Built over the last 50 years, UOB Kay Hian’s regional network has given it the upper hand in sealing deals, but for senior executive director Esmond Choo, the Singapore market — for all its shortfalls — is still the home market to be in
SINGAPORE (Mar 20): In his three decades in the finance industry, Esmond Choo, senior executive director at UOB Kay Hian Holdings, has seen his fair share of market cycles. From his perspective, the 1997 Asian Financial Crisis hit Singapore and Malaysia most directly, causing the most fear, but he sees what is happening now as not far behind: The ongoing Covid-19 crisis has ended the 11-year bull-run of the US markets, sending markets down by nearly 30% in just a fortnight.
“In the current climate there is no real safe haven stocks. When there are fund redemptions, the most liquid stocks get sold first and these are generally large caps,” says Choo.
For those with cooler nerves, they should stay vested in quality but beaten-down stocks, keep a patient, long-term view and watch out for bargains. “It is from such indiscriminate market actions that’s when opportunities are greatest,” he adds.
While admitting it is difficult to catch the bottom, Choo’s recommendation is to build a portfolio of large-cap stocks that have corrected significantly and are offering high yields such as the local banks and REITs whose assets have long lease expiry dates.
One recent example might be United Hamsphire US REIT, which UOB Kay Hian helped to bring to the market. This REIT has a comfortable weighted average lease expiry date of more than eight years, and at its offer price, it has a projected yield of more than 7%. When Choo met The Edge Singapore on the morning of March 3, the placement tranche for this issue was already some 3.5 times covered.
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Besides UOB Kay Hian, the joint global coordinators of this issue were much bigger global banks such as HSBC, UBS and Credit Suisse. “We punched way above our weight.
We did extremely well,” says Choo. He could not disclose the exact proportion, except that UOB Kay Hian, which celebrates its 50th anniversary this year, helped bring in the largest share of orders for the placement tranche.
However, the fact that UOB Kay Hian garnered most of its orders from overseas investors — especially Thai funds — instead of local investors, was a bugbear for Choo. According to him, private banks, high-net-worth individuals and hedge funds were keen on this issue. Yet, there was scant interest from the at least 30 Singapore funds which UOB Kay Hian tried to market to.
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UOB Kay Hian has been involved in at least half of the Singapore IPOs. Choo points out that such a phenomenon is not new at all, and certainly not due to a new worry such as the Covid-19 outbreak. In order for the local fund managers to buy something, they have to sell something. “We don’t have a consistent inflow of money into the market. The market cannot just be led by high-net-worth individuals, or retailers. You need institutional money. And that is the missing, critical piece, for Singapore,” says Choo.
In contrast, the foreign funds help manage superannuation money — mainly government pension funds. “Every month, there’s new money coming in. They cannot stand still, they must find things to invest in,” says Choo.
Healthy ecosystem
Here in Singapore, the CPF system takes a sizeable cut out of most working adults’ monthly pay to add to the pot used to buy a special class of government bonds. The proceeds from these bonds are then given by the government to government investment agency GIC to manage.
GIC’s total assets under management (AUM) and annual returns are not disclosed but the quantum of CPF contributions has been increasing each year in the past decade. In 2009, the total was $20.125 billion. In 2018, it reached $38.37 billion. For the first nine months of 2019, it exceeded $30.5 billion. Total CPF balances, as at September 2019, were $417.5 billion — a pool of any money any fund manager or broker would love to get their hands on.
Choo points out that in any developed exchange, retail participation is important, but funds from superannuation sources easily comprise at least half to 60% of the market. “They play into each other, and create a healthy ecosystem,” he says.
The party line is that GIC and Temasek Holdings, the other Singapore government investment agency, have made a conscious decision to invest outside Singapore, in the name of portfolio diversification. “Yes, that is true, but a certain percentage can come back to Singapore. We are not just investing in Singapore companies on the Singapore Exchange. You look at the exchange: many of the listings have diversified businesses across the world. Food Empire (see Page 13), for example, is in Russia. You are using SGX as a jumping-off point into other markets,” says Choo.
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He also acknowledges that there is Heliconia, a subsidiary of Temasek that invests in local companies. But, its war chest is limited, and its mandate is limited as well. It can invest only in Singapore-based companies and thus cannot go near Singapore-listed foreign companies. “In comparison, look at Hong Kong.
The top counters are all China companies listed there. It is a huge ecosystem,” says Choo.
“I can’t teach GIC or Temasek how to do their business, but if they want a viable exchange, they have to do something and don’t give it to individual clients to decide,” he adds, referring to CPF money, which is meant for retirement although individuals can take the risk to buy certain stocks. “Have you seen the CPF-approved list? It contains things we won’t even margin. You allow your retail investors to go and dabble in those counters? Crazy,” says Choo.
The CPF-approved list, as at March 17, includes blue chips such as the three local banks. However, it also includes a clutch of companies that have been in the news for the wrong reasons. For example, there is Epicentre Holdings, the former Apple reseller which is now being investigated by the Commercial Affairs Department (CAD) and Monetary Authority of Singapore (MAS); another counter is AA Group, who has a director entangled with the Epicentre probe.
Then there is Midas Holdings, the former white-hot aluminium parts maker which imploded two years ago after its former chairman Chen Wei Ping allegedly took out unauthorised loans. Last but not least, there are a couple of companies with known links to John Soh Chee Wen, the alleged mastermind of the October 2013 penny stock saga who is now facing trial. These include Magnus Energy, and Sunrise Shares Holdings, which used to be known as ITE Electric.
More than six years on, the effect of the penny stock saga is still being felt. “We probably count ourselves as one of the responsible brokerages,” says Choo. “We were the first to put a cap on John Soh’s activities very early on — six to eight weeks before they actually collapsed. And in those days, we were really whacked in the press for interfering. But, what we were trying to do was to take some steam off because it was getting too speculative. How can you allow people to trade counters that have 100 times book, 100 times P/E?” What happens is that when retail investors are burnt by their stock investments that turned sour, they turn risk-averse and refuse to endanger more of their CPF savings. Choo urges Singapore to follow the Hong Kong model which has a list of fund managers that retail investors can choose to put their pension money into. “So we should institutionalise it and we create a healthy retirement environment for your citizens. That’s the way to go.
Let them be more active in the market and not give them 2.5% or 4%,” says Choo, referring to the guaranteed annual interest rates CPF members enjoy on their ordinary and special accounts respectively (see “Connecting with a younger investor base” on Page 12).
Perfect leverage play
Choo also feels that regulations here focus on the wrong places. On one hand, CPF investors can punt on speculative stocks using their retirement money. But on the other hand, retail investors are not allowed to trade instruments — such as contracts for differences with blue chips as the primary securities — unless they have gone through training and pass a test on Specified Investment Products (SIP).
According to Choo, this has stifled trading interest in Singapore. Hong Kong, for example, enjoys 20% of their turnover via a type of leveraged derivative products called callable bull/bear contracts. In total, UOB Kay Hian has around 600,000 account, out of which 100,000 are active; And from this already small base, just 2,000 of UOB Kay Hian’s retail clients have taken the SIP exam and qualified, says Choo.
He laments how UOB Kay Hian has this
long-only product called “CFD 10” which, in return for 10% upfront payment of as low as 10% and slightly higher brokerage fees, allows investors can enjoy up to 10 days to contra the product.
For example, when a client buys a CFD 10 on DBS, UOB Kay Hian has to immediately buy the underlying DBS primary securit to hedge back. When the client sells the CFD, UOB Kay Hian sells the share as well. If dividends are paid before the sale, the investors are entitled to the dividends too. The client makes a profit off the actual movement of the underlying share price but only has to stump up just a percentage as capital. “This is a perfect leverage play,” says Choo. However, investors need to be SIP-qualified before they can trade in such an instrument. But with so few of them, products such as CFD 10 has not really take off. As a result, no one will be bothered with developing new products due to the lack of demand, he warns.
To be fair, the current tight regulations resulted from the fallout of the Lehman crisis, when tens of thousands of retail investors were burnt buying the so-called “mini-bonds”.
Choo recalls how the product prospectuses were written in a way so arcane it was probably understood by just a few good lawyers.
“Someone higher up probably got angry and said ‘you must sort out this thing’. But now, we have to look [at this] again,” he says.
“Twelve years after Lehman, I think it is time to move on. The key thing is to teach customers to be less naïve.”
Choo is calling for a more systematic, industry-wide process where issue managers of new financial instruments here should make their case to both regulators and potential distributors like UOB Kay Hian, explaining exactly how the products work. In short, this means setting a higher governance bar in this area and be aware what is being introduced into the market. “We got AVA [Agri-Food and Veterinary Authority of Singapore] to look at the food that comes in before we eat; what about investments?” says Choo.
The home base
Even though the brokerage business now is a far cry from the glory days, Choo prefers to maintain a positive attitude. He says he feels for the remisiers, especially the older ones who are still operating the way they used to in the good old days. Still, there are younger ones in their 30s and 40s, who are actively engaging clients in their own ways and have done “reasonably well”. In fact, Choo says there are remisiers who are easily making “five, six digits” in commissions.
To be sure, there have been several golden eras since UOB Kay Hian started business.
One of the more prominent ones was marked by two former remisiers David Loh and Han Seng Juan, who had a big hold over the listing and trading of S-chips — China-based SGX-listed companies — when they were in vogue more than a decade ago.
Choo is careful to play down the personality-driven characterisation of the remisiers and that “we all” have to be like Loh and Han.
“We have to broaden the base of remisiers and sales guys who can originate deals, go out and hunt, and not sit behind the desk,” he says.
Today, Choo adds there are “several” individuals — although he declined to name them — who have the contacts to originate and structure deals as well as the distribution network to place out the shares when needed. “We are no longer dependent on this one team. You must be a good storyteller to position the company, then you leverage on their network,” he says.
In the same vein, UOB Kay Hian — which, besides Singapore, also operates in Hong Kong, Malaysia, Thailand, the UK and the US — is able to sell deals such as United Hampshire US REIT successfully because of this network.
Yet, the Singapore home market is one that will be critical if the firm is to survive and thrive for the next 50 years and more. “It will remain poor as long as we don’t have a home base,” says Choo.
