World Federation of Exchanges (WFE): Encouraging Investment in Emerging Markets Hinges on Co-operative Effort

Emerging market exchanges and policy makers are keen to encourage international investors, who play an important role in the development of emerging economies’ public markets.

International investors can provide additional capital, enhance liquidity, promote greater competitiveness and adherence to standards of corporate conduct, and help to balance local retail and institutional participation. World Bank data estimated the level of net international portfolio equity inflows into emerging markets between 2000 and 2017 to be more than $955bn.

Established in 1961, The World Federation of Exchanges (WFE) is the global industry association for exchanges and clearing houses. Headquartered in London, it represents more than 250 market infrastructure providers, including standalone Central Counterparties (CCPs) that are not part of exchange groups.

“Exchanges and policy-makers can work together to ensure the creation of enabling investor environments that allow for the growth of different investor groups, which will, in turn, help emerging public markets thrive in the long-term.”

Of our members, 37% are in Asia-Pacific, 43% in EMEA (Europe, Middle East and Africa) and 20% in the Americas. Nearly 70% of our members are located in emerging or frontier markets. Supporting the growth and development of these markets is a core strategic pillar and mandate of the WFE in a variety of forms, from conducting capacity building to leading business development workshops and undertaking market-leading research.

The WFE has an active Emerging Markets Working Group (EMWG) with 28 members, whose role is to develop relevant learning and information-sharing sessions for EM exchanges, and to propose EM-relevant research topics. Since the establishment of the group in 2015, the WFE has published four emerging markets-focused research reports, and this article focuses on the two most recent publications, from December 2018 and January 2019. These were interconnected reports on the relationship of international investors to emerging markets.

The WFE’s report Attracting International Investors To Emerging Markets – from December 2018 – identified the factors that seek to attract international portfolio investment into EM equities. The paper looked at foreign investment inflows to emerging equity markets, as well as foreign trading activity, and identified factors that are related to increases in both areas.

The report found that factors associated with increases in foreign investment inflows included:

  • Emerging market equity returns, with just a one-percentage point increase in domestic returns being associated with a $24.4m increase in monthly inflows;
  • Markets with higher corporate governance standards, with additional foreign inflows as high as $756m over the sample period; and
  • A country’s inclusion in the MSCI Index, the use of IFRS reporting, and requiring or encouraging English-language disclosure.

The report further discovered positive factors linked to higher levels of foreign trading activity, such as:

  • Larger and more liquid markets, with a one-percentage point increase in turnover velocity associated with a 1.3% increase in the value of foreign trading, and a 0.84% increase in the number of foreign trades;
  • Reduced trading fees; and
  • The introduction of market structure enhancements, such as the ability to short-sell and engage in securities lending and borrowing.

While the research observed a range of factors that benefit the development of emerging markets, it also outlined the factors that are associated with foreign investment outflows and can hinder the development of emerging market such as:

  • Emerging market volatility, suggesting that foreign capital tends to withdraw from emerging markets during periods of higher domestic market turmoil, consistent with the idea of a ‘flight to safety’; and
  • Explicit barriers to investment, such as the presence of restrictions on capital inflows, with markets imposing these restrictions seeing a reduction in inflows equal to $302 million over the sample period.

The report concluded with a number of actions that exchanges and policy-makers can take to enhance the attractiveness of their jurisdiction to foreign investors and traders. These include prioritising the adoption of high corporate governance standards, reducing or eliminating barriers to investment such as capital gains and dividends taxes, reducing or minimising costs of transacting in the market, and introducing market structure features, such as short-selling, and securities lending and borrowing.

A second, qualitative WFE report published in January 2019 entitled Investing In Emerging And Frontier Markets – An Investor Viewpoint followed on from the findings of December 2018’s quantitative paper. The second paper provided an understanding and analysis of the investor perspective by discussing what encourages, or discourages, international investors’ participation in emerging markets.

This report, written with the support of the European Bank for Reconstruction and Development (EBRD), aims to provide exchange operators, securities regulators and policy-makers with greater insight into the factors that drive investment decisions, as reported by investors. Given the contribution that international investors make to emerging and frontier markets – providing capital to the local economy, participating in risk sharing, and helping to reduce price volatility – a better understanding of investor motivation is key.

The key findings of the report were:

  • Financial returns are important, but the broader investment strategy will guide how they evaluate returns, and how they decide where to invest;
  • Smaller ‘frontier’ markets struggle to attract the same levels of attention as their emerging market counterparts;
  • Lack of certainty about ownership of shares would prevent investors from investing in a market;
  • Corporate governance (or lack thereof) was a particular challenge in emerging market investing, as was government interference, and, in some markets, the length of time it took to open investment accounts;
  • Liquidity was a concern, measured in different ways by different investors (e.g. at market level versus at individual stock level). Some investors required a minimum liquidity threshold to invest, whereas others adopted a long-term investment strategy;
  • The importance of market infrastructure features (including the presence of an electronic trading platform, ability to short-sell, presence of market-makers, and the ability to engage in securities lending and borrowing) varied across respondents. Notable exceptions were the existence of a delivery versus payment (DVP) settlement system, and the presence of global custodians; and
  • Environmental, social and governance (ESG) factors are important when evaluating investments. In some instances, poor ESG performance would deter investors, while others said they would engage with companies to look for improvement on relevant metrics.

The report concluded with recommendations for emerging market exchange operators and relevant regulators and policy-makers. These include:

  • Reducing the direct and indirect costs of investment (the time and effort required to open an investment account, and the costs of obtaining information);
  • Enhancing the corporate governance of listed firms and educating them about the relevance of ESG factors to their business, and by extension, investors;
  • Investing in market infrastructure enhancements to contribute to the improvement of the market over time; and
  • Developing the local investor base, including strong, local asset managers.

The findings of these WFE reports reiterate just how important and interlinked international investors are to the development of EM economies. Exchanges and policy-makers can work together to ensure the creation of enabling investor environments that allow for the growth of different investor groups, which will, in turn, help emerging public markets thrive in the long-term.

About the Author

Author: Nandini Sukumar

Nandini Sukumar is the Chief Executive Officer of the World Federation of Exchanges (WFE), the global association for exchanges and CCPs. The WFE represents more than 250 exchanges and clearing houses globally, educating stakeholders on the vital role played by market infrastructures in the real economy, and as a standard setter, finding the consensus on issues among the global membership. Sukumar is Vice Chair of IOSCO’s Affiliate Members Consultative Committee and Chair of the AMCC’s DLT Workstream.

Sukumar has been CEO of the WFE since March 2015. Prior to this, she served as Acting Chief Executive Officer from November 2014, having been recruited by the WFE Board as Chief Administrative Officer in May 2014 to run the Federation on a daily basis and work with its global network of members as a proponent of the benefits of fair, orderly, public markets. Sukumar came to the WFE after a 14-year career at Bloomberg where she created, grew and ran their coverage of market structure, exchanges and UK regulation.

About the World Federation of Exchanges (WFE)

Established in 1961, the WFE is the global industry association for exchanges and clearing houses. Headquartered in London, it represents over 250 market infrastructure providers, including standalone CCPs that are not part of exchange groups. Of our members, 37% are in Asia-Pacific, 43% in EMEA and 20% in the Americas. WFE exchanges are home to nearly 48,000 listed companies, and the market capitalisation of these entities is over $70.2 trillion; around $95 trillion (EOB) in trading annually passes through the infrastructures WFE members safeguard (at end 2018).

The WFE is the definitive source for exchange-traded statistics, and publishes over 350 market data indicators. Its free statistics database stretches back more than 40 years, and provides information and insight into developments on global exchanges. The WFE works with standard-setters, policy makers, regulators and government organisations around the world to support and promote the development of fair, transparent, stable and efficient markets. The WFE shares regulatory authorities’ goals of ensuring the safety and soundness of the global financial system.

With extensive experience of developing and enforcing high standards of conduct, the WFE and its members support an orderly, secure, fair and transparent environment for investors; for companies that raise capital; and for all who deal with financial risk. We seek outcomes that maximise the common good, consumer confidence and economic growth. And we engage with policy makers and regulators in an open, collaborative way, reflecting the central, public role that exchanges and CCPs play in a globally integrated financial system.


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