Foreign investors seek securities lending when analysing emerging markets

Foreign investors look for short-selling and securities lending capabilities above other market structure features when analysing emerging markets.

By Jonathan Watkins

Securities lending capabilities are driving foreign portfolio investment towards emerging markets more than any other market structure features, according to new research.

The World Federation of Exchanges announced the findings in a report identifying factors that attract international portfolio investment into emerging market equities.

The results showed that “the only market structure feature found to be positively associated with international investment is the introduction of securities lending and borrowing.”

Other factors such as direct market access, the ability to short-sell and colocation were also cited, along with market making and the presence of a central counterparty (CCP). However, none of these have as much pulling power as securities lending capabilities.

“We find that the introduction of market structure features, such as the ability to engage in short-selling and the availability of securities lending and borrowing (also relevant for investment) are associated with increased foreign trading activity,” the report said.

World Bank data estimates the level of net international portfolio equity inflows into emerging markets between 2000 and 2017 to be more than $955 billion.

This data shows how international investors can provide additional capital; enhance liquidity; promote greater competitiveness and adherence to standards of corporate conduct; and help balance local retail and institutional participation.

Other factors impacting further investment outside of market structure included equity returns, MSCI inclusion and higher corporate governance standards.

Volatility was linked with outflows in the research.