The rise, reach and rallying power of the retail investor in Asia

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Eloise Goulder: Hi and welcome to J.P. Morgan's Making Sense. I'm Eloise Goulder and today I'm delighted to be sitting down with Clare Witts, Head of APAC Equity Market Structure, to discuss the rise of the Asia retail investor. Such a topical theme given the significance of this group today and given the strength we've seen in Asian markets this year, particularly those markets exposed to the AI trade from semis to memory. Clare, welcome. And to kick things off, just how big is retail participation across Asia today?

Clare Witts: Thanks Eloise. It's great to have you here in Hong Kong. The short answer is retail is very large and in many Asian markets it's dominant. So retail investors aren't just participating in the markets here, they're driving them. Retail's always been big in this region. In many markets there hasn't been a culture of funds or pension institutional investing, so there's been a focus on single stock investing for wealth creation. And if we look at the numbers, in China retail's about 50 to 55 percent of turnover. That's roughly 200 billion U.S. dollars a day. In Korea the percentage is even higher. It's 55 up to 65 percent on some days. And currently that's about 40 to 45 billion U.S. dollars a day of trading. Taiwan sits at about 48 percent and very significant retail volumes there as well in dollar value terms. Then if we think about Japan, retail's now at around 28 percent of total turnover and India at about 34 percent, rising in both of those markets. But what's really important is that as Asian markets have rallied, the dollar value of retail money at work has just surged. As I mentioned, retail's always been a large part of Asia trading, but even if the percentage of the market is stable, how much money is going to work has expanded dramatically. And this is catalyzing liquidity and it's catalyzing growth. Both China and Korea are really good examples of that recently, where positive retail sentiment has actually been the trigger for a market turnaround. And that's in terms of volumes and also in terms of performance.

Eloise Goulder: Well, those are incredible shares of volumes, especially when you compare them to the U.S., where we often discuss the rise in share of the U.S. retail investor. But it's at a much lower level, at more like 20 to 25 percent. And of course, in Europe, that share is far, far lower. And it means that the retail investor here in Asia has both participated in, but also driven such strong market performance this year. But Clare, while these whole index levels have moved significantly, under the surface, there's been real concentration in a few single names, hasn't there?

Clare Witts: Yes, very much so. Asia's showing its own version of the Mag-7 dynamic, but in some markets it's even more extreme. In Korea, around 65 percent of all the market turnover is in just two stocks. So a huge amount of that retail flow is going into a very small number of names. And I think what's changed is that these aren't just a local market story anymore. When these topics catch retail attention, it quickly becomes a global trend. For example, Asia's first single stock leveraged ETFs on Korea stocks were actually launched in Hong Kong. They proved hugely popular with Hong Kong retail investors. And meanwhile, U.S. retail has been getting involved as well. We've seen plenty of memes on social media. I Buy Korea Right now, which came about because one of the large brokerage platforms enabled access to Korea for the first time recently. So at the center of all of this, we do have the AI theme and those fundamentals are real. But what we're seeing retail doing is accelerating and amplifying the trend. I think a great example of this was around the recent MSCI rebalance at the end of May. This was a record day for the Asia markets in terms of the institutional flow. It was the biggest index rebalance ever. But in Korea, I was surprised to see that the next two days, the volumes were even bigger and they hit new record highs afterwards. But the trigger was completely different. Those two days of record highs were coming off a lot of retail excitement when Jensen Huang hosted a lot of Korea partner dinners with the large Korean companies. So we're seeing that retail enthusiasm actually having a bigger effect than even the largest institutional flows.

Eloise Goulder: It's absolutely fascinating how significant the retail investor has been. And also the fact that it's not just local market participants trading in local markets, but actually this has become a global phenomena. And the fact that social media is also a global phenomena, I think is helping. Many social media platforms now have automatic translation functions so that you get this true global communication between markets. But as you said, Clare, the power of the AI trade and the earnings growth of the AI trade is clearly the fundamental driver behind much of this market outperformance. From your lens, are there more structural drivers as well for retail in the region?

Clare Witts: It varies quite a lot by market. So in Japan, the growth of retail has been more policy led. The NISA savings tax reform encouraged a lot more direct equity investment. And we see there that retail behavior is still relatively measured. So more interest in index ETFs, a bit more income focused. Whereas Korea, the hot market at the moment is very different. It seems much more driven by sentiment or animal spirits. And for investors in Korea, equities are really seen as the main way to build wealth, particularly for younger investors. So it's described as the Tina trade. There is no alternative. Whereas China's moving the other way towards gradual institutionalization, retail is still dominant, but its share there is slowly declining as we see more quant and institutional flow coming into the market. But because the market is growing in terms of its amount of trading and the valuations going up, retail is still very large in absolute terms. I just wanted to touch on India as well. That's quite a unique market because retail there's been very active in derivatives for a long time, particularly futures and options. And that's different to other markets, which have been more cash equity focused historically. But overall, that seems to be the general direction of travel. Asian investors are getting younger, they're getting more reactive and generally they're getting much more comfortable taking risk.

Eloise Goulder: And does this high retail participation change market dynamics on a day to day or an intraday basis?

Clare Witts: Absolutely. These Asia retail driven markets tend to be very front loaded. So you'll see a lot of activity early in the day as investors react to overnight news, especially from the US. Again, Korea, about 10 percent of daily volume happens in a short pre-market window, and that's often very volatile. We see that front loading pattern also in Taiwan and China. And interestingly, in Hong Kong, which was traditionally more of an institutional market, southbound flow from China investors, which includes quite a high proportion of high net worth investors, has actually started shifting some of the activity more towards the morning. So you can literally see a volume spike as mainland investors start trading after the open. Retail is therefore reshaping not just how much is trading, but also when and how it's trading.

Eloise Goulder: It's fascinating. And arguably, when you look at European markets, which is the most retail light region globally, you see quite the opposite. And you've seen this shift in trading activity at the close.

Clare Witts: Exactly.

Eloise Goulder: So Clare, the retail investor is so significant in share of volume, but also in the dollar value that they are trading at this stage. Are there further changes you're expecting from here?

Clare Witts: The biggest structural shift in my view is how the stock exchanges themselves are responding in Asia and beyond. So now they're actively competing for retail flow, and that competition is increasingly global. A clear example of this is T plus one settlement. So in this region now, there's interest to accelerate so that retail can get their money back in their pocket quicker. India was actually the first to do this, pushed by a regulator who was concerned about retail flow into crypto. But now Hong Kong and Korea are also aiming to deliver T plus one within 18 months. And that is really a retail, not an institutional style timeline. And of course, extending trading hours, a hot topic in the US, is also largely to cater to retail trading behavior. And that goes back to retail money being fundable across borders.

Eloise Goulder: So, Clare, we've been seeing clients this week. And from my lens, the key question is how much further these Asia AI-exposed markets can go. And on the one hand, that's a fundamental question. And right now, fundamentals are strong and earnings delivery is real. But from a market structure perspective, what are you watching to understand whether markets have become overextended?

Clare Witts: For sure, there's a focus on tracking retail leverage and whether we're coming into an overshoot situation. But the data at the moment in a market like Korea is showing that although retail margin levels are at absolute highs, in terms of relativity to market cap, they are not necessarily worrying at the moment. And so that question of overextension is not uniquely a retail story.

Eloise Goulder: That's interesting. And of course, we get the same question on the hedge fund leverage side. Net positioning is high in certain pockets, such as Korea and Taiwan and increasingly Japan. But for the Global Equity Index space as a whole, it's not currently at record highs. But beyond the AI trade, Clare, what else is changing?

Clare Witts: I think the new ETFs are the space to watch in this region. In Japan, ETF rules have been relaxed to allow more flexibility. And in Hong Kong, it's similar. There's more ETFs being listed on overseas products. There's more leveraged and inverse ETFs coming to market. And there's significant expansion of the cross-border product set. So, in this case, there's a very clear direction of structural travel, which is, number one, make it easier to list products. Number two, make them more thematic. And number three, make them easier for retail to access. So, we're seeing stock exchanges in this region, which have traditionally been domestic or nationally focused, now effectively exporting market access. And that's a big shift.

Eloise Goulder: And how are we seeing hedge funds responding to these changes?

Clare Witts: I think as we're seeing with AI, the trend works best when there's fundamental value and retail exuberance combined. But we're seeing more hedge funds finding opportunity in Asia, even when there's only one of the two. And as the exchanges expand, the product set, and as we see these retail volumes continue at high levels and retail moving with trends, I think that's only going to continue.

Eloise Goulder: Yes. And I think tracking where the retail investor is buying and where the hedge fund investor is buying is also really important because it allows you to see the extent to which there's major concentration and major overlap or not. And it's always reassuring when you can see that the overlap isn't 100%. But this is certainly an area we're exploring right now. So Clare, you've spoken a lot about cash equity trading, but are there also changes in the derivatives markets?

Clare Witts: Yes, Asia retail is definitely becoming more sophisticated in derivatives too. This started as largely speculative. But increasingly, they're being used for risk management too. Again, if we look at Korea, single stock futures have now overtaken index futures in terms of open interest. Retail is about 12% of the derivatives market volumes. And other Asia markets are looking to rapidly expand the range of derivative products as well. So the retail investor in Asia today isn't just buying stocks, they're increasingly building positions across multiple instruments. And I think that's a positive because it's opening up more liquidity, more hedging tools, more alpha opportunity for institutional investors as well.

Eloise Goulder: And what about IPOs? I mean, this has been a hot topic this year.

Clare Witts: Yes, retail investors in Asia have always had strong appetite for IPOs. That continues. We tend to see very strong participation in the growth and the tech listings at the moment. And that can drive strong early liquidity, but it does also drive a lot of volatility in that post IPO performance. And that in itself has an impact on regulation. So regulators in this region are extremely focused on retail outcomes. In the IPO space, that might be retail allocations, lock-ins, post IPO performance. But that also translates into a strong regulatory focus on best ex in the secondary market. And we do see in Asia, retail outcomes play a bigger role in policy than perhaps we see in other parts of the world. And that explains many of the regulatory interventions that we've seen in the market in recent years, particularly in markets like China and Korea and India.

Eloise Goulder: So looking ahead, what should we be watching on the market structure front?

Clare Witts: A few things. First, more product innovation, especially ETFs, cross-border access and derivatives like we've talked about. Secondly, the evolution from the stock exchanges to drive more of this retail flow. So those topics we discussed like shorter settlement cycles, longer trading hours, and then also work on microstructure like tick sizes and spreads to make stocks more accessible for retail. And third, we must say over-extension. These retail-driven rallies can be extremely powerful, but they can also overshoot, especially as the leverage builds. And we're seeing some discipline from retail taking profits on the way up, but that is definitely something to watch.

Eloise Goulder: Well, that is something that investors are clearly questioning on both the fundamental side in terms of the power of the earnings dynamics for these themes, but also on the market structure side. Well, Clare, this has been such a fascinating conversation and such a critical conversation, given the strength of markets and the high share of retail participation in Asia today. Thank you so much for taking the time to share all of these insights today.

Clare: Thank you so much, Eloise. It's been great as always.

Eloise Goulder: And thank you also to our listeners for tuning in to this Making Sense podcast. And with that, we'll close. Thank you.

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