Mirror, mirror on the wall, who's the fairest of them all? If you love fairy tales, you would probably say Snow White. But if you're a man who is in love, you might be inclined to disagree. After all, we're all entitled to our own opinion. And beauty is a particularly difficult quality to define. But how about stock exchanges? Which is the fairest exchange of them all? New York, London, Hong Kong and, of course, Singapore spring to mind. What do they all have in common? They are all considered international exchanges. Thailand, or more precisely the Stock Exchange of Thailand (SET), is not on the list. Should it be?
What does it really mean to say an exchange is international? It helps to first think of a large market or bazaar. What makes the great markets of the world — say, Tokyo's Tsukiji fish market, Istanbul's Grand Bazaar or Holland's Aalsmeer Flower Auction — truly international? Is it the goods that come from across the globe, the non-stop buying and selling or the heady mix of local and foreign buyers and sellers? Probably all. Being international is a multidimensional aspect.
Let's take a look at the elements that determine what it means for an exchange to be international:
Multinational corporations: Your exchange is only global if it sells global products — that is, ones made by multinational corporations (MNCs). These gems are somewhat hidden on the SET. In the past decade or so, Thai companies have been quietly going global and becoming world-class MNCs. The operations of large Thai listed firms now span five continents. Thai Union Frozen accounts for more than a fifth of the world's canned tuna production. Almost all of Charoen Pokphand Group's revenue is from emerging markets. One in four airbags contains yarn from Indorama Ventures. Siam Cement Group has revamped its core strategy to focus on innovation and now derives a considerable portion of its sales from innovative new products. Boston Consulting Group's list of top MNCs from emerging markets all over the world now includes four Thai MNCs: CP Group, Indorama, PTT and TUF. Why are Thai firms venturing out? The reasons are varied: to find new consumer markets, build brands, acquire technology, enlarge production networks and locate new energy sources. Malaysia, Indonesia and the Philippines combined boast only five companies on the list.
Global indices: These are the gatekeepers of the investment world. A global index selects the cream of the cream and spans exchanges across multiple countries. They are used as benchmarks for institutional investors. SET shares are gaining presence in these indices. Selection criteria include good liquidity, free float and even environmental, social and governance risk management.
MSCI Global Standard Indices added four Thai stocks last year. MSCI Global Small Cap Indices is adding 14 Thai stocks. Both constitute the largest number of additions in Asia.
The corporate governance and sustainability development of listed firms continue to improve in line with global standards. For example, Thai listed companies achieved the highest marks in the Asean CG Scorecard assessment for a second straight year. In addition, 10 Thai listed companies, the highest number among Asean members, were selected for the Dow Jones Sustainability Indexes.
FTSE also upgraded SET shares to Advanced Emerging Market status due to improvements in minority shareholder rights, market monitoring by regulators and competition among brokerages.
Foreign listings: One key component of international exchanges is the share of foreign listings — that is, businesses based abroad raising capital in the local exchange to do business locally or abroad. This is a weakness of the SET. The Singapore Exchange boasts listings from China, Thailand and even Myanmar. This gap is being remedied by Thai policymakers. Recent policy initiatives now allow five channels for foreign businesses to list on the SET: holding companies, primary listings, secondary listings, infrastructure trusts and real estate investment trusts.
Foreign investor participation: Over the past five years, foreign holdings have been substantial, making up between 34% and 37% of market capitalisation and remaining remarkably stable throughout the Lehman crisis and the quantitative easing taper tantrum. Many of the foreign holdings are likely long-term. A large chunk of this consists of holdings by strategic shareholders (such as foreign investors holding more than 5% of total shares excluding non-voting depository receipts, foreign mutual funds, custodians, nominees and trustees).
Investor trading base: The SET is unique in that it boasts a diversified investor trading base that includes retail, institutional, proprietary and foreign investors. Retail and foreign investors constitute about 60% and 20%, respectively, of total trading value.
Trading value: Transactions in products and money are the lifeblood of any market. More is better. In Asean, the SET has been the leader since 2012. Singapore is behind at second place and Malaysia third.
So how does the SET perform overall with respect to being an international exchange?
Good but not excellent. It has many elements in its favour: world-class multinationals, high trading volume, diversified investor trading base, foreign investor participation and a presence on global indices.
However, it lacks extensive foreign listings. Policymakers are working to remedy this, easing the way for foreign firms to raise capital on the SET and paving the way for the SET to evolve into an international or regional exchange. Thailand's growing trade and investment linkages with the Asean Economic Community will naturally drive this evolution.
So what does this trend mean for you, the investor? It means you can invest in companies that will eventually grow into world-class multinationals listed on global indices or look for investment opportunities that benefit from economic growth abroad. Don't wait for the mirror to tell you who's the fairest of them all. By then, it may already be too late.
Kiatipong Ariyapruchya heads the SET's Capital Markets Research Institute. He holds a PhD in economics from Columbia University in New York.
