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Yoshikami: This Asia Merger Means Something To You

With the announcement that the Singapore Stock Exchange plans to acquire its Australian counterpart, it is clear that Asia’s growing role as the financial center of the world is gaining strength.

The combined exchange group, ASX-SGX Limited, marks the first major consolidation of exchanges in the Asia-Pacific region, and the combined entity will create a strong global trading platform.

Both exchanges needed to take action as they tend to be exchanges that are concentrated in utilization because of the nature of securities traded in these regions. So this is a defensive action as well as a move to capture greater mind share (and trading activity) throughout the region.

In a First on CNBC interview, the CFO of SGX described the reason behind this move.

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His rationale for the merger was compelling.

On paper, it looks a formidable combination.

Together, ASX-SGX will operate in the world’s second largest base of institutional investors (USA is still first by a wide margin), with a combined investor base in excess of $2.2 trillion USD. The combined exchange will now be the second largest listing market in Asia Pacific, including over 200 listings from Greater China, the world’s second largest listing of resource companies (more than 900), the number one real estate investment trust market in terms of capitalization (over 80 listings), and the largest number of ETFs (over 100) in Asia Pacific.

According to press releases, being a leader in the derivatives market also continues to be an important step towards having a greater global impact in the financial markets. This is understandable given that the entire Asia-Pacific region is now larger than North America in terms of derivative markets.

By coming together, ASX-SGX is trying to control their destiny in a very competitive landscape. It’s seeking to become the central trading platform in Asia, and with the annual Gross Domestic Product in Asian emerging markets surging once again, the focus is to ride this tailwind geographic growth trend. It's exactly why companies from McDonalds to General Electric are so focused on global expansion.

This merger underscores what should be clear to most investors, and now must become embedded in investment strategy. Asia's importance becomes even more significant for portfolios as accessibility and credibility grow throughout the global investment community. What were once thought to be obscure companies in Asia, are now gaining more prominence as exchanges seek to tap into global capital while investors seek to ride the Asia growth story. What was once hidden is now becoming apparent. Who knows which is the next big companies or opportunities in the Asia Pacific region. Perhaps this is why Warren Buffet's Berkshire Hathaway invested in Chinese car maker, BYD Co. Ltd,; he realizes that global investing is the key to future success.

The same holds true for you as well as Buffet; understanding emerging economies is critical like never before. Developed economies have their place in portfolios; one should not underestimate the strength of the United States and European economies despite recent troubles. But it is clear as emerging markets continue to expand their presence and accessibility, investment strategies must reflect broad diversification by geography. The merger of two regional exchanges announced today underscores the emerging power of Asia in the global economic theatre. The Asian Development bank recently raised its forecast for the region’s growth to 8.2 % compared with a previous projection of 7.5% growth and maintained its 9.6% growth projection for China, the world’s second-largest economy. The ADB also revised upward growth forecasts for Hong Kong, Singapore and South Korea.

The last time I was in Singapore, it was clear to me that this is a country seeking to take a great leap forward by playing a key role in the growth of emerging Asia. In fact, CNBC Asia's new flagship studio in Singapore is located at the Singapore Stock Exchange. Perhaps this is just another indication that the region is looking towards the future and to compete successfully with other global exchanges. And today's merger adds to the theme; Asia's role in the next century of expansion will be a strong one and shows no signs of easing anytime soon.


Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 and 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com.