With IPO markets at a standstill, venture capitalists have joined the call for something significant to be done for the Singapore stock market. Different players in the market ecosystem weigh in
For years, the Singapore market has endured descriptions ranging from “listless” to “boring” to “undervalued”. This starkly contrasts with some other regional exchanges, which have gained momentum and grown faster than the local bourse.
However, local trading activity has increased over the last few months. In May, market volume reached its highest in a year. The bellwether Straits Times Index (STI) gained 1.3% despite many blue chips having gone ex-dividend. Singapore Exchange S68 ’s (SGX) derivatives trading, its reliable earnings generator, did well as usual. Not to be outdone, May’s SDAV (securities daily average volume) improved again to increase 21.8% y-o-y to reach $1.27 billion, up from $1.212 billion in April.
According to SGX, May’s higher overall volume was led by stronger retail participation in products such as the newly launched Singapore Depository Receipts on Thai stocks, which led to its largest monthly net inflow ever.
However, a big reason for the higher trading volume was MSCI’s regular balancing of indices. As part of the MSCI Singapore Index rejig, five blue chips were dropped without replacements — suggesting that Singapore stocks as a whole have become less attractive. The rebalancing resulted in volume that was heavier than usual as passive managers adjusted their respective portfolios so that what they hold can be aligned with the index.
The higher level of activity can also attributed to a paper by the Singapore Venture & Private Capital Association (SVCA) that effectively calls upon various government agencies — not just the SGX — to do something to revive the local market that for years has suffered from an interlinked list of woes ranging from the lack of attractive new IPOs and shabby post-IPO trading to low valuations and tepid liquidity.
The paper put forward suggestions such as requiring private funds booked here to invest in the local market and getting Singapore pension and sovereign funds to follow the footsteps of their counterparts in Australia and invest more in the local market. The paper is reportedly being considered by multiple government agencies. Besides the Monetary Authority of Singapore (MAS), which has oversight of the market, authorities asked to weigh in include the Singapore Economic Development Board and the Ministry of Trade and Industry.
Arthur Lang, group CFO of Singapore Telecommunications Z74 (Singtel), is heartened that this initiative is from a group of people who genuinely care about the Singapore market coming together. “It has to be a collective effort with regulators with SGX, Singapore-listed companies and other market participants. We all need to come together as Team Singapore and see what we can do to make SGX more attractive as a listing location and spur companies to tap growth capital here. Otherwise, it doesn’t benefit anybody,” says Lang.
William Tng of CGS International believes that a combined task force should be formed by SGX, MAS and relevant parties. “These bodies of authority have to see the importance of this as an issue, and once it is, a committee can be formed to take the next step in dealing with it,” says Tng, who has more than 25 years of experience as an equities analyst. “This slowdown has been going on over a decade.”
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Given how long the market here has been perceived as moribund, or rangebound to be more charitable, various individuals — like Lim & Tan remisier S Nallakaruppan — have, for years, called for action on the part of the government. “More could be invested here as our markets are seriously suffering from a dearth of liquidity. It is about time our government takes a keen interest in our local market and provides the necessary support just like many other countries,” writes Nallakaruppan, in his capacity as the president of the Society of Remisiers, in a commentary published by The Edge Singapore on Feb 26.
S Nallakaruppan, president of the Society of Remisiers, has been calling for years for something to be done for the local market / Photo: Samuel Isaac Chua
The situation was made even more painful over the past year when rate hikes dampened widespread interest in REITs, leaving only the three banking stocks with reasonable prospects of attractive returns, which came largely from their dividends and less from capital appreciation. Meanwhile, Singapore continues to attract trillions in wealth, only to see them parked in private funds, US stocks, luxury properties, Rolls-Royces and Bearbricks — but not much in local stocks.
The market’s challenges recently received an airing in Parliament, following questions from Member of Parliament Louis Chua. In his response on May 8, then-Deputy Prime Minister Lawrence Wong suggested that Singapore needs to be realistic about global trends and what can be done. Globally, IPOs were similarly down, he said. “Strong-growth companies backed by private equity and venture capital have the option to remain private for longer in the high-for-longer interest rate environment. Those that choose to go public tend to gravitate to the United States due to its deep and liquid capital market and investor base,” he added.
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VC in a vicious cycle
Interestingly, SVCA is not the usual mouthpiece urging for something to be done to revive the state of the local stock market. Active members of the association work for key local institutions such as GIC and Temasek and its various separately-run asset management units like Fullerton Fund Management; private banks such as LGT; and Singapore-based investment firms including Monk’s Hill Ventures, Dymon Asia Capital (Singapore), Tower Capital Asia and Granite Asia, renamed from GGV Capital recently. Top-tier international investment firms KKR, BPEA EQT and SoftBank Group International are represented as well.
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For years, venture capital (VC) and private equity (PE), with their billions or more under management, can roam and range, picking choice targets to acquire, choosing whose money to take, and deciding when and where they want to exit. With their connections, they are described as the “smart money”, entering a good deal early and using “patient capital” to grow their portfolio companies while dressing them up for a splashy public debut.
The dynamics changed when the global — and not just Singapore’s — IPO pipeline dried up over the last couple of years, trapping these managers of private money in a potential vicious cycle. According to EY, Southeast Asia saw 22 PE deals worth a total of US$3.9 billion ($5.28 billion) in 2023, down from 38 deals worth US$6.7 billion in 2022. In 1Q2024, the number of deals and their value increased but exits did not pick up while value dropped 57% y-o-y instead. EY Asia Pacific private equity leader Luke Pais says the slower year for fundraising and the exits in 2023 were somewhat linked because a slower return of capital to limited partners resulted in a lower level of commitment to new funds raised.
A separate study by Bain & Company showed a similar trend. “General partners and limited partners are telling us that the areas they are most concerned about are challenging exit conditions, lack of deal opportunities and uncertain economic outlook,” says Usman Akhtar, Bain’s senior partner and head of its private equity practice in Southeast Asia.
Also, exits in Southeast Asia have lagged other markets and post-IPO performance has been disappointing. Venture-backed companies in Southeast Asia are not immune from the macro headwinds facing better-developed venture ecosystems. Similar to global VC dealmaking trends, exit activity has lagged recently, says Pitchbook. All these lead to longer holding periods for VCs and slower fund flows.
“The market seems to be in a vicious cycle [right now]. If you don’t have a consistent stream of good companies listing on the exchange, you don’t attract good investors and liquidity. Then, if you don’t have liquidity, good companies are not attracted to list. So, how do you break that vicious cycle?” says Kuo-Yi Lim, co-founder and managing partner of Monk’s Hill Ventures. “No single action can solve the problem: there has to be an ecosystem approach to this. To break the chicken-and-egg-kind of cycle, you need a significant jolt,” he says.
Kuo-Yi Lim of Monk's Hill Ventures warns that the market seems to be in a vicious cycle / Photo: Samuel Isaac Chua
Lim describes the capital market system now as being at a “critical juncture”. The region has been in the spotlight for the last few years, with “sizeable” tech-enabled new companies emerging. Some of these have been listed successfully, though not necessarily on local bourses. However, the VC community cannot count on global investors to pay continuous attention to this emerging sector. “I’m concerned we will lose that attention if we don’t follow up with concrete actions in seeing private market exits. We need to take our fate into our own hands, whether in Singapore or as a region, and I think having some local, regional or indigenous form of exit is highly critical for our success as an industry,” says Lim.
Research, restructuring
Despite the overall challenges, investing in Singapore stocks can be profitable. Peter Lum, founder and executive director of boutique fund manager Arkenomics Capital, says companies on the SGX are attractive because they are undervalued. According to Bloomberg data, the STI trades at a forward P/E of 10.8 times, just above Hong Kong’s 9.1 times, which has been suffering from China’s slowdown. In contrast, the KLCI trades at 14.4 times and the ASX200 trades at 17.5 times while the Dow Jones Industrial Average is further ahead at 19.2 times and the Nasdaq at more than 31 times. That the SGX is a moribund market could be its redeeming feature. Lum says: “Factors we look for include a high starting yield and balance sheet strength We cannot base our investments on the MSCI Global Investable Market Indexes because they are weighted in favour of the US which is overvalued.”
The three local banks, competently managed amid a favourable interest environment, have kept most shareholders happy with their record earnings, juicy dividends and peak share prices. A few of the large caps that have undergone extensive restructuring and focused on delivering clear growth plans — namely, Keppel and Sembcorp Industries U96 — are attracting a healthy level of market interest. Yangzijiang Shipbuilding, having spun off its financing sideline into a separate listco, is riding on record order wins, especially for cleaner fuel vessels. Year to date, the stock has gained more than half to within striking distance of its all-time peak of $2.70 when the previous marine-cum-China-play boom was in full swing. As SGX’s market strategist Geoff Howie points out, Yangzijiang now trades at 13 times earnings and has an ROE of 21.3%. In contrast, the Bloomberg World Shipbuilding Index, which includes bigger rivals such as China CSSC Holdings, China Shipbuilding Industry and Kongsberg Gruppen, has a median ROE of 9.7% and P/E of 34 times.
The research teams of various brokerages are constantly generating new ideas to hold market interests. Maybank Securities, tapping on its familiarity with both Malaysia and Singapore, is actively promoting the Johor-Singapore Special Economic Zone investment theme that includes both Bursa- and SGX-listed names.
From left: Wayne Lee of W Capital; Ooi Chee Keong of Forvis Mazars and Thilan Wickramasinghe of Maybank Securities
However, it remains a struggle for smaller companies to attract interest. In May, even as SDAV for the month reached the highest level in a year, peel just a bit deeper and the bifurcation is painfully obvious: Mainboard trades increased by 5% y-o-y to 6.38 million; Catalist stocks, which account for just below a third of total listed stocks, saw trades for the same month plunge by 30% y-o-y to 138,474 instead.
Are Catalist companies as a whole faring worse? Are all big caps naturally assumed to be doing well? Not necessarily, of course. Thus, on top of relying on required reporting by companies themselves, numerous industry observers stress the importance of having more extensive quality research.
A retired veteran of the securities industry, who prefers not to be named, says there are good companies listed here but the market is not giving them their rightful valuations. He cited the example of Tianjian Pharmaceutical Da Ren Tang Group Corp, one of the very first China stocks or S-chips to be listed here back in 1997, which was followed by a Shanghai listing in 2001. Supported ultimately by the Chinese government, it has grown steadily over the years and stayed clear of corporate governance issues or business failures that have plagued dozens of other S-chips here. Its Shanghai-quoted shares now value the company five times that of its Singapore counterpart, which receives no coverage here.
The veteran recalls how, back in his days, brokerages, flushed with commissions generated from the fixed-fee industry practice, could assemble full-fledged research teams that could cover a good 100 or so stocks each. In contrast, the industry now has to “do more with less”.
Maybank Securities’ Thilan Wickramasinghe, who runs its Singapore research team, has similarly observed that years of industry consolidation have resulted in massive under-investment in equity research, nudging analysts to prioritise popular large caps. “This has led to providers focusing mostly on liquid large-cap stocks at the expense of the wide tail of small- and mid-cap stocks. Without these stocks gaining sufficient investor attention, they suffer from lower valuations and liquidity. This makes them unappealing for research coverage, leading to lower valuations and liquidity. A negative feedback loop is thus created. More investment in high-quality equity research is essential for a dynamic market,” says Wickramasinghe. Similarly, SVCA has suggested more funding for research — but to be conducted across the whole lifetime of a stock, from pre-IPO to IPO to post-listing.
Specific moves can also be implemented. Wayne Lee, executive chairman of corporate finance firm W Capital, observes that after years of conservative management, many SGX-listed companies are sitting on cash balances that exceed their market value. Yet, several of these companies have not declared dividends, citing the need to preserve cash in uncertain operating periods. Naturally, these counters tend to trade at very depressed prices. Lee believes that SGX can consider compelling such companies to pay a certain level of dividend, undertake share buybacks, or divest assets to enhance value for shareholders.
According to Ooi Chee Keong, partner and head of capital markets at Forvis Mazars in Singapore, in addition to government investment, leveraging market makers is crucial for ensuring sufficient buying and selling activity. Market makers play a vital role in enhancing market depth by providing liquidity and narrowing the bid-ask spread, making it easier for investors to enter and exit positions. Their active participation can attract a broader range of investors by creating a more liquid and efficient market, he says.
For Lee of W Capital, the role of market makers applies especially to the small- and micro-caps. “Why would any sensible investor invest in any micro or small cap listed on the Catalist board when there is no avenue for an exit due to lack of liquidity? The implication is that persistent low valuations make it very challenging for secondary fundraising of such listed companies and raises the question of the purpose of listing, which would also incur the continuing listing costs.”
A big kick-off needed?
Still, as the term “capital markets” suggests, capital — more specifically, the availability of large sums of capital — remains key. As observed by UBS, liquidity on SGX has been among the lowest among key Asian exchanges. The structural reasons behind this include low retail participation, which is estimated to be around 15% on SGX, which is significantly lower compared to 50%–70% in Malaysia, Indonesia and Thailand.
“There has to be enough money put into the local market to make a difference. My few million dollars won’t make a difference. You need thousands of millions which the CPF can do,” says the securities industry veteran.
He attributes part of the challenge to the popularity of passive investment, which has channelled away a lot of money from active managers. Gone are the good old days when the emergence of substantial shareholders like Aberdeen (now renamed abrdn) in a company was often a bugle call for others to jump onto the bandwagon. “Passive index funds and ETFs distort the market because the managers are obliged to copy the indices. So, if Nvidia’s weightage goes up more, the managers need to buy more,” he says.
“If our local state-owned or pension funds and private capital from family offices can invest in SGX-listed small and mid caps in a structured approach, it would certainly help boost the confidence of investors and the liquidity of the stock, creating a virtuous cycle to attract higher-quality companies to list here,” says Lee of W Capital.
Indeed, GIC has often been mentioned as the entity with the potential to move the needle — if it would allocate just part of its secretive but presumably huge pool of funds under management. However, that will mean breaking its role of investing only in overseas assets.
“While certainly possible in theory, it is easier said than done given the macroeconomic implications of any such move,” says UBS in a research report on SGX, referring to forex and portfolio concentration risks, among others. “Given the uncertainties around the implementation and effectiveness of initiatives, we are keeping our forecast unchanged for now,” adds UBS.
Participation by the likes of GIC might raise other complications. A painful trend seen in the past couple of years was the dozens of privatisations of mainly undervalued stocks by their controlling shareholders, at times with help from a savvy fund. Maybank’s Wickramasinghe estimates that 67% of SGX listings trade below book and believes that the relatively low level of free float at 41%, is a factor. In contrast, the free float for S&P500 and LSE are at 90% and 70% respectively. “So, the low valuations on SGX is not a bug but a feature of the market. Valuations will be constrained as long as insiders and large holders create an overhang to broader minority participation.”
Thus, if big investors like GIC were to take substantial stakes in small-cap companies, this could further reduce the free float available to minorities and external fund managers, constraining valuations in the long term, reasons Wickramasinghe.
Ooi of Forvis Mazars warns that expanding GIC’s mandate to invest in local firms is a “complex” issue with both pros and cons. He says GIC can consider making targeted investments in high-potential sectors such as technology and green energy; and work with other institutional investors and PE firms to share risks and insights. And, instead of taking sizeable strategic stakes, GIC, if it does invest locally, could do so gradually. “This phased approach would allow for continuous assessment of the impacts and adjustments based on market conditions and performance.”
Singtel’s group CFO Lang, when asked what can be done to make the Singapore market more attractive, points out that the role of “domestic funds” should not be underestimated, as the UK, Malaysia, Thailand, Korea and other markets have shown. “Australia is a classic example of how superannuation funds have participated in the funding of many companies — both public and private — in Australia.”
However, Lang says having more domestic funds invest in Singapore stocks may not be the “magic bullet”. A holistic approach should include attracting “smart capital” to invest in stocks listed here. Needless to say, the stocks have to be attractive. “It is always a chicken-and-egg question because good companies want to list only if the exchange has good liquidity. Likewise, investors deploy capital only if they have good companies to invest in,” he adds.
Lim of Monk’s Hill Ventures says reviving the stock market likely requires a first mover who can kick things off and is willing to bear a “higher bit of risk”. “It is clear that there are not many players who can play that role, and it is likely the likes of a sovereign fund with the level of ability and interest in the region that can play that role,” he adds.
Lim recalls that just over a decade ago, the VC industry in Singapore and across Southeast Asia was nascent at best or even non-existent in certain markets. According to Lim, Temasek began to fund “a good number” of VCs, including Monk’s Hill, which kicked off the whole early-stage investing cycle and then snowballed to the rest of the industry and region.
Temasek’s decision to fund the VCs was risky, with no guarantee of success. Yet, with that kick, the VC industry has grown and strengthened to become the collective voice whose latest call to revive the local market is receiving all this attention now.
“I think we need a similar type of action to inject the liquidity into the market as an initial jolt, which will then hopefully kick off a cycle of attracting good companies to list on the exchange and investors to invest via the exchange,” says Lim.
- reporting for all stories by Nicole Lim, Goola Warden, Felicia Tan, Douglas Toh, Jovi Ho, Samantha Chiew, Khairani Affifi Noordin and Chan Chao Peh
