When investors consider investing overseas, two challenges typically emerge. The first is currency risk and the second is familiarity. Within Southeast Asia, the second challenge of familiarity component is somewhat mitigated by the close economic and tourism ties between countries. In particular, Thailand is a favorite tourism destination for many Singaporeans. Now, a new tie-up between the Singapore Exchange (SGX) and the Stock Exchange of Thailand (SET) is off to a promising start. It is a first among the ASEAN exchanges.
Called the Thailand-Singapore DR (depository receipt) Linkage, the DR which represents shares in SGX-listed security, are available for trading on SET and vice versa. Investors from both countries can benefit from easy access to securities listed on either exchange. They can buy and sell securities via a DR through their local broker arrangements and in their domestic currency, resolving the first challenge.
Through the partnership, both exchanges hope to attract more regional investments as there is a growing demand from both market participants for more cross-border investment opportunities. It is also an opportunity for investors to diversify their investments.
The link also allows Thai companies to signal their governance by appropriately adjusting their financial reporting to align more with Singapore and international standards. Currently, Thai listed companies need not comply with the International Financial Reporting Standards, but may instead follow Thai Accounting Standards which may be different.
Initial trading
Since the announcement of the partnership, there are now three DRs issued for Thai companies on SGX. They are Airports of Thailand, CP All, and PTT Exploration and Production. As these DRs experience a healthy investor inflow, there will be more Thai firms trading on SGX in the near future, according to Philip Securities, a brokerage for the initial Singapore DRs.
At the same time, Singapore family-run firms can benefit by leveraging DRs as instruments to satisfy local investment rules for their tax exemptions. They can diversify their investments instead of investing in securities exposed to Singapore-specific risks.
For Thai investors, there is a DR issued for Singapore Airlines. As one of the world’s top airline, many Thais can gain exposure to Singapore’s economic importance as a trade and logistics hub by investing in the DR. It isn’t surprising that Singapore Airlines is the first DR since it is a brand Thai people are familiar with. As more SG companies expand their operations into Thailand and potentially more investor engagement from Singapore firms ti increase their familiarity, there may be more DRs issued for these firms.
Risks involved for all
But it’s also worth thinking about what exactly is new about this set up. All investments carry some degree of risk. In this case of DRs, investors are exposed to the underlying stock but also the underlying currency risks when investing in DRs. In this regard, it is simply an instrument of convenience – saving investors time from dealing with potential capital controls and opening local brokerage accounts. However, there are also other risks.
Notably, DRs are not directly issued by the underlying company. This means they do not need to have the same rights as the underlying stock. For example, depending on the design, investors holding the DRs may not be able to exercise their shareholder rights as they are not direct shareholders.
Looking ahead
Thai companies seeking to expand their shareholder base should place more focus on investor relations and help potential investors familiarise themselves with the companies. The language barrier does not help. At the very least, financial reports and company presentations should be in English.
Nevertheless, what can investors expect from future DRs? To drum up investor interest, SGX can focus on Thai companies from lesser-known sectors such as energy, materials and industrial for Singapore investors. And for Thai investors, SET can bring in real estate investment trusts (REITs) and finance firms. Finally, more tie-ups among the region’s exchanges could be on the way, leading to more investment opportunities for investors.