The Singapore stock market has outperformed regional peers and gained a third year to date. Morgan Stanley believes that 2025 could be another "fruitful" year, says Morgan Stanley.
As part of a raft of impending changes seen to help uplift the local bourse, the US bank believes that the CPF funds will be a key source of capital to boost valuation multiples by up to a fifth.
In its base case, Morgan Stanley sees Singapore's PE re-rate to above-trend levels of 14x, and up to 16x in its bull case.
“The combination of seemingly stronger political will and low market expectations drives our conviction that soon-to-be announced initiatives will likely have a meaningfully positive market impact, even if their exact details are still to be fleshed out,” states Morgan Stanley on Nov 18.
Morgan Stanley, echoing what market participants and observers have been lamenting for years, says that the low trading liquidity of Singapore stocks has over the years led to a vicious cycle of lower institutional investor interest, lower stock valuations, de-listings outpacing new listings, and lower institutional investor interest and trading liquidity.
“Finding the means to improve stock trading liquidity, we believe, is key to reversing this,” says Morgan Stanley, adding that better liquidity begets better valuation multiples through expanded institutional following, leading to an overall improvement in market vibrancy and attractiveness.
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“This in turn supports the venture capital and wealth management industries, enabling higher value add job creation and Singapore's ambitions of excelling as global financial hub more broadly,” says Morgan Stanley.
One way to inject liquidity is to tap on CPF savings. As at end of 2023, there was a balance of some $571 billion. CPF balance as a whole grew by some 9% per year over the past five years, with half from member contributions net of withdrawals, and the other half from credited interest estimated at 4%, generated by investing in Special Singapore Government Securities.
According to Morgan Stanley, less than 5% of the total CPF balance is invested in local equities, substantially lower than that of 24% in Malaysia’s equivalent EPF and OECD average of more than 20%.
“This suggests to us there is a lot of room to increase CPF fund allocations to equities, which would simply narrow the existing wide gap to peers globally,” says Morgan Stanley.
The US bank suggests that as part of the ongoing market review, half of the annual growth in CPF balances, or some US$15 billion, be allocated to the local market instead of government securities.
Over a 10-year period, CPF's portfolio allocation would shift from a 95:5 mix of bonds-to-equities to a 70:30 mix, more in line with the OECD average of 28% allocation to equities, says Morgan Stanley.
To secure buy-in from the industry ecosystem, Morgan Stanley suggests that the CPF balances to be channelled to local equities be allocated to “established local fund managers” to manage.
“An approach adopted by pensions globally, such as Japan's GPIF, outsourcing stock selection expertise to third-party fund managers averts the need for the CPF board to develop in-house equity fund management capabilities, and could help revitalise the local fund management industry — which would likely boost global institutional interest in Singapore stocks as well,” says Morgan Stanley.
“In their pursuit of performance fees, and perhaps to secure larger CPF mandates in the future, these fund managers would likely have to turn over their positions (as opposed to just buying and holding) to maximise portfolio returns. This would further boost the trading liquidity of stocks after the initiation allocation of AUM, which we think could lead to better valuation multiples,” the US bank adds.
