On Tuesday, the Tokyo Stock Exchange Group, Inc. (TSE) and the London Stock Exchange Group, Plc. (LSE) entered into an agreement to form a new market for emerging Asian companies. The new market is still without a name, but its purpose is clear — create funding for small and startup ventures in Asia.

The agreement is to be a joint venture. The TSE brings its knowledge and expertise of local Asian markets and companies, and LSE brings its experience from the Alternative Investments Market (AIM).

The AIM is an international market for small, growing companies based in London. It was started by the LSE in 1995, and through seeing some 2,500-plus companies trade, the AIM has helped raise upwards of £34 billion for these small enterprising companies. To put it in perspective, the size of the average company’s market cap falls between that of the Toronto Venture Exchange (TSX-V) and the NASDAQ.

This new market has significant implications for all small-cap investors. For one, any small-cap market in Asia is bound to attract many U.S. investors. One of the most frustrating realizations of the past few years has been how difficult it is for small-cap investors to invest in the growing markets of Asia.

Many foreign investors are skeptical of Asian small-caps — more specifically, Chinese small-caps. You see, many Chinese companies currently don’t meet the requirements of the larger exchanges. They rarely release financial information in English and, when they do, it’s not consistent enough.

Many Asian startups trade over the counter, which is an unregulated practice that scares many would-be investors away. A new exchange gives both — these companies a new place to raise capital, and investors to put their money.

Although the new market won’t have as many regulations as the NASDAQ does, it will have many more requirements than are currently in place. For right now, we only have the AIM to speculate on how the new market will play out. The AIM has fewer requirements than most growth markets, but it does require timely financial releases of a listed company’s performance, expected performance, recent activity and financial condition. These new requirements for Asian small-caps should boost foreign-investor confidence.

By boosting investors’ confidence, the new market will allow for much more money to flow into smaller enterprises in Asia, which will add to competition worldwide. Until now, if a Western company is working on the same technology an Asian one is, the Western one has had the advantage of raising capital quickly, whereas the Asian company couldn’t. Which means it would usually lose out to its Western counterpart.

The new market should come online at the end of 2008. So for now, all we can do is speculate. But however this plays out, it’s big news for us small-cap guys. We’ll be looking forward to see how this works out…

Sincerely,
Jim Nelson
November 1, 2007

P.S.: There’s only one person that I know, who doesn’t have to speculate on investing in Asia. He’s an expert. He’s even lived in Hong Kong for a few years. In fact, you already know him… He’s your Friday Sleuther, Christopher Hancock.

Christopher recently finished a report describing one company that he calls “The World’s Greatest Growth Stock.” The world’s richest investor just put over a half a billion dollars into this particularly company.

Jim Nelson

Jim Nelson began his investing career during the tech boom at age 14 – with purchases of Starbucks and AOL. Early inspiration came from an old Tweedy Brown whitepaper: “What Works in the Market.” He graduated with a degree in Political Science from Pittsburgh University, Nelson focuses on income investing, including dividends, covered calls, and fixed-income. Additionally, he covers MLPs, ADRs, utilities, consumer staples and tobacco. Nelson is the managing editor of Lifetime Income Report.

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