From frontier to developed – The FTSE ASEAN Index Series
The FTSE ASEAN Index Series provides a comprehensive range of benchmarks to measure the performance of stocks within an increasingly integrated and fast-growing economic region.
The Association of Southeast Asian Nations (ASEAN) was set up in 1967 and initially included five member states: Indonesia, Malaysia, Philippines, Singapore and Thailand. With the addition of Brunei Darussalam (1984), Vietnam (1995), Lao PDR and Myanmar (1997), and Cambodia (1999), ASEAN’s membership has since expanded to ten.
ASEAN’s founding aims include the joint pursuit of economic growth, social progress and cultural development1. In 2007 ASEAN’s member states committed themselves to a process of economic integration through the introduction of a single market, called the ASEAN Economic Community (AEC). The AEC has the goal of regional economic integration by 2015, including the free flow of goods, services, labour and capital between ASEAN member states.
Collectively, ASEAN countries command significant economic weight. According to a recent study2 by consulting firm McKinsey, ASEAN’s member states had a combined GDP of $2.4 trillion in 2013. If ASEAN were a single country this would place it seventh in a ranking of world economies by GDP, just behind the UK.
Regional Economic Statistics
The ASEAN population of over 600 million represents the third-largest labour force in the world (behind China and India). Indonesia, Philippines and Vietnam are the three most populous states, representing around 70% of the collective ASEAN population in 2012.
Eight of the ten ASEAN member states boast literacy rates in excess of 90%.
The ASEAN region has witnessed dynamic economic growth rates during the last decade. Over the ten-year period from 2005-2014, inclusive, the ten ASEAN member states recorded compound annual growth rates in gross domestic product (GDP) of between 6% and 16%.
ASEAN countries have also shown high levels of openness to international and intra-regional trade. According to the ASEAN Statistical Yearbook 2013, both intra-ASEAN and Extra-ASEAN trade levels grew at more than 10% per annum between 2006-2012. As a result, the total trade levels of ASEAN countries more than doubled from US$1,224 billion in 2005 to US$2,476 billion by 2012.
The make-up of ASEAN countries’ exports is relatively diversified: as illustrated in the chart below.
ASEAN Countries within FTSE’s Country Classification Framework
Six of the ten ASEAN countries are members of the FTSE Global Equity Index Series (FTSE GEIS)3, FTSE’s broadest measure of the global equity markets. The FTSE GEIS covers around 7,400 securities in 47 countries.
The number of countries considered by the average portfolio investor has increased greatly during recent decades, reflecting a trend towards globalisation. For example, according to the IMF the average non-domestic allocation of a US institutional equity portfolio was only 21% in 1997. By 2013, 49% of the average equity portfolio was invested outside the US4.
When investing outside their domestic market, many investors wish to distinguish mature, more stable economies with deep, developed capital markets from other countries with relatively underdeveloped equity markets and a less evolved infrastructure for share trading.
To achieve this distinction, FTSE classifies FTSE GEIS countries within one of four development categories: developed, advanced emerging, secondary emerging and frontier.
The FTSE Country Classification Advisory Committee, which meets annually in September, uses a number of criteria to assess a country’s classification status (as set out in the table below).
There are standard scorings for countries to qualify for particular levels of development status: a country should meet 21 specified quality of markets criteria to be classified as a developed market, 15 criteria to be classified as advanced emerging, nine to qualify for secondary emerging status and five to be classified as a frontier market.
As can be seen from the table below, individual ASEAN countries fall into each of the four development categories: developed, advanced emerging, secondary emerging and frontier.
The table also shows each ASEAN country’s equity market capitalisation and its total number of listed companies. As at end-2014, the market capitalisation of ASEAN countries within the emerging markets category outweighed the market capitalisation of the countries classified as developed (Singapore) and frontier (Vietnam).
Stock Exchange Partnerships
Over 20 stock and derivative exchanges around the world have partnered with FTSE to calculate their domestic indexes.
The FTSE ASEAN index series, launched in 2005, is calculated under a partnership agreement between FTSE and the ASEAN Exchanges. The index series is designed to represent the performance of large-, mid- and small-capitalisation stocks from across the ASEAN region.
When partnering with local exchanges, FTSE applies global standards in index methodology to a range of domestic equity markets, while taking into account local market characteristics. FTSE seeks to implement a consistent approach when constructing partner indices: for example, by using a single industry classification framework and applying a common standard for measuring and reflecting index constituents’ free float and shares in issue.
FTSE’s approach involves regular discussions with its clients and external advisory committees to ensure that indices meet the requirements of end-users. Publicly available rules provide full transparency of index methodologies.
ASEAN Capital Market Integration
In recent years governments, stock exchanges and regulatory authorities in ASEAN member states have made concerted efforts to increase the level of integration of local capital markets.
In 2011 seven stock exchanges from the ASEAN region–the Bursa Malaysia, the Hanoi Stock Exchange, the Ho Chi Minh Stock Exchange, the Indonesia Stock Exchange, the Philippine Stock Exchange, the Singapore Exchange and the Stock Exchange of Thailand–joined an initiative called the ASEAN Exchanges.
According to its member exchanges, this initiative aims to promote the growth of ASEAN capital markets by driving cross-border trading flows, streamlining market access and creating financial products with a focus on the region.
Additionally, as at mid-2014 three of the ASEAN exchanges (Malaysia, Singapore and Thailand) are connected via the so-called ASEAN Trading Link. The link provides a common access point for participating ASEAN exchanges in the network via a single hub, enabling investors within the region to route orders from their domestic stock exchange to other ASEAN exchanges for execution.
The ASEAN exchanges have also announced plans to streamline the post-trade procedures for cross-border transactions conducted via the ASEAN Trading Link.
The FTSE ASEAN Index Series
The FTSE ASEAN index series consists of the following equity indexes and index categories.
The FTSE ASEAN All-Share index represents the performance of large-, mid- and small-capitalisation ASEAN companies. The index consists of the constituents of the FTSE ASEAN Indonesia All-Share index, the FTSE ASEAN Philippines All-Share index, the FTSE ASEAN Vietnam All-Share index, the FTSE Bursa Malaysia EMAS index, the FTSE SET All-Share index and the FTSE ST All-Share index.
The FTSE ASEAN All-Share ex Developed index represents the performance of all the companies in the FTSE ASEAN All-Share index, with the exception of those listed in developed markets (i.e., companies listed on the Singapore Exchange are excluded).
The FTSE/ASEAN 40 index is designed to represent the performance of the largest companies from across the ASEAN exchanges.
The FTSE ASEAN Sector indexes subdivide the FTSE ASEAN All-Share index into industry, supersector and sector indices, following the Industry Classification Benchmark (ICB).
The FTSE ASEAN Stars index comprises 30 companies from each of the ASEAN exchanges of Indonesia, Malaysia, Philippines, Singapore and Thailand, and 15 companies each from the two Vietnam member exchanges (Ho Chi Minh and Hanoi). This index is intended to serve as a market barometer and not as the underlying benchmark for financial products.
Investability and Liquidity Screens
In common with other indexes from the FTSE range, the FTSE ASEAN index series is adjusted for free float and screened for liquidity. This facilitates replication by index-tracking financial products.
Companies with a free float of 15 percent or lower are not eligible for inclusion in the index series. In Vietnam the minimum free float is 5 percent to allow some of Vietnam’s largest companies to be included.
The categories of shares subject to free float restrictions are set out in detail in the index ground rules5.
The constituents of the index series are also subject to a screening for liquidity, based upon the monthly median of each security’s daily trading volume. In order for a security to be eligible for inclusion in the FTSE ASEAN indexes, its median trading volume must exceed a minimum threshold, also detailed in the index rules. Reflecting the differences in trading volumes across the different ASEAN markets, the minimum turnover threshold is set at different levels for different ASEAN exchanges.
The total return performance of the FTSE/ASEAN 40 and FTSE ASEAN All-Share indexes since the end of 2012 is shown in the graph below. The table provides a five-year comparison of the return and volatility statistics of the FTSE/ASEAN 40 index with the FTSE Asia Pacific ex Japan index.