Malaysian Prime Minister Najib Razak's announcement that stock exchanges of his country and Singapore will establish a market corridor to provide investors access to each other's markets is a welcome development. It's in step with other moves towards regional cooperation being taken on a variety of fronts, and speaks of mutual confidence in neighbouring economies. The proposed link also reflects the strengthening of Singapore-Malaysia bilateral relations over the past years. Likely to start by year-end after regulators have ironed out the creases, the corridor will help investors to access the stocks of 1,600 publicly-quoted companies with a combined market capitalisation of US$1.2 trillion (S$1.6 trillion).
Since the new link will be jointly led by regulators on both sides, investors will have a measure of assurance. While a connected market will be viewed positively by many, the cautious might prefer to wait and see. Regional stock exchanges have sought to cooperate before, not always with success. Fourteen years ago, talks were held on such an arrangement but the idea was given up. Subsequently, an Asean Trading Link was started in 2012 between Bursa Malaysia and Singapore Exchange, with the Stock Exchange of Thailand coming in later. But that system was shut down last year. The evident success of the Hong Kong-China stock connect possibly prompted a rethink on both sides of the Causeway.
The biggest concern of Singaporean investors, who carry memories of the Clob saga, is whether a similar experience awaits them. This unfolded in 1998 when Malaysia's then leader, Tun Dr Mahathir Mohamed, imposed capital controls and outlawed Clob, an offshore market for Malaysian shares, as he tackled the Asian financial crisis. He had then accused foreign investors of subverting Malaysia's economy. At the height of the market frenzy, Clob transactions exceeded trading volumes on the SGX main board. The decision affected 180,000 shareholders holding an estimated US$4.3 billion in Malaysian stocks. It took years to unravel that mess, with many small investors taking big hits in the process.
When regional or world markets are in turmoil, investors are aware that extreme measures might be taken by a country to limit damage to its economy. Hence, they will look for provisions to mitigate that risk as the Asean Capital Markets Forum explores ways to deepen financial connectivity across the region's capital markets.
As a starting point, the forum is a useful initiative. But more needs to be done and it is not inconceivable that some of the better regulated markets in the region could link up with the corridor initially. However, Asean countries ought to take a broader view in their quest to build an Asean Economic Community. The aim must be to link the financial markets of all member nations.
