Lee Kuan Yew, credited for converting Singapore into an economic success, once described the Association of South East Asian Nations (ASEAN) as "Unpromising Start, Promising Future". This phrase can also describe the South Asian Association for Regional Cooperation (SAARC), 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 minimising 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 (Brazil, Russia, India, China, South Africa), 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. The book, 'Capital Market Integration in South Asia; Realizing the SAARC Opportunity' 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 mobilise 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 member remains disagreeable, the structure of these product ideas has been kept flexible to allow implementation with only few agreeable members.
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.
The writer works with a leading capital market company in Mumbai. Previously, he worked with financial companies in Delhi and London.