Friedrich Nietzsche, in Beyond Good and Evil, talked about the dangers of fighting monsters lest one becomes a monster. “And if thou gaze long into an abyss, the abyss will also gaze into thee,” he wrote wrote in Aphorism 146.
The subject of endless schools of philosophical debate, a solution to Aphorism 146 was to jump into the abyss instead of looking into it — not to find firm ground but to make the void your home. “Jumping into the abyss and accepting that there will be no firm ground removes the fear of falling into your philosophical death — a blissful weightlessness,” was Rene Descartes’ conclusion.
I received a host of feedback and a couple of summons from last week’s column. They range from folks who understood the essence of the argument — that demand has to be sustainably created locally (generally those across the financial industry past and present got it intuitively) to sceptics who believe the fault lies elsewhere, including academics who only saw their corner in absolute terms and missed the context.
Some policymakers think the issue is with another department, agency or ministry while others think it has to do with our size or the weaknesses of our local companies. Whatever the issue, investors of all shapes and sizes, and market participants including the stakeholders of listed companies, liked the idea of a potential free lunch from state capital.
Now I would like to stress that it will not be a free lunch as it is really about our pension savings and how they could be deployed. Therefore, this week’s column aims to address some issues raised and break down what and how the spark is intended to work.
If it ain’t broken …
The idea promulgated in last week’s column are not entirely novel. In essence, it proposes channelling some of our domestic savings built through our labour and good economic management back into our capital markets through investing so that we can create a self-sustaining domestic ecosystem where entrepreneurs can raise capital to grow their businesses, create jobs and be rewarded for their risk-taking. Without this investment, we now find our domestic fund management, brokerage, investment banking, research, and professional services industries in decay through structural decline and the inability to attract new talent, a lesson Japan learnt after its economic bubble burst some 35 years ago.
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However, this idea goes against the grain of orthodoxy established by decades of how we allocate savings in our economy and manage our reserves and our thoughts on free markets and globalisation. Why change something that seemed to have worked thus far?
In the past, as a fledgling new country with little capital and reserves without an established strong Singdollar like we have today, it made perfect sense to diversify and manage our investments largely overseas. Thanks to the Monetary Authority of Singapore (MAS), which defends our Singdollar against an unpublished basket of currencies, Singaporeans, households and businesses are spared from the worst of higher global rates. GIC’s mandate to invest overseas and diversify allowed us to tap global opportunities and diversify our sovereign funds with a decent 20-year rolling track record. Temasek too started doing the same thing in the 2000s, reducing stakes in TLCs (Temasek-linked companies) in Singapore (and positively increasing the free float of DBS Group Holdings and Singapore Airlines C6L , among others) and making significant and mostly successful forays into China and other developed markets, which culminated with its recent Paris office opening.
Instead of the profligate governments we see in the West and the East, the Singapore government, through successful economic and financial management and a steady hand that includes an elected president who has a say in the drawing down of reserves, has created a pool where net investment income funds a sizeable part of our annual budget which is spent on increasing healthcare, education and social services. Why then should we bother to pay attention to our local capital markets if everything is hunky dory now?
Well, not everything is, and a less-than-fully functioning domestic capital market has implications for our future economy.
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Why we should care
This is a legitimate question that has been raised. After all, there are competing demands for any common public resource and it does seem self-serving for current and past members of the financial industry to talk about their own strategies to try and revitalise their fortunes. The answer is we must care because it is not only about the fortunes of a stock exchange (for example, when the Singapore Exchange S68 (SGX) does very well globally in derivatives, it helps provide a CDP (central depository) service for free to investors subsidised by its shareholders, which is not sustainable). It is also not about the fortunes of stockbrokers, fund managers, local investment bankers or professional services per se. Indeed, many of them have simply gone where the money is to survive and thrive, deploying our institutional and retail capital overseas to developed markets like the US, or joining the speculative flows in Hong Kong, Bangkok, Jakarta and Mumbai.
It is really about job creation and employment and sustainable economic success. In aggregate, the largest employers in our country are the legions of SMEs. Notwithstanding the the Economic Development Board’s (EDB) unparalleled success constantly bringing in new investment into Singapore, the days of mass employment from MNCs setting up shop here are rarer. High-value industries that thrive in Singapore will provide better jobs which require greater skills. I visited the only car manufacturer in Singapore recently at the Hyundai Motor Group Innovation Center in Jurong. In a clean factory floor staffed by robots in self-contained pods, advanced manufacturing did not require assembly lines but a couple of highly skilled workers analysing data sent and processed by the robots. AI may even take care of that eventually.
It is less about whether our companies are strong and big enough to make it in the Big Apple. Sea set the threshold for an IPO to be noticed at $5 billion and the benchmark has grown from there. However, the bulk of potential IPOs of our SMEs will not be $5 billion. They may span from $50 million to a couple hundred million to $2–$3 billion in market size if valued properly. If they are too small for the US and cannot sustain an orphan listing in Australia or Hong Kong, then where else can they go? If our economic success depends on strengthening our SMEs who, in turn, have to rely on the capital markets elsewhere, we are no better than an emerging market depending on London or the US. This is sadly ironic when we have multiple pools of capital in a country we claim as a key global financial centre. To build global champions, we must have the ecosystem to build our local and regional champions first.
How will it work?
Note that I am not suggesting that we should change the mandate of our sovereign wealth funds (SWF) and turn completely inwards. This was implied by a very public objection posted on LinkedIn by a respected academic who asserted that “we should not be using our SWF money to boost a market that has serious fundamental issues with regards to corporate governance and investor protection”.
Perhaps, I was too subtle. The point beyond the headline of last week’s column “It only takes a spark: 3% of what GIC manages”, is to be understood in the context that structurally, our pension fund monies in CPF, while ably managed by GIC globally as part of its mandate from the Ministry of Finance (MOF), ensures the promise to members of 2.5% or 4% through the ordinary and special accounts. The proposal is to channel some of this into our domestic market as determined by our policymakers, who are effectively GIC’s clients. As elaborated last week, a signal from GPIF (Government Pension Investment Fund) in Japan in 2014 catalysed that spark. All countries recycle their domestic savings and insurance monies in one form or another domestically, whether it is the EPF in Malaysia, Superannuation in Australia or 401K in the US.
Instead of getting fixed returns from GIC for its members through the existing structure arranged via MOF, our CPF Board, which is under the Ministry of Manpower, could, through an appropriate agency, allocate some of the money — for instance, US$3 billion ($4.06 billion) for small caps, US$12 billion for mid caps and US$15 billion for large caps — to five to 10 fund managers each to manage locally. That is roughly 3% of the rumoured and unverified US$900 billion managed by GIC. Or start with 1% in proportion gradually to smoothen market impact.
This was done by MAS and GIC successfully for our private equity and venture capital industry 10 years ago, which helped secure our No 1 status in the region. The irony is, without public markets functioning well, this too will eventually peter out as exits get chocked and new fundraisings are stymied. CPF could also commit to allocating a certain percentage of new funds saved by its members periodically to the street, adding new money regularly to the market.
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This will also be the catalyst for revitalising the local funds management industry with a specific mandate for Singapore. They include Eastspring, the asset management unit spun off from Prudential; Fullerton Fund Management, part-owned by Income and Temasek; Lion Global, a unit of OCBC; Schroders; and UOB Asset Management. This means there will be a need to allocate and hire talent on the buy and sell side to analyse and research, improving coverage for the rest of the market with downstream ecosystem benefits.
There will be capital that will be consistently coming in to form cornerstones for IPOs and also to provide secondary liquidity, thereby creating competition for performance and market discipline. This will lead to managers deploying and differentiating much-needed capital to deserving companies. In turn, our companies can realise their growth potential and get a fair valuation of their stock prices for M&A activity, instead of suffering the lack of equity capital at or after IPO to grow and build champions. With institutional liquidity in the market and wider free floats now that there is more capital available for placements by major shareholders to exit, institutional managers can then push as shareholders for stronger corporate governance and company performance.
The alternative is what we face today, undervaluation in mid- and small-cap stocks with limited free float and institutional shareholders invested, and hence less demands on companies to perform and conform, unlike 25 years ago when there were multiple Singapore funds with even more competing fund managers. Today, there is but one fund with a small capacity that focuses on Singapore equities. Singapore’s weighting in the MSCI global index was five times higher at that time than after its cut in May.
The chicken-and-egg issue is this: If we do not support our own companies and market cap, we will lose institutional capital as the removal of City Developments, Jardine Cycle & Carriage C07 , Seatrium and the two Mapletree REITs have shown. Instead, we could envisage a more virtuous cycle where companies accorded fairer valuations are reweighted, thereby drawing greater international demand — a phenomenon that is consistently shown in Australia and Japan, which successfully revitalised its market by stimulating demand.
If allocations to the proposed Singapore-focused domestic fund management industry take off, it will also provide CPF members with some transparent local fund choices, from riskier small-cap funds to large-cap STI ETFs. The behavioural outcome would once again help lift potential domestic interest in the market and revitalise our local brokerage industry and not just their online CFD or overseas execution services. They may even be able to allocate to domestic small- and mid-cap stocks through institutionally managed funds rather than be exposed to the dangers of individual stock-picking for small caps, abetted by the small quantum available through CPF investment schemes.
The only thing to fear is fear itself
Frankly, our SWFs and individual investors have been burnt many times in the past by “flawed” overseas markets and stocks — whether it is Luckin Coffee and the pink-sheet market in the US or HanEnergy and small caps in the “Enigma Network” in Hong Kong. Both markets also accept a host of dual-class shares where entrepreneurs like Elon Musk of Tesla and Anthony Tan of Grab Holdings have multiple voting rights but still command legions of retail and institutional investors. Even Warren Buffet’s Berkshire Hathaway is dual-classed, a structure that corporate governance purists baulk at.
The recent irony of GameStop, a loss-making business that was played up by the meme stock phenomena pushing out short-sellers, is back with a vengeance. The company was able to once again raise capital with a large placement after Roaring Kitty made a comeback. In our market, small and mid caps with decent business plans and assets trading below book value do not get the capital they deserve to grow. At the other end of the spectrum, Aramco, listed first in Riyadh, enjoyed lots of domestic support. The US$13 billion it raised this month is rumoured now to be covered by foreign institutional investors who had to weigh in.
What if the market does not take off after all the proposals are adopted? Will it be “egg on the face” for policymakers? Would we have created a moral hazard and transferred wealth to nefarious players who are out to abuse the markets? Well, the latter will continue to happen anyway and our regulators will deal with it when a crime has been proven to be committed. Meanwhile, how long more can we stare into the abyss? When will we dare make the jump?
Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange, and he was awarded FOW’s Lifetime Achievement Award. He serves as chairman of the Community Chest Singapore
