Wednesday, January 12, 2011

Laos Launches Stock Exchange

WSJ: Laos Looks to Become a New Market Frontier

Laos will be home to the world's newest stock exchange when the Laos Securities Exchange begins trading on Tuesday. Laos is a small, land-locked Southeast Asian country with a population of six million. It is also a one-party communist state. Its leaders hope that the stock exchange will bring in foreign capital and help reshape the economic landscape of Laos, one of the poorest and least industrialized Asian countries. The exchange will also provide domestic companies with a means to raise funds to expand their businesses.

The Laos Securities Exchange currently has just two listed stocks: Banque Pour le Commerce Exterieur Lao, a bank, and EDL-Generation Co., a power company. With only two trading companies, some analysts claim that the real benefit for Laos in launching its stock exchange lies in the publicity it will provide Laos. The new exchange will highlight the "potential for the country's isolated economy," and may encourage its "Marxist rulers to spin off other state-controlled businesses and take them to the securities exchange." Douglas Clayton, an executive who invested $2.6 million to purchase 2.32% of EDL-Generation's initial public offering said that "we need to be modest in our expectations, but this is the beginning of a process that could end up with ten or fifteen companies listed on the market in the next few years."

Laos is hoping that its power sector and large export market will lure investors. Laos is a major exporter of hydro-power, and has the potential to become even more dominant due to its network of fast-flowing rivers.. Further, officials hope that this launch will allow it to take advantage of investors’ increased interest in "frontier markets," or very small markets that don't qualify as emerging markets. Last year, the credit-rating agency Standard & Poor's Frontier Board Market Index rose by 23%, Ghana's market doubled, and Sri Lanka's market rose by 88%. However, investing in frontier markets can be risky. Just this week, for example, Bangladesh's stock exchange had to suspend trading when a riot involving thousands of investors turned violent and resulted in a sharp market drop.

Investors hope the increased foreign interest in Laos will result in a currency appreciation for the kip, currently trading at 8,034 per dollar, an increase of 5.2% over the past year. Clayton says that for a nation with such a small economy, "it doesn't take much to move the currency—and turning on a big power plant is like creating a trade surplus." The Asian Development Bank is also optimistic, stating that hydro-power exports could bring in billions of dollars in revenue, and is predicting a 7.5 percent expansion of Laos's economy this year. Laos officials hope that the increased revenue will allow the government to spend more money on infrastructure projects and create jobs for its citizens.

Discussion Question: Even though Laos is considered a "frontier market," do you think it is a good idea for investors to invest in the new exchange?

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