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Keith Rabin

Keith Rabin

Keith W. Rabin serves as President at KWR International, Inc., a consulting firm specializing in the delivery of Asia-focused trade, business and investment development, research…

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Establishing the Yangon Stock Exchange (YSX) as a Vibrant Capital Market

This interview is part of an ongoing series highlighting Asia-related business, trade and investment opportunities and issues.


Conversation with David Grayson, Co-founder and CEO, Auerbach Grayson and Co.

David Grayson

Hello David, good to see you again. Can you tell us about your background and the work of Auerbach Grayson and Co. (AGCO)?

I started in the brokerage business in 1975 and before starting AGCO in 1993 I was CEO of a New York Stock Exchange (NYSE) member firm specializing in selling US equities to European institutions. We were probably the only NYSE firm that had no clients in the US. One of our minority shareholders was AMRO Bank, which merged with ABN Bank, and I become MD of ABN-AMRO Securities in New York. I then met Jonathan Auerbach who had the idea of establishing a brokerage to sell European equities into the US and we became partners and established this firm. We are best described today as a NY-based global firm that specializes in selling foreign securities to major institutions - 99% of what we do is selling securities from outside the US to US clients.

We started with Europe, but early on were introduced to a broker in South Africa. While there were sanctions on at that time, we knew things would change. Mandela was then released from prison. We did very well and decided to expand - and are now in 120+ countries, including both developed as well as frontier markets. Our niche is establishing a relationship with one leading broker in each country. Generally these are firms who seek to do business outside their country and to deal with US investors, but do not want to register with the SEC and set up a physical office.

Since we only do business with one broker in each country, the relationship is totally transparent between the local broker and the client. That allows complete transparency between our clients and the local broker partner. We always try to be the first or one of the first in a country after it opens and that is what initially attracted us to Myanmar.

Yangon Stock Exchange (YSX) Picture 1

You just returned from the launch of the new Yangon Stock Exchange (YSX) and in October hosted a luncheon meeting in New York to introduce Myanmar Deputy Finance Minister Dr. Maung Maung Thein to high profile US institutions and investors. What are your thoughts on the YSX and what are the impressions of institutions and other portfolio investors on this market?

I would say that most frontier and emerging market investors are very interested in Myanmar and the opportunities that are present there. One reason is that Myanmar is starting at such a low level and has so much growth potential - which is something you do not see often. Two years ago it was difficult to get mobile service and now the sector has experienced tremendous growth. There are also new car dealers, office buildings, shopping centers, hotels and restaurants as well as the development of large projects and special economic zones. When you couple that with 51 million people in a country about the size of Texas, which possess large reserves of natural resources, that is tremendous. Myanmar is also demonstrating a desire to get close to the West. When they were under sanctions China had an outside influence and now they are moving closer to Thailand, Singapore, Japan, Europe and the US. You are also seeing active efforts to develop an active liquid stock exchange. This is all very positive and attractive to investors.

Yangon Stock Exchange (YSX) Picture 2

The visit of Deputy Finance Minister Dr Maung Maung Thein, who serves as Myanmar's chief regulator for the new exchange and its emerging securities market, also went very well and we were pleased by the opportunity to host him in New York. We brought him to visit the NYSE and unlike some other guests we have brought there, he was very eager to observe and learn and to see how what he saw could apply back to Myanmar. This was very positive and demonstrated Myanmar's intention not just to set up a showpiece exchange just to have one, but rather to establish a real, dynamic funding mechanism that will serve to enhance and leverage Myanmar's corporate and overall economic development.

Your Thai partner KT ZMICO and Myanmar-based KTZ Ruby Hill Securities were recently awarded one of four foreign licenses to transact brokerage business and offer investment banking services in Myanmar. How did this come about and given that YSX trading will initially be restricted to local investors, what will be the focus of your activities at this early stage?

Out of the list of potential bidders, KTZ ZMICO was one of the few entities aside from the Japanese contenders to have solid brokerage and investment banking capabilities as well as experience dealing with global investors and institutions. While the Ministry of Finance has not elaborated on the criteria they used to award these licenses, one must imagine this must have been part of their decision. Initially, KTZ ZMICO will seek to be part of the process for facilitating new listings within Myanmar, though over time foreign investors will be involved which will provide more opportunities for them and other firms such as ourselves. They also hope to take part in privatizations and the listing of other companies in the market.

Yangon Stock Exchange (YSX) Picture 3

As mentioned, what is clear and encouraging is that unlike some of Myanmar's neighbors, regulators and officials in Myanmar have been very open to suggestions. They do not view the market as a showpiece but rather as a platform that can generate the funding needed to enhance the development of companies and employment. It was positive they had the Tokyo Stock Exchange (TSX) establish the stock platform rather than build it themselves. That gives them more credibility and capacity, as well as introducing the efficiencies and experience the TSX can offer.

Publicly-listed securities depend on the existence of adequate transparency and regulatory and service infrastructure so that investors can make intelligent investment decisions from reliable publicly-released information. In Myanmar, however, as in most frontier markets, companies lack experience differentiating between shareholders vs. management and how to address the requirements of analysts and investors. What needs to be done to instill trust and confidence both in terms of corporate governance and their operations and reporting? What do international institutions and investors need to know about Myanmar and frontier markets in general?

Yangon Stock Exchange (YSX) Picture 4

First of all, frontier investors will be largely composed of those with a frontier mandate. These people are used to operating in markets without lots of transparency, and where it may be unusual for companies to meet with outside investors. In Myanmar, however, one of the things I have encouraged the government to do both in their privatizations and private listings is to encourage management to have shares in their listed company. This will provide incentives to raise share value and make these individuals more open to speaking with analysts and investors. Having met with various regulators, it is also clear to me they understand and are intent on finding ways to make the market a major part of the economy moving forward. In my view there is no better way to raise money in a fair, efficient, transparent manner than listing companies on a stock exchange. If regulators and the YSX establish sufficient regulatory oversight and enforcement to make rules that are adhered to, they will have a successful stock exchange. If they don't, however, all it takes is one negative incident to scare investors away.

Yangon Stock Exchange (YSX) Picture 5
Downtown Yangon street market and Junction Square Shopping Center

Whereas the US has an established "equity" orientation in which companies seek the participation of outside investors to share risk and to fund their development, many markets are more reliant on debt through commercial bank financing. In Myanmar, however, companies have traditionally focused on internal financing which has made it difficult to expand and compete on a larger scale. Based on your experience and what you have seen in Myanmar, how do you see its financing environment evolving in coming years?

Based on the rapid growth I have seen in Myanmar over the last few years and the fact that the YSX has been advertising and developing its potential as a funding mechanism, I believe a culture will develop where local businesses and government will see the advantages of raising capital by listing on this exchange. Once they, and Myanmar society as a whole, understands that the capital raised will go toward raising business and jobs this will become a very popular way of raising money.

Yangon Stock Exchange (YSX) Picture 6
Expanding Myanmar's infrastructure through on and off-grid electrification

Until now, Myanmar companies and government entities seeking foreign capital and funding of infrastructure and large projects have focused mostly on joint-ventures and foreign direct investment (FDI). Will the creation of the YSX change this dynamic? How should Myanmar companies and entrepreneurs differentiate between portfolio and corporate investment?

I think that capital raised through the YSX will supplement rather than substitute for the rising FDI inflows we have seen in recent years. While portfolio investment will help to fund companies and corporate activity, I think large infrastructure and capital projects will still be achieved largely through FDI - including both debt and equity financings. We are also likely to see a continuing shift from China toward investment from Thailand, Singapore, Japanese, US, European and other investors.

Until the launch of the YSX this year, the few Myanmar-focused companies and funds that sought public listings, such as Yoma, Interra, Singapore-Myanmar Investco and Myanmar Investments, relied on reverse-mergers or other mechanisms so they could list in foreign markets. Will this remain a viable strategy? What are the advantages to pursuing a listing on the YSX as opposed to one in Singapore, Hong Kong, London AIM or other more-developed markets? How should Myanmar companies and international investors differentiate and choose between these different options?

If Myanmar does a good job in creating a viable stock exchange, in my opinion they at least initially should discourage companies from listing overseas in the same way the Vietnamese have done. The primary advantage of listing overseas is that these more established markets provide more liquidity. They are also subject to more regulatory oversight and enforcement which gives confidence to investors.

Yangon Stock Exchange (YSX) Picture 7

While it will take Myanmar awhile to generate the trading volume needed to enhance liquidity, they can both speed up this process and encourage both greater domestic and foreign investor involvement through development of prudent regulatory oversight and enforcement.

Another reason Myanmar should move to enhance the attractiveness of listing locally, as opposed to overseas markets, is that this will give more impetus and importance to the YSX. You don't want to create a market and then have everyone list overseas.

What also should not be underestimated is the employment opportunities that will accompany development of a vibrant financial services sector and all the support services a stock exchange and capital markets structure will require. Not only with this raise employment in Myanmar, it will also help to create a greater understanding and appreciation of capital markets and have positive spill-over effects within Myanmar's overall business and commercial environment.

Yangon Stock Exchange (YSX) Picture 8

One problem international institutions and investors have had in respect to their Myanmar-focused market-entry and investment strategies has been the continued existence of prominent entities on the US Specially Designated Nationals (SDN) list as well as areas that continue to remain subject to sanctions and additional reporting. This was given as a reason why the Singapore Exchange rejected approval of Max Myanmar's efforts to list there through a reverse merger with Aussino in 2013. In some cases, even when sanctions are no longer an issue, legacy fears remain and there is a reluctance to take on exposure to Myanmar-focused investments. What advice would you give to individuals who view this as a barrier and concern?

I have been in touch with the OFAC office at the US Treasury Department, and have been told there is no prohibition on US investors investing in Myanmar firms unless it involves individuals that remain on the SDN list. At the same time there is sometimes a lack of clarity as to who is involved, and as you say "legacy fears" remaining which cause firms and institutions to be reluctant to make commitments.

That said, I am confident that as Myanmar proves itself and demonstrates its attractiveness to international investors and proves its potential as a place where they can earn an attractive return, all of this will be worked out over time.

In a recent interview Myanmar Deputy Finance Minister Dr Maung Maung Thein noted that he expects the YSX to catch with Vietnam's Ho Chi Minh Stock Exchange, which has over 300 stocks and a combined market capitalization of $19.2 billion, within three years. What would have to happen for the YSX to achieve that goal?

I am very optimistic and believe the YSX can surpass the Vietnamese exchange. When the exchange opened in Vietnam they were very xenophobic and only recently relaxed the process needed for a foreign investor to get a license. That took 4-6 months. Today it takes two months. While Myanmar will initially restrict foreign ownership, I can sense in my conversations with key officials and companies they are far more receptive and open. Over time I believe they are intent on opening an exchange that will offer Myanmar firms a platform from which to access capital and investors to earn an appropriate return. Further when Vietnam opened to foreign investors they did it very quietly. In Myanmar's case they have noted there intention to open to foreign investors - but still need to determine the optimal regulatory framework to guide this activity.

That said, an aggressive program will be required to build capacity and to allow privitizations and a sufficient number of private listings. Regulations must be developed and implemented, ideally with incentives provided to help spur activity. When initiated in a country that has had no real industrial expansion in many decades the potential for growth is enormous.

The end result will be significant job creation, establishment of larger, more vibrant middle class and a growing economy. Much, however, needs to be done, including substantial efforts to initiate expanded education and training so that necessary financial services can be provided.

Yangon Stock Exchange (YSX) Picture 9

Myanmar is opening its financial markets during a time when international institutions and investors are scaling back their exposure to emerging and frontier markets in favor of the lower perceived risk of more developed and mature markets. How do you view this trend as well as current perceptions of international institutions and investors toward frontier markets? What does this mean for Myanmar in the near and longer term?

When people talk about scaling back their exposure, my impression at least in an institutional sense, is they are talking mostly about Brazil, Russia, India and China and not about frontier markets. Frontier markets tend to be smaller and less liquid and it is not so easy to enter and exit. As a result frontier market investors tend to be patient and see opportunity over time. Additionally, we should not forget that while we are now seeing rising volatility and risk aversion in financial markets, ultimately it is the emerging and frontier markets that will drive global growth given the lower base from which they now operate.

Yangon Stock Exchange (YSX) Picture 10
YSX funding can help to enhance private sector development in Myanmar

Thank you David for your time and attention. Before we conclude is there anything else you would like to note for our readers?

Yes, I remain very optimistic on Myanmar and its plans for the YSX and we have a long line of funds and investors waiting to make their first investment and trade there. It is also my sincere hope that Myanmar establishes a proper system in which the best use of capital generated is for it to be utilized locally to enhance local development - rather than what has been seen in some other countries where a lot of capital went to fund real estate purchases in London and other major cities.


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