If you’ve been following developments in the local mainstream media, you’d probably know that there have been an increasing number of calls in recent months from investment professionals and various other commentators about the need to revive the SGX by stimulating interest in what is commonly said to be a moribund local stock market.
Among the recommendations is to get the government’s investment arm GIC to inject Central Provident Fund (CPF) money into local stocks, to study what Japan did to get its market moving again, to encourage large government-linked companies like PSA Corp and Singapore Power to list and to raise the standards of corporate governance so as to instil greater investor confidence.
Before evaluating the feasibility of these suggestions, let’s take a look at what led to these calls.
The SGX "incredibly shrinking" market – and a bit of perspective
A big reason for calls for action is that the Singapore stock market has undeniably been contracting.
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At the end of 2017 there were 752 entities worth S$1.1 trillion listed on the Singapore Exchange (SGX).
By end of April 2024, there were 634 worth S$777 billion.
The number of listed firms has fallen 19% while the value has dropped 29% in about six and a half years.
No surprises then, that in 2019, Bloomberg news agency described the Singapore market as “incredibly shrinking” while the South China Morning Post in 2021 said the market’s “zombie’’ condition was undermining the country’s status as a financial centre and worse, the problem is probably irreversible.
The main cause of this shrinkage is that the majority shareholders of dozens of companies have opted to surrender their listing status and delist.
Most of these are well-known, good-quality, medium-to-large firms such as Koufu, Eu Yan Sang, Osim International, Chip Eng Seng, GK Goh, Isetan and Lian Beng (and soon, possibly Great Eastern), while new listings have been mainly small, lesser-known companies with no earnings track record.
The outcome is a “hollowing out” of the market – you have the large blue chips on one end and small, possibly unprofitable companies on the other with a diminishing middle ground of mainly good-quality firms.
The most common reasons given by exiting companies for wanting to leave the market are persistent undervaluation of their shares, poor trading liquidity, high compliance costs and no need for additional capital. In other words, because the costs of remaining a public company outweigh the benefits, it’s better to go private.
Clearly then, something needs to be done as a market with aspirations of being a global or regional financial centre should ideally have a thriving, growing stock market – not one where a good, profitable company can list at a high price, then delist after several years at a much lower price because its shares are languishing through a lack of interest.
Looking at SGX's regional competition
However, it’s also worth noting that comparisons with Hong Kong or any other market are unfair. Hong Kong has the immense hinterland of China to draw upon, whilst Singapore’s domestic economy is made up of mainly small-to-medium sized enterprises (SMEs). Furthermore, a China company would prefer to list in Hong Kong or in China because of greater investor familiarity and analyst coverage.
Most companies would always prefer to list in their home exchanges because of investor familiarity and greater analyst coverage. The Singapore companies who have listed in Hong Kong and the US may have enjoyed higher IPO prices but the majority have underperformed since listing. So Alibaba initially listed in the US because the company has a dual class share structure which Hong Kong did not allow at the time, but once Hong Kong changed the rules to allow such a structure, Alibaba returned to Hong Kong for a secondary listing.
Additionally, whilst in the past it was possible to entice firms from the region like those from Indonesia, Thailand, the Philippines and Malaysia to list here, technological and other advancements have meant all these regional exchanges are now able to offer services comparable to SGX.
In short, regional competitors have caught up, and so an Indonesian or Thai firm today is much more likely to list at home than on SGX.
It’s also worth pointing out that other markets are also shrinking, so Singapore is not alone. The US stock market for instance, has shrunk by half over the past 20 years and a similar pattern can be found in the UK and Western Europe, though most of the delistings there are due to mergers and acquisitions and not privatisations by majority owners.
Having put things in perspective, let’s look at the suggestions that are circulating on ways to boost interest.
- Get GIC to help revive SGX by investing in local stocks
GIC’s website states that as a rule, it only invests outside of Singapore in order to earn long-term return so there is no doubt if it was to shift some of the sizeable S$500+ billion in CPF funds into local stocks, the market would enjoy a large boost.
But the spike up would very likely prove short-lived and in the long term, unsustainable without the introduction of fresh, attractive investment-grade companies.
Over time, putting GIC-managed CPF money into SGX stocks would result in an over-concentration of retirement money in one place because individuals can already invest a portion of their CPF savings in local stocks under the CPF Investment Scheme.
This would increase risk to society as a whole which would then compromise the role of CPF, which is to ensure sufficient retirement adequacy through the generation of safe, stable returns.
Furthermore, government involvement in local stocks is already significant via Temasek Holdings so there’s no need for GIC to also jump in.
- List large government-linked companies (GLCs) to help revive SGX
This suggestion was made based on a hope that history will repeat itself, because back in October 1993 when Singtel went public, the local stock market experienced a “super bull” run.
Again, like the CPF suggestion, this would likely only provide a short-lived boost. Let’s not forget that Singtel’s listing was hugely successful because at the same time, the public was allowed to use CPF money to buy local stocks for the first time.
Furthermore, that bull run lasted less than six months, ending abruptly ended by an unexpected US interest rate hike in early 1994. This is not to say that large GLCs should not go public, however, it is worth bearing in mind the limitations of this strategy.
- Raise the standard of governance and with it, investor confidence
Many observers have cited the repeated blows to investor confidence brought on by perceived regulatory failures as a big reason why local investors have abandoned the local stock market.
In chronological order, these would be the collapse of trading in Malaysian shares on an over-the-counter segment known as CLOB International in 1998 because of unilateral action taken by Malaysian authorities, the crash of China stocks known as S-chips between 2003-2008 due to fraudulent accounting and other irregularities, and the penny stock debacle of 2013 when sudden regulatory intervention in trading of the three manipulated counters Asiasons, LionGold and Blumont wiped S$8 billion off the market’s value.
As a result, many in the market believe that better regulation is needed to bring back investor confidence.
This suggestion is more difficult to evaluate because more regulation doesn’t necessarily lead to a more robust market. The whole point of deregulation in the late 1990s and the shift away from a merit-based regime to one based on disclosure was to lighten the load on regulators and place more reliance on market discipline. To add more rules now would run counter to this intent.
My view is that what’s needed is sterner action when the rules are broken, which is not the case currently. No need to intervene frequently but when there is intervention, make sure due punishment is sufficient to serve as a deterrent.
- Look at what Japan has done – shift the responsibility to companies themselves
This is the best option. Japan not long ago mandated that companies whose share prices trade below their book values or net asset values now have to disclose measures they intend to take to address this valuation gap.
This move has been so successful that South Korea is looking to follow suit and so should SGX.
After all, why should companies be allowed to complain about persistent undervaluation and the absence of liquidity, then later be permitted to buy everyone out at depressed prices, sometimes lower than their listing price and always at a large discount to net asset value, when they themselves haven’t taken all possible action to help themselves?
The lacklustre conditions shrouding the local stock market have persisted for way too long – more than 10 years by some reckonings. It’s time to do something about it, and a good starting point would be to look at measures that Japan took.
