The emerging markets will drive the next wave of transformational change and deal-making in the exchanges sector, according to a new report by PwC.
The report, titled ‘Trading blocs – what next for the stock exchanges?’ suggests the most viable growth options for Western exchanges are to focus on developing post-trade clearing and settlement capabilities or fostering ties with emerging market players.
According to the report, high operating leverage and heightened competition have suppressed margins across the sector and will continue to provide a compelling economic rationale for consolidation.
Much of the new competition in Europe has been enabled by regulatory changes, such as Europe’s Market in Financial Instruments Directive (MiFID), allowing new entrants with low-cost business models to seize market share.
Shamshad Ali, partner at PwC, said talk of an end to consolidation in the stock exchange sector may be largely true for the more mature Western European markets, but Asia and Latin America are likely to see significant M&A in the future – if regulatory hurdles can be overcome.
"Over the next five years, significant M&A activity will be driven from the emerging markets as local exchanges seek growth opportunities outside their home markets.
"As economic growth in the emerging markets continues to outstrip the traditional markets, exchanges in Asia and Latin America have the obvious benefit of being positioned within the heart of this growth surge," he added.
In addition to serving local companies, Hong Kong and other leading Asian exchanges have already seen an increasing number of dual-listings from Western corporations keen to access the region’s growing capital bases, the report said.
PwC report also highlighted that despite strong growth predictions in the Asian region, a number of hurdles to M&A remain. Crucially, Asia is not a single market and. therefore, does not have a single regional regulator. It has therefore not developed the cross-border market liberalization measures that would pave the way for more straightforward cross-border mergers. In addition, local considerations, such as constraints on foreign investment, are a crucial barrier to further intra-regional consolidation.
The report named Brazil, Hong Kong, Singapore, Shanghai, and the merged Russian exchange as top emerging market exchanges to watch out for.