Asian liquidity sees an upturn

Agency broker ITG is upbeat on prospects for trading volumes and costs in Asia for the coming year, citing a rise in liquidity, falling trading costs and increased turnover and market values.

In December, ITG's liquidity indicator snapped a five-month falling streak in Asian trading liquidity with a rise to 882 from 822 the previous month. The financial crisis had triggered a slump in liquidity, with the indicator showing a steady drop from 1,228 in July 2007.

The main reason for the rise in December is that turnover -- volume and value of equities traded -- in Japan had been slumping for some time, dragging the indicator down, says Ofir Gefen, ITG's Asia head of research and analytics in Hong Kong.

This trend reversed slightly at the end of 2009, when spreads narrowed in Hong Kong, Japan and South Korea, and turnover increased in Japan, Singapore, South Korea and Taiwan. "This all helped to deliver an uptick in liquidity across the region," Gefen tells AsianInvestor.

Institutional investors may have stayed away from Japanese assets due to the impact of the foreign exchange rate and disappointment in both the political structure and economic issues, says ITG in a report* released on Thursday.

The situation was compounded by the performance of the highly concentrated, small group of stocks that dominate the Nikkei 225, several of which are banks/financials, particularly hard hit by the global economic environment.

However, things are starting to look more positive. "Broadly speaking, we are very optimistic about the outlook in terms of liquidity in 2010," says Gefen, "due to a combination of macro and micro factors."

On the macro side, for example, there is Asia's strong growth potential, particularly in countries such as China. Gefen also cites micro factors such as: increasingly sophisticated technology, like Japan's new Arrowhead trading system; changes in the regulatory framework in Australia, which will open that market up to more competition; and e-trading platform Chi-X setting up shop in Singapore with Chi-East.

"We're seeing a lot of interest in Korea in e-trading, as well as in other markets," adds Gefen. The rise in the liquidity indicator points to more trading liquidity in IPO markets, he says, and trading costs are trending down in the region in general.

Trading costs in Japan and South Korea fell particularly heavily between the fourth quarters of 2008 and 2009, by 55% (from 161 to 73 basis points) and 53% (from 97bp to 45bp) respectively. Of course, it should be noted that Q4 2008 marked the depth of the crisis.

However, Japan was the only Asian market to see sustained drops in turnover last year, and market turnover ended a meagre 1.8% up at end-2009 on 2008.

Elsewhere, a surge of IPO activity in Hong Kong helped deliver 43% turnover growth during 2009, while the Australian market benefited from popularity among both international and domestic investors, posting a rise in turnover of 62%. South Korea, awarded developed-market status this year by index provider FTSE, saw year-on-year growth of 20%.

As for market capitalisation, Hong Kong, Singapore, South Korea and Taiwan all posted overall growth of 60-80%. Both Hong Kong and Taiwan had a strong IPO market through the latter part of the year, which contributed 15% and 14% respectively of the market cap growth, according to ITG. Japan has the biggest market cap among Asian countries, but market cap growth was comparatively stagnant, with little IPO activity.

*ITG's Asia Pacific Liquidity Barometer, December 2009/January 2010.