Exchanges in the biggest emerging economies began trading futures based on each other’s benchmark stock indexes today as rising wealth spurs demand for new investment products.
The five members of the BRICS Exchanges Alliance will cross-list futures on Brazil’s Bovespa Index, Russia’s Micex Index, the BSE India Sensitive Index, Hong Kong’s Hang Seng Index, the Hang Seng China Enterprises Index and South Africa’s JSE Top40 Index. Traders engaged in arbitrage will be able to buy and sell futures based on the same index on multiple venues, boosting liquidity, according to Mumbai-based BSE Ltd.
The products may appeal to the growing number of wealthy individual investors in developing nations who want to access foreign markets, said Bruce Weber, dean of the Lerner College of Business and Economics at the University of Delaware in Newark. Per-capita gross domestic product in emerging markets has jumped 104 percent during the past decade to about $6,980, according to the Washington-based International Monetary Fund.
“The exchanges are doing well in local markets and want to be seen as international for their local investors, who can then go to another BRIC country easily,” Weber, who co-wrote “The Equity Trader Course” in 2006, said in a phone interview. “BRIC countries have generated a lot of growth for investors.”
The grouping joins Brazil, Russia, India and China -- nations identified by the acronym BRIC in 2001 by Goldman Sachs Group Inc.’s Jim O’Neill, representing countries the New York-based bank predicted two years later would join the U.S. and Japan as the world’s biggest economies by 2050 -- with South Africa. The BRIC nations held their first summit in 2009 and invited South Africa to join the group in December 2010.
Financial assets in developing countries may triple to $141 trillion, or 36 percent of the global total, by 2020 from 21 percent in 2010, according to a December report by the McKinsey Global Institute. Investors in Brazil, Russia, India, China and South Africa have an average 16 percent of their assets in equities, compared with 42 percent in the U.S. and 29 percent in western Europe, McKinsey said.
Emerging-market investors have grown richer as their economies expanded at a mean annual rate of 6.3 percent during the past decade. Growth will probably average 6.5 percent in the next five years, compared with 2.5 percent in developed countries, according to September estimates by the Washington-based International Monetary Fund.
“From a portfolio diversification point of view, it’s certainly a nice strategy,” Bluford Putnam, chief economist at CME Group Inc., which operates the world’s largest futures exchange and owns a stake in Sao Paulo-based BM&FBovespa SA, said in a March 29 interview in London. “Growth rates in Europe and the U.S. are going to be lower.”
The Bovespa climbed 14 percent this year through yesterday, while the Micex gained 6.6 percent and the Sensex increased 10 percent. The Hang Seng China Index rose 6 percent and South Africa’s Top40 index advanced 3.9 percent. The MSCI All-Country World Index of shares in developed and emerging countries climbed 11 percent.
New futures products may encourage investors to focus on shorter-term returns and lead to increased volatility in stock markets, said Allan Conway, who oversees about $24 billion as the head of emerging market equities at Schroders Plc in London.
“That could actually be counterproductive,” Conway said in a March 29 phone interview.
In Hong Kong, only contracts on the Sensex index attracted enough bids and offers to complete trades, according to data compiled by Bloomberg. Five Sensex futures expiring in April changed hands, with the contracts settling at 17,491, the data show. The Sensex closed at 17,404.20 in Mumbai today.
Futures on the Bovespa, Micex, Hang Seng and Top40 indexes traded on India’s BSE, with a total of 882 contracts changing hands, according to data compiled by Bloomberg. Only one trade linked to the BRIC gauges completed on the South African bourse as of 1:38 p.m. in Johannesburg, an April contract on the Hang Seng Index that was priced at 20,445. The gauge closed at 20,555.58 in Hong Kong today.
Initial trading in the contracts may be “quite light,” Charles Li, the chief executive officer of Hong Kong Exchanges & Clearing Ltd., told reporters at a conference in Boca Raton, Florida on March 13. All the exchanges, except for the Russian bourse, won’t charge users to trade the index products being cross-listed for the first six months, Li said.
Half the revenue from trading futures based on another exchange’s index will be shared with that market operator, Li said. The Hong Kong exchange, for instance, will give half the revenue it eventually produces from trading futures on India’s Sensex Index to BSE Ltd.
Russia’s Micex has delayed listing the index futures until May.
The project’s next phase will include the development of an index representing the member countries, Marta Alves, a senior adviser to BM&FBovespa, said at the March 13 conference. Products such as exchange-traded funds based on that gauge will probably generate more liquidity and interest from investors, she said.
“It shows a good level of partnership and collaboration,” said Weber. “They could move forward with a combined index.”