In the Battle for Foreign Investment, One Exchange Will Win
Which is the best stock market in Asia?
In the race to become Asia’s most important financial center, Hong Kong and Singapore are neck and neck. But one is pulling ahead. The growth engine behind each economy will determine which stock exchange will win.
Asia is a battleground.
When the Warring States Period ended in Japan, the country unified under the samurai lord Hideyoshi. His first goal was to conquer Ming China via Korea in 1592.
Each army was roughly equal, except in naval power. Japan’s army depended on the navy for supplies, which the Koreans quickly exploited with their secret weapon: fire-breathing turtle ships.
These ships were the first-known iron-clad warships, distinguished by a dragon-shaped head at the bow that could launch cannon fire or flames from the mouth.
Korea’s military advantage forced Hideyoshi to abandon his conquest, and eventually withdraw.
Today, the war in Asia isn’t for territory, but rather, to become the center of Asian finance. The most pivotal battle is between two financial heavyweights: Singapore and Hong Kong.
Although they are equal in many ways, one has a metaphorical fire-breathing battleship on its side, which is propelling it into first place.
Same same but different
Singapore and Hong Kong couldn’t be more similar.
Both former British colonies, the two nations have strong legal and regulatory institutions. They are two of the most well-known business destinations in Asia and a favorite place for multinationals to house their Asian headquarters.
As major ports, shipping fuels both economies. The two cities rank in the top 5 for world container ports by shipping volume, as shown below.
Indeed, the shipping industry was what drove the two cities to become competing global financial hubs. Banks and other financial institutions were created to aid local businesses – mostly shipping firms and warehouse owners – who demanded financing and insurance services.
With advanced financial and banking systems, both small city-like-states act as the gateway to something much bigger.
Singapore is seen as the entry point to Southeast Asia and is a wealth management hub.
Hong Kong is the gateway to the second largest economy and boasts easy access to its trade and capital flows.
Even when you add up the numbers, Singapore and Hong Kong are almost identical. Since 2008, the prices of each stock market have closely correlated.
Unsurprisingly, the two similar markets face the same challenges of slowing economies and aging populations.
Singapore and Hong Kong have old workforces, relative to the rest of Asia. You can see in the graph below that the median age is roughly the same.
A rapidly ageing population – since there are fewer babies and thus fewer young people – causes the share of the working-age population to decline. When this happens, GDP per capita starts growing more slowly.
Lackluster global trade compounds the demographic dilemma.
Slowing global trade
Each economy’s GDP relies heavily on international trade.
You can see in the graph below, the seven highest trade-to-GDP ratios in the world. The trade-to-GDP ratio reflects how open a country is to international trade – and it also shows how much an economy relies on trade.
Trade through Hong Kong accounted for over 400 percent of the country’s GDP in 2015 – the highest ratio in the world. Singapore’s economy ranked third at 326 percent, just after Luxembourg.
The global economy has yet to recover from the 2007-2008 financial crisis and international trade has fallen, hurting trade dependent economies like Singapore and Hong Kong.
Despite being almost identical, the major difference between the two economies (and why you should invest in one over the other) is the secret weapon behind Hong Kong’s economy.
Hong Kong’s fire-breathing battleship
Hong Kong has an advantage over Singapore because it is economically and politically connected to the second largest economy in the world, home to 1.3 billion people.
China is pivotal to Hong Kong’s inevitable victory. It makes Hong Kong’s stock exchange larger and more liquid (a better place to invest) than Singapore.
As you can see in the graph below, total market cap in Hong Kong is around US$7.1 trillion.
Over a third of that amount comes from H-shares. Normally, mainland Chinese companies can only list on Shanghai and Shenzhen exchanges. But H-shares allow Chinese companies, many of which have huge market caps, to list on the Hong Kong Stock Exchange. Big H-share-issuing companies significantly add to the market cap of the Hong Kong Stock Exchange, and the number of trading companies.
In fact, the Hong Kong Exchange has held the title two years in a row for largest IPO. Both IPOs were from mainland Chinese companies.
Singapore, however, doesn’t have many huge companies listing on its stock exchange from abroad.
Hong Kong’s larger market attracts more institutional investors. As you can see in the graph below, institutional investors account for around 51 percent of trading each year on the Hong Kong Stock Exchange. Meanwhile, Singapore’s institutional investors make up less than 50 percent of shareholders on its exchange. The more influential institutional investors are in a market, the greater the market’s liquidity. And liquidity (ease of selling a security) is good for all types of investors, including retail.
The difference between Asia’s two financial hubs is one country: China.
With China’s growth story (and upcoming economic reforms) behind the Hong Kong Stock Exchange, it will certainly outperform its regional competitor in years to come.
Our recommendation: invest in Hong Kong’s market; ditch the Singapore Stock Exchange.