Recently, there has been increased chatter about the moribund state of the Singapore equity market. This problem of national importance has been left to rot for too long, so it is good to see it finally getting more attention.
As we explore the issue further, it becomes evident that the local stock market’s challenges have deep-rooted causes. No simple solution can satisfy all stakeholders and significantly improve the market. A comprehensive study is necessary to make informed decisions and pave the way for a holistic solution.
What is the problem with the local market in the first place?
Singapore prides itself on being one of the world’s great financial centres. Virtually all the important financial institutions of the world have a presence here. We host the third most active foreign exchange trading hub globally and remain the main centre of the Asian dollar market, which Singapore has helped to create. Our wealth management activities have now outshone Hong Kong’s and can compete with pre-eminent centres such as Switzerland.
But there is one area where we badly lag other major financial centres: the local equities market. Our total stock market capitalisation of around US$570 billion ($769.9 billion) is embarrassingly smaller than the other great global centres — Hong Kong’s market capitalisation is US$4.2 trillion, for instance.
Average trading volumes, at around US$900 million a day, are puny compared to the other major centres — Indian markets trade US$16 billion a day, while Hong Kong trades US$13 billion a day. Even Bangkok does better than Singapore at US$1.15 billion a day. At the rate we are going, smaller regional bourses will probably overtake us in the not-too-distant future.
Worse still, many listed companies complain about the low valuations they receive on the Singapore exchange. This is a problem for large companies such as Singapore Telecommunication as much as for smaller ones. Some companies find that the value of their subsidiaries listed abroad exceeds the total market capitalisation of the parent company listed in Singapore!
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These low valuations are one reason many companies are delisting from Singapore and moving elsewhere. Delistings have exceeded listings in recent years — 25 in 2023 compared to just seven IPOs last year. The number of IPOs has plummeted, from an average of 14 a year between 2015 and 2022 to above 20 a year before that.
Why having a healthy stock market is important
It would be the height of complacency to dismiss this problem as a sideshow since the rest of the financial sector is in robust shape. A vibrant stock market plays an important role in an economy in several ways:
A healthy economy and its companies need a diversity of funding sources. Stock markets evolved as a means of helping companies raise capital — without them, economies would depend excessively on debt, particularly bank loans. If it were not for stock markets, many entrepreneurs would not even get a leg-up since securing a loan from a bank can be difficult for smaller firms. If entrepreneurs depended on their savings alone to grow their companies, many companies would not make it beyond their initial stages.
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Stock markets offer a regulated and transparent marketplace to invest in companies. Without the assurances provided by such regulation, investors would hesitate to invest. Not only would companies be starved of capital for expansion, but investors would have fewer options to put their savings to good use.
Stock markets offer price discovery as well. Investors and companies can see through stock prices how different sectors and businesses are valued and can deploy their capital more efficiently.
Equities as an asset class provide other uses as well. Share options are a way of incentivising employees and managers of listed firms. Shares can be a currency to facilitate mergers and acquisitions as well — a company can take over another using its shares rather than cash to settle the transaction.
An active stock market creates an ecosystem of business and employment opportunities, which adds to economic output and income. Aside from brokers, there would be a range of service providers for the industry, including companies that extend technological support to accounting, auditing, consulting, and research firms. A lacklustre stock market deprives the economy of much value-added activity.
In short, the sorry state of the Singapore stock market is a problem for the economy as a whole.
Why is the stock market in this state?
Stock markets all over the world are indeed facing similar challenges. A good part of this is due to the extraordinarily low interest rates of the past two decades, which have made debt financing preferable to equity financing. With interest rates normalising, we could see a revival of equity-related funding. The global dimension of the problem is likely to sort itself out in the coming years.
Singapore has to focus on the domestic causes of its weak equity market. If an equity market is not functioning well, it must be because one or more of the ingredients for success is either too weak or failing outright:
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The first key determinant is having a diverse pool of appealing companies that list on the market. Companies offering high growth are always exciting. However, even mature companies that offer investors a steady stream of reliable dividends would also be needed.
A large pool of savings that companies in their IPOs can access or raise capital through rights issues is also important. Many pension funds and insurance companies seek to deploy their accumulated funds in the largest and most developed stock markets.
An efficient market structure is also key. The stock market has to be well-regulated enough to ensure that investors need — without being too oppressive. Since price discovery is key in such markets, an infrastructure must support it. This means having strong equity research capabilities so that most listed companies, whether large or small, are covered by analysts who guide investors on the true value of the listed firms. It also means having competent financial media (newspapers, radio and television channels specialising in finance) that provide investors with news and good analysis or commentaries.
Singapore has challenges in each of these areas:
First, Singapore’s economic model relies principally on multinational companies to drive economic growth, leaving less room for local companies to grow to a size and level of excitement that allows them to be listed.
For an economy the size of Singapore (the 40th largest economy in the world with a GDP of around US$500 billion), a disappointingly low number of locally-owned companies have emerged from nowhere, grown rapidly and offered promising returns. A stock market needs flourishing local companies since most multinational companies will list in their home countries, not Singapore. Moreover, many currently listed companies outside the banks have not performed well in recent years for several reasons — perhaps because they failed to adjust to changing technology, could not withstand new competition, or could not safely expand abroad.
Second, we need to get more liquidity into the equity market. There are several issues here:
One issue is the Singaporean retirement funding model under which the Central Provident Fund (CPF) dominates the savings mobilisation for retirement. The CPF does not manage these funds; instead, it hands them over to be eventually managed by GIC. However, GIC, by law, is not allowed to invest locally. So, we have the supreme irony in that the one thing Singapore is globally scaled in — our gargantuan savings — is not deployed to nourish the development of the local economy but goes abroad. The local stock market has to operate without the long-term funds that all other large equity markets thrive on.
A secondary reason is that local retail investors have been spooked by a series of shocks, which led to large investor losses. The penny stock saga is one, the collapse of the Central Limit Order Book (Clob) market another and the unfortunate performance of S-chips yet another. Consequently, local punters now prefer to trade in overseas markets rather than Singapore.
Third, market infrastructure is wanting in some ways. The number of local stock brokers has fallen in the past 20 years, with the amount of equity research conducted on local companies. How can an investor deploy his funds in Singapore’s stock market without company analysis? As for the financial media, it is not disrespectful to say that Singapore lacks a financial daily of the standing found in the leading financial centres in the world.
What do we do?
First, we must deploy more of our large savings pool to the local equity market. However, we caution against simple expedients such as requiring a certain proportion of CPF funds to be allocated to the local market. The retirement funding system needs to be reviewed first.
Perhaps it is time to assess whether the model of CPF funds being channelled to GIC is the optimal approach. It is appropriate for GIC to remain the main manager of the government’s considerable reserves. For retirement-related funds from CPF, it might be time for at least a large portion to be allocated to a diverse number of dedicated funds. Like pension funds worldwide, they will tend to deploy a certain share of their monies into the local market.
Second, we need more companies to list on the local exchange. Once again, we would not support expedients such as asking Temasek to list some of its large companies, such as PSA, Changi Airport Group or Singapore Power. There may be good strategic reasons why these companies have not been listed.
What we suggest, though, is that ways be studied where such large, profitable and quite exciting companies can be listed without endangering the national strategic objectives. After all, ST Engineering, our premier defence company, has been listed without any real danger. We could consider, for example, having different classes of shares with different rights attached to them so that the government shareholder can guide management to adhere closely to national interests.
Third, we disagree with the view that onerous corporate governance regulations are behind local equities’ poor performance. As we found with the penny stocks and the S-chips, good governance and strong regulation are needed to protect investors. There is room for a review of how regulations are designed and enforced.
Fourth, if Singapore is serious about being a global financial centre, we need a stronger pool of equity research and enhanced financial media. Suppose the market fails to produce a sufficient quantity of essential services. In that case, there is a case of state intervention to provide these and facilitate market efficiency. There is already a small effort to fund research on companies; this needs to be expanded so it has a more material impact.
The lacklustre status of the local bourse is a national problem, not just a small problem in one part of the economy. It requires more forthright policy responses. However, we should avoid simplistic solutions because the issue is highly complex and touches on the interests of various stakeholders, including CPF savers and local companies.
We need to examine some of our sacred cows — how CPF funds are managed, for instance, or how strategically important state enterprises are managed. In that way, we can come up with solutions that are best not just for boosting the stock market but also for achieving our national goals.
Manu Bhaskaran is CEO of Centennial Asia Advisors
