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SCMP Reporter

THE past year has been one which many in the local broking industry would prefer to forget. Increased competition from major foreign brokerage firms and drastically shrinking stock market turnover has led to Hong Kong's smaller broking outfits fighting a desperate battle for survival.

For many, this is a fight which is likely to continue next year.

'A lot of the smaller brokerage firms are being squeezed out,' said Sun Hung Kai Securities executive director Larry Tam.

Sluggish share price movement has caused many local and foreign investors to steer well clear of the stock market this year and turnover has slumped as a result.

 Daily turnover during 1995 has averaged a meagre $3.2 billion, compared to the $5.1 billion which it reached in 1994, according to the Stock Exchange of Hong Kong.

'The poor trading volume this year has been a big problem, because, in order to be able to break even, the brokerage houses in Hong Kong really need to have trading volume at a level of around $4.5 billion to $5 billion,' said Yamaichi Securities head of research, Alex Tang.

'The smaller brokerage houses are suffering a little bit more than most because of the low volume and there's speculation that some of them might have to close.

'But, at the moment, they're all hanging in there and hoping that things will turn around next year. I've not seen any closures yet, but I can foresee some mergers taking place next year,' he said.

Sun Hung Kai's Larry Tam said that the larger foreign brokerage houses had taken business away from local firms this year. He said that the trend was for the number of foreign brokerage firms which were active in the territory to increase and for the number of local outfits to fall.

 Vickers Ballas research director Andrew Fernon said that it had been fairly easy for the foreign operators to establish a base in Hong Kong in the past few years.

'It's always been a market that has had some very low entry barriers and so, in the past few years, we have seen the emergence of the overseas broking firms who have established a presence here, as well as the mainland Chinese broking interests.

'The broking industry has become very crowded and so this makes it difficult for firms to compete, particularly when the trading volume is fairly thin. Our firm has managed its costs very well this year, despite a difficult environment, but I think it could be said that certain firms are going through a very tough period right now, with cutbacks and merger activity imminent in some cases,' he said.

Mr Fernon is among a number of upbeat stock market analysts who believe that Hong Kong's beleaguered brokers will have overcome the worst when this year finally comes to a close.

Many analysts believe that China's inflation picture is improving so much that the country will ease its austerity policies next year, enabling much greater mainland involvement in Hong Kong's stock market in 1996.

These analysts expect the Hang Seng Index to fare better next year and they see the 1996 average daily turnover rising considerably from its present level, as a result of the increased investor interest in the market.

'Next year, I think we'll see more foreign firms focusing on the Asia-Pacific region,' Mr Tang said.

'Although I expect them to keep a neutral weighting on Hong Kong, there will be so many of them that, even though they have a neutral stance, Hong Kong's turnover figure should rise,' Yamaichi's Mr Tang said.

However, even if the average daily turnover figure does rise significantly from this year's paltry level, many of the smaller brokerage outfits can still expect to face some extremely tough times in 1996 as a result of the increased attention which the big foreign brokers will continue to pay to Hong Kong.

Equipped with large research units, the most up-to-date technology systems, extensive overseas links and the ability to buy stocks in other markets for clients, they can offer a wide range of value-added services which are being demanded by more and more members of an increasingly sophisticated investing public.

Many of the territory's small brokerage firms are just unable to match these advanced services although, if they are to survive, they must try hard to do so.

 In today's increasingly competitive market place it is no longer sufficient for brokers to only be able to buy and sell stocks for their clients.

'For brokers to survive over the coming years, it will be essential that they set up a good research department and that they provide some value-added services to their clients,' Mr Tang said.

'If they want to do well, then I think they must also expand and offer a regional service.' 



Small brokers face battle for survival