ANALYSIS-Internet stokes Asian stocks volatility
By Nick Edwards HONG KONG, March 22 (Reuters) - The Internet revolution that has sent high-tech stocks soaring is also pushing price volatility to new heights via online trading technology that lets retail punters plunge into markets at the push of a button.
Electronic trading firms say the increased liquidity from such players is good for markets and that better access to financial information over the Net is good for investors.
But investment professionals say online retail investors could be causing shifts in market cycles and exposing themselves to huge risks as price gyrations become more wild. "The people investing have taken a very much shorter term outlook...which is a reflection perhaps of them being ill-informed, as well as their trading habits," Robin Howe, managing director of APC Asset Management, told Reuters.
"These are basically people sitting in front of their (computers) at home punting," he said. Retail investors historically have a heavy participation in Asian equity markets.
About 90 percent of daily trading volume in Taiwan is typically retail-based, as is some 80 percent of trade done on South Korea's small cap Kosdaq <.KQ11> market.
KOSDAQ HEAVILY INTERNET-BASSED Kosdaq is also heavily Internet-based, with about 40 percent of trades conducted electronically.
It has seen its volatility index, which reflects the degree and frequency of price changes, jump 21 percent this year while the underlying index has lost 14 percent.
"Interest in investing and ease of access is a combustible combination," said Mark Duff, chief executive of Hong Kong-based online securities trading firm Boom.com.
Duff reckons 30 to 40 percent of total share market turnover in Asia could migrate to the Internet over the next year -- two or three times the present levels.
"A very aggressive investor base is going to have exactly what they need to be slipping in and out of the market, including the information," he said. These aggressive investors sent small cap indices soaring last year -- Japan's Jasdaq <.JSD> up 244 percent, Kosdaq up 235 percent, Singapore's Sesdaq <.SESD> up 173 percent -- and gave Malaysia and Hong Kong the incentive to set up new exchanges.
This year they have been behind some stunning share debuts, such as Hong Kong's tom.com Ltd <8001.HK> which jumped a massive 445 percent on its first day, and Hongkong.com Corp <8006.HK>, which leapt 384 percent.
RUMOURS RIFE The Internet's potential to spread rumour and speculation -- traditional drivers of small cap shares -- faster and further is one reason retail investors like it so much. But its increased use could be accelerating market cycles.
Jardine Fleming analysts say small cap bull runs have four phases and in Hong Kong, the market has completed the first two in record time. "The catalyst for this was the massive liquidity surrounding the Internet plays," JF said in its March small cap monitor.
"We believe the small caps sector has entered phase three of the bull run cycle." Phase three is when markets begin to overheat and retail investors risk being burned as the cycle slips into phase four and professional players sell into a retail buying frenzy.
GOOD SOURCES HARD TO FIND Reliable sources on valuing high-tech stocks remain hard to find, despite the Internet being a gateway to vast data banks. There is no consensus yet among analysts about which is the right methodology and almost every house has an alternative.
Another worry is that while retail investors often lack ready cash of their own, many lenders seem all too willing to bankroll them through both personal and margin loans. That helps inflate liquidity and adds to the risk a market reversal could turn into a rout if over-extended retail punters panic. Australia's Securities and Investments Commission has issued warnings to retail investors about the risks of trading on margin loans which it says have doubled to about A$4.2 billion ($2.6 billion) over the past two years. Market sources estimate that in South Korea around 90 percent of the 10 trillion won ($8.9 billion) rise in household lending by banks last year was plunged into the stock market.
Leverage increases volatility as investors run for cover when they feel threatened and pile in regardless on the upside swing. Also lacking is a clear understanding of what the technology story is all about. The term "high-tech" is so broad it encompasses everything from makers of air-conditioners with fuzzy logic chips controlling temperature to the more nebulous delivery of services through Internet portals.
APC's Howe has identified more than 30 sub-sectors for technology firms and estimates Asia's high-tech bull run has two or three years left -- if one invests in the correct sector.
"I believe the fundamentals are intact across the region for technology.
There are plenty of good stories out there, it's just a question of knowing where to go," he said. "But the Internet fever at the moment means that investors just sink their money in. They are probably missing 95 percent of what's really going on out there," Howe added. ((Nick Edwards, Asia Investment Desk, Tel: +852-2843-6470; Fax: +852-2845-0636; E-mail: nick.edwards@reuters.com)) .
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