Unifying Global Stock Markets; Asia Looks Next!

``Over the next three to five years, we will become global and more diversified. The next logical spot is Asia. At some point we want a position in the Chinese market and in the Indian market."--John Thain, CEO of The NYSE Group

In its 3^rd annual report the McKinsey Global Institute estimates that the Global Capital markets-equity securities, private and government debt securities and bank deposits reached US$ 140 trillion in 2005 representing about 316% of the Global GDP as shown in Figure 6.

Figure 6: McKinsey Global Institute: 2005 Global Financial Assets

Global equities which accounted for about 31% of the financial pie contributed the most growth among these assets in 2005, according to McKinsey, ``Equities accounted for nearly half of growth in global financial assets in 2005, increasing by $7.1 trillion. Although Japan had the largest single gain in equity markets, with an increase of $1.5 trillion, equities’ growth was broad-based. The eurozone saw its stock of equities increase by $1.2 trillion; the United States by $650 billion; and the United Kingdom by $550 billion. Equities also accounted for more than half of emerging markets’ growth in financial assets—with growth of $2.2 trillion.”

As global equities are expected to reach $59 trillion in 2010, the race towards the industry’s consolidation has apparently intensified.

At the end of 2006, two major stock exchanges, the New York Stock Exchange (NYSE), the world’s largest stock exchange in US dollar terms and the Euronext- Continental Europe’s largest bourse which runs Paris, Armsterdam and Lisbon, obtained the respective approval by their shareholders to a merger of giants. Last week, the European regulators formalized the approval of the US$15 billion merger.

Following the failed takeover offer by the Macquarie Bank, the London Stock Exchange (LSE) received a bid by NYSE’s key rival, the NASDAQ in March of 2006. As the NASDAQ negotiated its way through the takeover deal, it worked to accumulate LSE shares, which today accounts for a hefty 28.75% of England’s bourse. Having been spurned twice, NASDAQ’s active offer remains in abeyance even as the LSE options dissipate following the finalization of the NYSE-Euronext merger and Deutsche Börse withdrawal from the bidding contest. A resolution to this takeover offer could be realized this year with a growing likelihood of its completion.

Even in the futures market we are witnessing the same thrust: In 2006 the Chicago Mercantile Exchange (CME) proposed to acquire Chicago Board of Trade (CBOT) that would create the world’s largest futures exchange in a deal worth about $8 billion. Presently awaiting regulatory approval and the endorsement from the shareholders the merger is likewise expected be completed by 2007.

With the revolutionary advances in the field of communications and information technology-the advent of on-line electronic trading platforms makes it possible for real-time electronic transactions regardless of the geographical distance.

Grounded on this premise, the major exchanges appears to be in a rush to integrate financial services, to diversify and expand their market coverage, reduce transaction (bookkeeping, clearing and settlement) costs by achieving the economies of scale, to eliminate further inefficiencies by way of human intervention, provide for financial depth by attracting global investors (to augment the demand side), traders and listing companies (to increase supply side), to improve on liquidity by easily matching buyers and sellers, and finally, adapt to the ongoing changes in marketplace by being accessible to the growing significance of institutional investors [pension funds, hedge funds, mutual funds and insurance companies] as compared to retail investors in the past.

With the global trade and economic structure presently favoring Asia, as evidenced by its exploding foreign exchange reserves and rapidly rising per capita and middle class, its largely fragmented and underdeveloped financial markets makes it a potential ground for an explosive expansion. According to McKinsey Global, ``Perhaps more surprising is the fact that Asian countries have the largest links not with Japan or Hong Kong, but with the United States, the United Kingdom, and the eurozone, underscoring the lack of an integrated Asian financial market.”

Under such vein, NYSE’s CEO John Thain said in an interview last December at CBS that Asia “is the next logical step” for expansion. Mr. Thain opines that demutualization as prerequisite prior to any possible alliances (instead of acquisitions), and that entities will be “kept separate with no regulatory crossovers”. Mr. Thain was said to be eyeing Japan, China and India.

At the onset of 2007, NYSE’s Mr. Thain wasted no time into taking concrete action with his plans. In a rapid fire succession, he recently stitched up an alliance with Tokyo, joined a team of investors which included investment bank Goldman Sachs and private equity firm General Atlantic to acquire 20% of the India’s largest stock exchange the Mumbai based National Stock Exchange and even Australia’s ASX caught up on the speculative excitement as the next potential deal for NYSE. On Friday, the Australian Stock Exchange jumped 4.5%.

Today, the Philippine Stock Exchange, despite its miniscule capitalization and traded volume relative to global standards or its peers, will be an inescapable part of the ongoing global trends to unify financial market exchanges, such that in the future it will a party to any potential alliances, or consolidations by mergers or acquisitions, as well as, take into account the realization of cross-border listings, after progress on regulatory hurdles would have been met and expanding trading facilities to possibly include other asset markets.

In the future, you and I would be able to possibly trade US, European or any neighboring countries stock listings that could be accessed by the local trading platform at our very homes.

All these will not happen overnight but is part of the ongoing seismic shift in the financial realm. This is just one of the many steps towards the Phisix 10,000!