SINGAPORE (Jan 21): It seems perfectly logical that a country that uses monetary subsidies to encourage its citizens to procreate would adopt a similar policy in order to boost the production of stock research. So, I don’t know why I was surprised to learn this past week that the Monetary Authority of Singapore plans to subsidise the salaries of analysts, in order to ensure better coverage of small, locally listed companies and “facilitate price discovery and liquidity” of their shares.
The subsidy is part of a new $75 million grant that MAS plans to launch in February. Dubbed the Grant for Equity Market Singapore, the three-year initiative is to help enterprises raise capital in the local stock market. One component of GEMS is a “listing grant”, where MAS will foot 20% of a company’s listing expenses, up to a cap of $200,000. Companies in certain “high growth” sectors will have 20% of their listing expenses co-funded, up to a higher cap of $500,000. Companies involved in “new technology” sectors — including financial technologies, consumer digital technologies, on-demand services as well as gaming services and peripherals — will have a more generous 70% of their listing expenses covered, up to an even higher cap of $1 million.
MAS will also earmark funds to crowd-source initiatives to spur the development of Singapore’s equity research ecosystem. Such initiatives can include publication of industry or sector primers as well as innovative ways to distribute research and disseminate enterprise information to investors. On top of that, MAS will also co-fund 50% to 70% of the salaries of locals employed as equity research analysts. “The research talent development grant is designed to groom a pipeline of equity research analysts and retain experienced research talent to initiate research coverage primarily of listed mid- and small-cap enterprises,” MAS said in a statement on Jan 14.
Growing up in the 1970s, I remember the government preaching that “two is enough” when it came to having children. And, as a young analyst in the early 1990s, I used to hear fund managers complain that they didn’t have time to go through the deluge of research reports and faxes that landed on their desks every morning. Then, as economies and markets in the region developed, and everyone became older and richer, we seemed to lose our enthusiasm for producing babies as well as stock research. And, for almost two decades now, policymakers have been throwing money at these problems.
Singapore abandoned its “two is enough” policy in 1987, and introduced its so-called Baby Bonus Scheme in 2001, which essentially defrays the cost of having children. The scheme has since been enhanced, and additional forms of financial support have been introduced, including even co-funding for assisted reproduction technology treatment. Through it all, however, Singapore’s total fertility rate has steadily declined. In 2017, there were 1.16 live births per female, well below the 2.1 needed for the local population to replace itself.
On the other hand, concerns about the lack of stock research in the market cropped up in the years following the Asian Financial Crisis as the brokerage industry reeled from weak trading volumes and liberalised trading commissions. Things became worrying enough for the Singapore Exchange and MAS to launch an incentive scheme in 2003, where participating listed companies paid an annual fee for a certain amount of analyst coverage. Besides the fees, the participating research firms received a grant from SGX and MAS to defray their costs.
The move sparked hope in the stock research business. In particular, independent research firms — such as Standard and Poor’s and NetResearch — saw the programme as an opportunity to build their businesses. For the traditional brokerages, the scheme was a form of temporary respite as they coped with weak revenues. Meanwhile, analysts were just glad for the prospect of remaining employed.
The optimism was short-lived, though. Today, it is still possible for companies to pay for research coverage under the SGX StockFacts Research Programme. But there seems to be little interest in obtaining such coverage. Meanwhile, the brokerage industry doesn’t appear to have shaken off its funk, with a number of well-known sell-side analysts moving on to new careers over the last couple of years. And, with the introduction in January 2018 of MiFID II, which essentially forces fund managers to disclose what they pay brokers for stock research, things could well become even worse.
Will subsidising the salaries of analysts with taxpayer money help? Is the cost of producing research really the problem? Or, is the research itself no longer useful? Why hasn’t independent research of the kind produced by S&P and NetResearch flourished?
Different business models
Much as would-be parents always cheer every enhancement to the Baby Bonus Scheme, the subsidy for analyst salaries is bound to be welcomed by everyone in the business of producing stock research. It might even spur enterprising analysts to set up new research outfits. But I doubt we will see a return to the enthusiasm of the 1980s and 1990s that many of us remember.
First of all, the original business model of producing stock research wasn’t perfect. Back in the 1980s and 1990s, the brokerage industry produced research as a service for their clients, who effectively paid for it with trading commissions. By its nature, it incentivised the production of research that drove trading activity, rather than the discovery of fundamentally sound companies that would deliver good long-term returns. And, in the US, research produced by the big Wall Street banks eventually became tainted by their investment banking relationships.
These shortcomings didn’t matter at the time, though. Economies in Asia were growing fast, which supported steady gains in asset prices. People had money to invest, and there were far fewer opportunities than there are now for that growing wealth to be deployed in international markets. Today, even as brokerage firms struggle to keep a lid on costs, their so-called sell-side research is still widely seen to be an important factor in keeping the market vibrant.
Independent research never developed the same cachet. One obvious reason is that the research is commissioned and paid for by the listed companies themselves. The research exists because companies asked for it to be produced, rather than because an analyst genuinely believes the companies deserve the attention of investors. For their part, independent research firms often point out that credit rating agencies and external auditors maintain strict standards of professionalism even though their fees are paid by the companies too.
Uninspiring mainstream research
In my view, it isn’t about perceived ethics or professionalism but the nature of the research itself. Much of the research produced by brokerages as well as independent firms these days is simply uninspiring. And, producing more of it isn’t going to enliven the market.
Stock research is only really valuable if it helps an investor see how they could earn a worthwhile return for the risk they are taking. Personally, I wouldn’t buy an individual stock unless I can see it at least doubling in value. That often means making assumptions about the company seizing some hot, new opportunity, or betting on the growth of its business a few years into the future. But such conjecture seems to have no place in mainstream research reports these days. And, price targets often seem much too low to risk the inherent volatility of an individual stock.
Interestingly, some unregulated but widely followed research outfits have made a far bigger impact on the market than any of the mainstream research firms in recent years. For instance, Iceberg Research has arguably been the leading voice since 2015 on Noble Group, with an unwavering viewpoint that the commodity supplier had been inflating the value of its assets and understating its liabilities. Noble’s market value has collapsed over the last few years, and it is currently the subject of a joint investigation by the Commercial Affairs Department, the Accounting and Corporate Regulatory Authority and MAS.
Elsewhere, short seller Muddy Waters has also made an impact in the local market in recent years with negative calls on Noble as well as Olam International. It also caused a stir with a negative call on Man Wah Holdings, a Hong Kong-listed furniture maker that was once listed in Singapore.
Are the mainstream research houses capable of producing research that has the same impact? Will that reignite local investor zeal for stocks?
What’s the future?
One consequence of Singapore’s inability to stop its total fertility rate from declining might well be that stock investing never regains its popularity with local individual investors. With an ageing population, there are simply fewer and fewer people with the tolerance for the risk that comes with investing in individual stocks. Many are likely to increasingly gravitate towards lower-risk instruments such as bonds, real estate investment trusts, exchange-traded funds or some fund management product tailored to their needs.
This doesn’t necessarily spell the end of individual investor interest in the market, of course. But it does mean that local research houses should rethink what they do, and who they will do it for in the future.
Even as Singapore has endured slow birth rates, the rapidly shifting structure of its economy has resulted in a mismatch between jobs and skills, contributing to its unemployment rate. The government might have more success increasing the supply of analysts in the market than it has had increasing the country’s fertility rate. But many of those analysts might find that their jobs a few years down the road are not just about producing research reports on locally listed companies for fund managers and wealthy individual investors.
With any luck, many of them will find themselves supporting short sellers, aiding the campaigns of activist investors, and consulting for technology experts with visions of a radically different local capital market. It is that diversity, rather than just the sheer number of analysts, that will make for a really exciting and vibrant local market.
This story appears in The Edge Singapore (Issue 865, week of Jan 21) which is on sale now. Subscribe here
