New Book in November 2016 by EUFAJ Author Sourajit Aiyer: Capital Market Integration in South Asia – Realizing the SAARC Opportunity

Lee Kuan Yew, credited for converting Singapore into an economic success, once described ASEAN as “Unpromising Start, Promising Future”. This phrase can also describe SAARC, the South Asian Association for Regional Cooperation of countries around India, Pakistan and Bangladesh, which has seen few successes as geopolitics slowed progress. Institutional investors use acronyms for groups of developing countries, but all is not rosy with these groups either. At such times, SAARC doesn’t look too bad. SAARC is a combination of sizable Emerging and Frontier markets with low correlation. While India is the largest in size, the other SAARC markets have seen decisive improvement in their metrics relative to India. Return on Equity and Profit Margins of top companies in Pakistan and Bangladesh has improved relative to India; while Sri Lankan companies have seen buoyant topline growth. The combined package should help counter volatility of single-market exposure. Investors may argue why they should look at SAARC asset class, and it is better to look at India or Frontier markets (FM) separately. But India benefits from the returns and low-correlation of SAARC’s FMs, while the FMs benefit from India’s size. A SAARC portfolio can increase the upside from multiple growth enablers, while minimizing the downside due to low-correlation constituents. A SAARC asset class may hasten country-specific funds for South Asian FMs, as current FM funds have only a small allocation to them.

Economic projections show the opportunity of SAARC vs other prominent regional groups like ASEAN, BRICS, Next-11, etc. The incremental economic size SAARC will add from 2014-2020 is next only to BRICS and Next-11. SAARC ranks high in savings growth, savings rate, and aggregate savings as of 2020. Capital market penetration is low, so depth has headroom to expand. Income is more evenly distributed, so investor breadth has headroom to expand. SAARC has the youngest demographics with a near absence of social benefits. Incremental capital formation is amongst the highest in SAARC. Not only is SAARC a large consumer base, it is building production capabilities across sectors.

As this economic story unfolds, it should translate into a financial story. This book discusses possible capital market Products/activities which regional stakeholders could explore to help realize the economic opportunity in this region. Some ideas may be implementable now; while some may be implementable as markets mature further. This book includes extensive data analysis of SAARC’s economic projections, and corporate performance and market indicators.

The purpose is to mobilize investment flows into regional markets, by providing scope for diversification, yield and risk mitigation; building product depth of smaller markets; and reducing information opacity for pricing efficiencies. Ideas are both conventional and unconventional. Unconventional ones convert SAARC’s unique challenges into ideas for capital markets. Specific rationale for institutions and retail investors is written with each idea. Products have to be viable. Hence, a focus is on how to deepen awareness of new products and markets so that asset flows increase.

Any integrated product has to take into consideration ground-realities. Bringing in an anchor partner might help counter implementation challenges in a geopolitically-sensitive SAARC, i.e. from a country that has bilateral interests with SAARC members individually and is looking for returns from overseas investments. Such an anchor may hold sway with SAARC members, which may enable faster agreements. Even if one or member remains disagreeable, the structure of these product ideas has been kept flexible to allow implementation with only few agreeable members.

In a region which is unexplored as an asset class, performance will be the kingmaker. This book includes the author’s CDCF Portfolio basket for the SAARC asset class, which selects the best fundamental-performers on a rolling basis. While this may not give equal representation to all countries, it selects the best performers. Relative comparison of this basket highlights its outperformance on risk-return parameters vs prominent indices of other regions.

It is an opportune time to look at SAARC. Recent years have seen new governments in member countries stressing their commitment towards economic development and regional relations. It makes it a hot iron to strike now. Above all, it is reasonable that SAARC as one of the world’s regional integrations – by the way always supported by the European Union – discusses about itself as a financial market, and this in view also of China. A comparison with Europe shows that it is good to have competing markets.

Sourajit Aiyeis a senior manager in investor relations and corporate planning with Motilal Oswal Financial Services, Mumbai, a leading Indian capital markets company. Previously he worked in equity trading operations with UBS Investment Bank, London; in financial analysis with Reliance Broadcast, Mumbai; and in financial research with Evalueserve, Gurgaon. He has done internships with Tata Motor Finance, Delhi and Grameen Bank, Bangladesh. He has written on over 60 unique topics in over 30 publications across 13 countries, including besides this Blog also European Union Foreign Affairs Journal (EUFAJ). He is also the author of a LIBERTAS Paper „Flying with the Winged Elephant – Niche Opportunities for Global Businesses that May Emerge in India“, see more: http://www.libertas-institut.com/de/PDF/Flyer_Sourajit.pdf

See the new book: http://store.elsevier.com/Capital-Market-Integration-in-South-Asia/Sourajit-Aiyer/isbn-9780081019061/ 

 

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