Last week, as global markets stumbled into October, Bloomberg ran a story with the headline “Singapore stocks index is the sole winner among developed markets”. This achievement is all the more remarkable, amid the strength of the US dollar thanks to the US Federal Reserve’s series of rate hikes to tame inflation.
The Straits Times Index was up 1% in US dollar terms may be nothing to shout about but the contrast is stark versus other major markets. The MSCI World Index is down 32%. Holding US stocks in US dollars may have given you a gain of 6% but the currency gains have all been rolled back by the 25% drop in the S&P and the 33% plunge in the Nasdaq. That is assuming that you have not invested in growth at all costs counters such as the Ark Innovation ETF and other new-fangled growth stocks or Grab Holdings, the world’s largest spac listing. The value of these counters has plummeted by over 70%.
Since its debut last September, this column has reminded local investors inflicted by the Pinkerton syndrome that currency translation back to where you are based needs to be an important consideration. Collecting Singdollar dividends from a basket of blue chips that makes up the Straits Times Index, has resulted in up to 30% extra money for holidays to Japan, South Korea, the UK and Europe for me.
This column has also pointed out that the various actors in our market ecosystem have different roles to play. Listed companies come in all shapes and sizes while investors have varying appetites and preferences. There are also market operators, regulators, and the clutch of intermediaries, which includes brokers, bankers and professionals, pundits and academics. In short, growing our capital market is like raising a child, where it takes the whole village, with each party playing a specific role.
If we want a vibrant local stock market, we have to make it happen — ourselves. For those who have been following the column and stayed largely in our own #safeSG, at present you have fewer wounds to lick but more dividends and maybe some M&A gains to spare. How is it that we continue to do what we do best in Singapore but yet point our fingers at the market operator when our own actions often are at odds with the desired outcomes we hope for?
The truth will set you free
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At the annual general meeting of the Singapore Exchange (SGX) on Oct 6, numerous questions were fired from shareholders cum retail investors. A particularly quoteworthy reply that made its rounds on social media without proper context was: “Do we want to spend all our lives on SME listings? We really want to be an international exchange.”
As it is, this quote encapsulates the hard truths from the perspective of SGX as a listed company — that it wants to be responsible to its shareholders. Unfortunately, hard truths often hurt but that is what has made the Singapore of today, with our founding fathers making the impossible of this little red dot possible.
As SGX shareholders, it is logical one should demand that the board and management focus on the best opportunities for the business that drive the greatest returns and growth. A steady quarterly dividend of 8 cents is nice but if earnings can grow instead of staying flat, that is even nicer.
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Given that Singapore has just received the accolade as the world’s No. 3 financial centre, it will be negligent for SGX to spend its entire resources on this end of the market. That is assuming the exchange’s primary responsibility was to local SMEs.
Beyond supporting SMEs, there are plenty of earnings opportunities from the world of risk management, clearing and derivatives; where there are plenty of tradeable instruments ranging from Chinese A50 futures to freight, iron ore, RMB and Indian rupee derivatives. These are market opportunities at the global level and where trading volumes persistently dwarf entire capital markets of Asean or Hong Kong, day in, day out.
When in conversation with remisiers, old stockbrokers and many in the industry who are passionate about our local capital markets, derivatives are often associated with a four-letter word. It is not evident to the traditional investment bankers, brokers, lawyers, accountants or board director aspirants but derivatives do create other economic value-add and employment in Singapore.
Detractors may point out that the trading volume of the Thai and Indonesian markets is now higher than Singapore’s. But these two Asean economic giants are going through their renaissance enabling local funds to be channelled to the local stock market, predominantly represented by SMEs. Just over two decades ago, Singapore’s market and economy went through the same phase. Are we being criticised for moving ahead of our neighbours?
When local retail trading creates liquidity, these markets will then draw in foreign capital — including that from Singapore. Nevertheless, as with all emerging markets, they go through boom and bust cycles as the lack of persistent international capital allocation creates a vacuum during a global crisis. Or when locals stop playing.
The latter observation is most evident in China, where under the over-arching “common prosperity” policy, there is the ongoing “death by a thousand cuts” of the markets. Specifically, the China Securities Regulatory Commission is bent on taking out retail speculation. Sentiment has further cooled and market valuations severely hurt by the US trade and technology war waged on China.
Ironically, many who for years have been harping about comparing our stable, growing and rewarding capital market with exciting Hong Kong, are now largely keeping quiet. Some years back, many Singapore SMEs ditched SGX for their own much-vaunted listings in Hong Kong.
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As it turns out, many had either underperformed or been privatised, like Razer for example. In the case of V3, the former Osim International, its purported listing in Hong Kong has yet to materialise despite rounds of reports indicating so. From before the pandemic, the Hang Seng Index is down 40% to below 17,000 points. On the other hand, the STI is slightly positive. In the face of Singapore’s outperformance, the shrill calls have fallen silent.
Even if it hurts
The range of comments I received following the widely circulated quote was telling. They range from “Exchange cancelling the Catalist board soon?” to “brave of him to say this in public. And I agree” or “Catalist or SME markets have their place but people need to be realistic”.
Here are more hard truths. First, small caps and SMEs struggling to raise financing is a capital markets problem all over the world. Also, as brokers and banks compete on fees and with more onerous regulations governing research which leads to higher costs, there has been diminished coverage of small and mid-caps, leading to less liquidity and interest.
The Monetary Authority of Singapore and SGX have tried to instil some energy with schemes to support sell-side research. CGSCIMB, which was ranked by Asiamoney as the top for research in Singapore and Asean, is one of the few valiant ones covering the mid and small-cap market. But if investors only want research for free from the incumbent brokers and yet merrily trade away on moomoo and Tiger Brokers, can this be sustainable? Disclosure: I am the corporate advisor to the group CEO of CGS-CIMB Securities.
Next, we are in a pretty horrific global macro environment now. Competition for primary market and secondary market capital has reduced scarce capital for IPOs. And when investors gulp at the red ink in their portfolios, stumping up more capital to invest in SMEs is something that is more challenging currently.
How is Singapore the top-performing stock market in the world? Is it merely attributable to strong business performance? Or is it the credit of strong governance and the push towards higher ESG standards? Is it because most of the STI companies have dedicated investor relations teams led by their respective CFOs, actively building and keeping the trust with their global — and not just local — investors?
How many of our 680 or so listed companies, including SMEs, take investor relations seriously as a public company? I was heartened by a comment by a CEO and owner of a Catalist company who joined the discussion with the comment “time to buck up and work harder”. His contemporaries and peers may not agree but when listed SMEs compete for capital and investors’ interest, there should be no sense of self-entitlement that regulators and markets are to help send the cheques raining down. The onus is on the SME owners to show that they have the most skin in the game in the very companies before they try pitching to other investors.
In June, SGListcos, an association of listed companies here, was formed with some 10 founding members with some funding from SGX and other authorities. SGListcos is dedicated to collective advocacy, sharing of best practices and building IR capabilities and ESG as a focus. I agreed to be the pro tem chairman because an industry self-help body is much needed. We are now about 50-strong but are waiting for 600 more companies to join. Meanwhile, we take up our end of shared responsibility and the bull by its horns.
For those viewing the market through 1990s rose-tinted glasses, we ask the question — where are the small-cap funds and capital that fuelled our own booms and busts? If they have been diversified globally or even went into trading crypto because of “market opportunity”, why should we begrudge SGX who is doing right by its shareholders — even if last week’s strategy board discussions, we hear, were held in New York? And if we lament that Thailand and Indonesia, which have much larger demographics with captive local funds, have larger trading volumes than Singapore, why do we ourselves contribute to that?
No looking back
Back in 2011, in a bid to bulk up, SGX made an audacious bid for the Australian Securities Exchange. Great pains were made in the offer that included commitments to Australian stakeholders on investing and support for local hiring and stock market infrastructure. When the Australian politicians spurned our offer, SGX had a ready backup plan: it simply accelerated its growth in distribution and derivatives, hence creating today’s relevance as an international multi-asset exchange.
The truth hurts as elaborated above but there is a case that can and must be made that the licence to operate a stock market requires ensuring resources and support from the local capital market in supporting local SMEs. The difficulty is in determining what is sufficient and who is to pay. Is it really the market operator’s or regulator’s job to engender animal spirits?
Today, Australia has a few thousand listed companies. Many are small and micro caps. They have even attracted a hundred or so small international companies, including numerous Singapore SMEs. These companies were lured by professionals and local brokers there who, after doing the primary deal, walked away with no research and liquidity support. Stocks that are hardly traded and where issuers are mostly unable to get secondary fundraising are a common feature Down Under but we only lament about those that do not do well here.
Companies get listed on Australia’s mainboard with a process that is simpler even though they do not have a Catalist board. Some succeed and some fail — like any normal capital market. What is different is when companies fail, it is accepted that its commercial risk and unless there is outright fraud proven, investors do not complain and have no recourse. It is caveat emptor in the main. In Singapore, over-conditioned for retail protection, regulators have had to get in the middle of free play, simply because we (investors, listcos and academics) complain too much.
SGX is the most international stock market as roughly 50% of its market capitalisation comes from non-Singaporean companies. The operator has facilitated global capital to come to Singapore capital markets while MAS has enabled over $4.7 trillion of capital managed out of Singapore, including the 700 and growing list of family offices here. It is thus incorrect to say, as some academics have questioned, that there is no net benefit in being an international exchange — both for its shareholders and Singapore as a financial centre and for job creation. Ironically, they will be the first to criticise should an SME listed here fails.
It is also a fact that derivatives exchanges command PE multiples at higher levels higher than stock exchanges. So, SGX in its multi-asset pursuit, if executed successfully, will deliver a better return for shareholders and have a cheaper cost of capital for its domestic obligations. I would much rather have SGX at $12, almost an all-time high when I retired last year than at $3 if it is valued as just a cyclical stock exchange trading just domestic listed companies.
Having miraculously diversified to have a shot at success in the premier league, it makes no sense for it to self-relegate to “re-examine its purpose” back to the future. However, with growing international multi-asset success and a local stock exchange licence, there is no question that the SGX does have an obligation to our SMEs which are a very important part of our economy.
But this is not an all-or-nothing conversation. SGX already supports industry bodies including Securities Investors Association (Singapore) and SGListcos. SGX is already providing the market infrastructure and rules for SMEs including the Catalist. Other state stakeholders including Temasek, through 65 Equity Partners and Heliconia, have supported or have goals to support local private to public equity listings.
In fact, it is probably good business if we define the SME capital market opportunity as Asean or even Asian, as we have an opportunity to gain supremacy in this time zone given.
But we can only do so if our promiscuous investment dollar — burned all around the world — comes back to play into our own market. If our companies stop going to HK, Australia or the US and end up disappointed for the most part. If we collectively rise to the occasion, stop lamenting and allow for risk and reward to be safely expressed in this market so the regulatory posture can lighten. If we can all recognise we are indeed stakeholders of the ecosystem and therefore not point fingers at anyone. If we want, we can perpetually talk down the Singapore market but we can step up and be responsible for our market once again too.
The STI is up when the world is generally down. Singapore is on a tear. An inclusive capital market that supports our SMEs to raise capital and succeed globally is up to us all. Instead of lamenting SGX’s relative success in a tough world of derivative competition, let us work constructively to play our part.
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
