, Malaysia, and Thailand, in respective order. Singapore's stock market equaled 0.5 percent of GDP, a level attained by Malaysia's stock market only in the late 1980s. Thailand reached that level in the 1990s. Table 2 shows the turnover rate, indicating the frequency of buying and selling stocks. Thailand has the highest turnover rate, but Singapore, Malaysia, and Thailand all have turnover rates which rose rapidly in the late 1980s and again in 1992 and 1993. Below, we will emphasize the fluid stock market and consider the relationship between economic growth and the stock market. First, let us examine the distinctive features of the players who shape stock market prices.
2-1 Individual Investors
The weight of individual investors in Asian stock markets is high, and their influence in price setting is believed to be quite strong. There is, however, very little data to confirm these points, but we can hypothesize about the behavior of individual investors in the three countries from a number of data sources. In 1990, the proportions of stockholders in Singapore was over 30 percent for corporations, 20 percent for individuals, and 37 percent for nominees. Many corporate investors held controlling shares and are believed to have engaged in little buying or selling of shares. Therefore, the main players in the market were individuals and nominees, including overseas and other institutional investors.
In Malaysia, the composition of stockholders was 16 percent individuals, 38 percent nominees, and 46 percent financial institutions. Included in financial institutions are domestic institutional investors, while overseas institutional investors are included with nominees. As will be explained below, domestic institutional investors did not play important roles as stock market players; it was individuals who were the key players. There is no data on Thai shareholdings, but in 1993 individual investors accounted for 75 percent of stock transactions, though this share fell drastically to 55 percent in 1995. In contrast, the share in transactions of overseas investors soared from 17 percent in 1993 to 33 percent in 1995.
What kind of investors are the individuals who are such important stock market players? One survey finds that the profile of an individual investor in Malaysia is: (a) highly educated, (b) an overseas Chinese, (c) a professional or manager, and (d) a short-term investor (40 percent hold stocks for less than one week during bull markets). A survey in Thailand produced similar results. Individuals' dealings in the stock market appeared to be decidedly short-term and speculative.
2-2 Domestic Institutional Investors
The Central Providence Fund (CPF), Singapore's largest financial agency, operates a system which draws forced savings of 20 percent of salary from both employees and employers. However, the CPF is not a stock market player. The major portion of working capital is held in government bonds, and never directly invested in stocks. In Malaysia as well, there is a large proportion of forced savings raised through the Employee Providence Fund (EPF) and other pension funds. Until recently, over 70 percent of the funds from these financial institutions were held in government bonds. There was only limited investment in the stock market. In Thailand, commercial banks and financial institutions are the most important financial institutions, while insurance companies and investment trusts are as yet relatively unimportant.
As the stock market expands, it will be important to buy and sell according to fundamentals to make it functional. In this regard, the stock markets of Asia are not increasing their functionality, since short-term buying and selling by individual investors remains the most common practice. On the other hand, institutional investors are playing increasingly important roles in the West and in Japan because the distribution of risk and information costs can be very effectively spread among them. In Asia as well, the nurturing of institutional investors has become a major issue. For the same reason, there are similar hopes for investment trusts, whose main purpose is spreading risks among individual investors. Figure 3 shows the relative scales of stock markets and investment trusts. Among Singapore, Malaysia, and Thailand, the scale of investment trusts compared to national stock markets is substantial in Malaysia. In Singapore, the relative scale of investment trusts against that of the stock market is small. Neither stock markets nor investment trusts are mature in Thailand, but the latter are growing rapidly.
Malaysia's investment trusts (unit trusts) include governmental, public, and private companies. At the end of 1996, there were three governmental funds, 24 public funds, and 50 private funds. The proportion of net assets value accounted for by the three categories was 81.6 percent, 6.7 percent, and 11.7 percent, respectively. The governmental and public funds accounted for an overwhelming share of the funds. The governmental funds could be sold only to Bumiputras (Malays). The first governmental unit fund, ANS, which was established in 1981, had a fixed price. The return, which took the form of dividends and bonuses (delivery without compensation), was extremely high, being more than double the return on deposits and savings. Later, another fund, the SNB, was established which gave preferences to Bumiputras and grew very quickly.1)
The secret of the strong performance of the governmental funds was that they were enabled to purchase new share issues at below-market prices. Further, the funds received priority in the distribution of national enterprises' privatized shares which were not open to the public. On the other hand, private unit trusts are growing quite rapidly, but their scale remains small. Moreover, the performance of the private funds is poor. Figure 4 shows the funds' risks and returns. The line in the figure indicates average risk-return relationship, but most of the funds are below the line.
Singapore's investment trusts are private unit funds, but in terms of volume they are rather small. Since there is no association of investment trusts for Singapore, accurate data is difficult to obtain, but estimates based on fragmentary information suggest that until recently, investment trusts were not very active institutional investors. An important feature of Singapore's unit trusts is that contributors to the CPF can withdraw reserve funds and purchase stocks and unit trusts, and this system is expanding. With regard to unit trusts, it is possible to purchase CPF trusted or approved funds. The policy of expanding the CPF unit trusts is intended to nurture Singaporean fund managers, who are considered weak in comparison to their counterparts in Hong Kong, and raise their efficiency. Further, the expansion of CPF unit trust assets will bring foreign asset management companies to Singapore. However, the current performance of Singapore's unit trusts is not at all good. Figure 5 shows that the performance of Singapore's investment trusts is the same as Malaysia's.
Until 1992, investment trusts (mutual funds) in Thailand comprised a single governmental mutual trust company. In 1992, a private assets management company was licensed, and seven new firms have since entered the business. A considerable number of asset management companies are scheduled to be licensed, and this sector is developing rapidly, but its scale is as yet small. The market in Thailand was a typical short-term, individual investor-dominated type, so policymakers are placing importance on nurturing investment trusts as institutional investors along with developing the stock market. Further, it is expected that measures will be taken to mobilize savings, as forced savings systems are underdeveloped in Thailand. As a result of the spread of investment trusts, the Investment Trust Association has been established, and efforts are being made to open information on investment trust performance to the public and to nurture institutional investors. The number of funds in Thailand is not large, but their performance is, on average, above that of the market average.
2-3 Overseas Institutional Investors
Foreign institutional investors, especially in Europe and the US, attach great importance to East Asia, with its high growth rates, as a link in their global operations. Because of stock price trends and high levels of turnover, it was anticipated that there would be an increase in overseas investors in the late 1980s and in 1992 and 1993. For example, the Euromoney Research Division conducted a survey of 600 firms conducting global institutional investment (124 firms responded). Table 6 shows the results as real values for ratios of investment by region in 1992 as well as predicted values for the end of 1994. It can be seen that US and European institutional investors are conducting high levels of investment in Asia, when own country investment is excluded, and that the trend is increasing. Further, within Asia as well, investment ratios are growing in countries accorded credit for, in addition to fundamentals, low restrictions on investments, liquidity of markets, and accurate research. Among such countries, Hong Kong and Singapore are gaining attention on the basis of the aggregate market value ratio of their markets.
Musashi University, Department of Ecnomics