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Homeward bound (Part 2 of 'Home sweet home')

Chew Sutat
Chew Sutat10/14/2021 11:13 AM GMT+08  • 10 min read
Homeward bound (Part 2 of 'Home sweet home')
Unbeknownst to most, another multi-ministry task force has been hard at work in Singapore, too: Chew Sutat.
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Q: Are the government’s capital market initiatives announced enough?
A: Let’s not let a good thing go to waste, but line up the other ducks.

As Covid-19 has rocked the markets and hogged the headlines since early last year, Singaporeans are by now familiar with the multi-ministry task force — given that they are often the faces of the government’s response to the pandemic.

Unbeknownst to most, another multi-ministry task force has been hard at work too — except it has been working largely behind the scenes, on essential initiatives long-awaited for the local capital markets. Besides the Ministry of Trade and Industry, other agencies involved include Temasek Holdings; the Monetary Authority of Singapore (MAS); EDBI, the dedicated investment arm of the Singapore Economic Development Board (EDB), and Singapore Exchange (SGX) itself.

No, the Singapore market is not quite on life support — yet. But as Minister for Trade and Industry, Gan Kim Yong, said at the launch of the swath of initiatives in the “September surprise”: “We have moved mountains to establish a global financial and business hub, and will spare no effort to achieve our ambitions for our economy and our people.”

Whilst acknowledging that these initiatives themselves are not a “magic” bullet, the “new wind” blown into the sails of the market will take us to new shores, only if all of us put our money where our mouth is, whatever our role in the ecosystem; and follow the lead, not just criticise in our armchairs.

Following the launch of the initiatives, the usual suspects bemoaned that $1.5 billion announced by Minister Gan was not enough. Why not $30 billion? they asked. Why so belated? The horses have already bolted, others lamented.

Ironically, they did this whilst quietly trying to guess which listed stocks may be beneficiaries of more such moves, or, as they tried to read the tea leaves by identifying the unicorns’ founders who were present (or not) at the SGX Securities Market Open Event where Minister Gan spoke.

Yet others scrambled to present themselves as local champions to garner the attention of EDBI and Anchor Fund @ 65, which is one of the co-investment funds that are part of the wider initiatives.

It is human nature to want more, especially if a free ride is there for a hitch. But let’s not just do an Oliver Twist. If more is afforded, where can it come from and where should it go to?

Not too hot and not too cold

When one thinks of best-performing stock markets for comparison, most experts — including the local media in its recent editorials — will think of the US market (which represents 54% of the market capitalisation of listed equities).

Indeed, it has been the longest bull market in US history. It started when then-US Federal Reserve chairman Ben Bernanke, affectionately dubbed “Helicopter Ben”, “dropped” copious amounts of cash all across the system to prevent a wider seizure after Lehman Brothers went under in 2008.

Japan has been in resuscitation mode since the 1990s as a result of negative rates. Europe seems unable to wade itself out of the liquidity-fuelled drug overdose, punishing savers while forcing investments to monetise the debt mountains.

China, with 10-year bond yields at 3%-plus now, almost seems like the most normal economy, even if it has insulated its borders Covid-wise and is just cleaning up. And no, it is not seeing a Lehman moment with the tottering Evergrande Group, as the Western media likes to allude to.

The savvier ones will point out that in any given year or given time period, one market or another will have a stellar year. Turkey, Chile and even Dogecoin all had their moments in the sun. The world’s best stock market in 2021 is Mongolia, galloping up 130% across the steppe year-to-date.

Volatility representing the embedded risks is higher, if one hopes for a higher return, goes the conventional thinking.

Then there is the anomaly of Australia. “The Credit Suisse Global Investment Returns Yearbook 2020” points that it has been the best-performing stock market over the last 120 years. Yet, counter-intuitively, it has had the second lowest volatility in the world. How is that possible?

Out of the 2,100 companies quoted on the Australia Securities Exchange, the 200 index stocks of the ASX200 alone represent some 90% of the daily trading turnover. In other words, there is a long tail of small caps that only garner situational attention. They include a couple hundred of non-Australian small- and micro-caps (including several from Singapore) that are suffering from no coverage and negligible trading. The FTSE 100, which represents around 88% of the market turnover on the London Stock Exchange, is also another low-volatility index.

In comparison, the 30 component stocks of the Straits Times Index represent around 65% of market turnover on the SGX. This means more of the market turnover is shared among the mid- and small-caps. Perhaps we are far away, but one almost never hears any moaning about the lack of liquidity of small caps in Australia and London!

Now, what makes Australia unique? It has higher turnover velocity (liquidity measured by turnover over market capitalisation of stocks), the best-performing market in the world over time, and yet the second-lowest volatility, making it almost as unexciting as Singapore?

One possible explanation would be the size and bias of the domestic superannuation funds. That has in turn created another issue of its own: for decades, the supers, and the Australian pensioners, wish they have a bigger variety of local stocks to choose from, which brings us to the next point: diversification. Even after years of talk, less than 10% of the assets are invested out of Australia. There is ample capital generated, new and recycled from employees contributing to their retirement accounts, much of which is managed professionally.

With the home-biased pool of captive capital (by mandate and default) plus market structure that encourages algorithms and active trading from global electronic trading funds (more than half of the turnover on ASX), the Australian market is concentrated in a few banks (Westpac Banking Corp; Australia and New Zealand Banking Group; and Macquarie Group); incumbent telco Telstra Corp; retailer Woolworths Group, as well as commodities giants BHP Group and Rio Tinto.

Oddly enough, this mix is similar to Singapore’s three banks (DBS Group Holdings, Oversea-Chinese Banking Corp and United Overseas Bank); Singapore Telecommunications, those few Jardine companies (Jardine Matheson, Jardine Cycle & Carriage and Dairy Farm International), as well as Wilmar International. What’s conspicuously missing are the big tech names that have produced the Goldilocks outcomes.

In more recent years, in Japan, with Abenomics as well as the Bank of Japan and Government Pension Investment Fund (with its world-leading investment pool of 191.6 trillion yen, or $2.3 trillion) supporting Japanese equities, the Nikkei 225 and other Japanese indices have had a smoothened run since 2015 to post-bubble record highs — irrespective of Covid and the government changes. Volatility has been reduced too, from before 2015.

Likewise, Chinese promotion of dual circulation, ringfencing limited exposure to mainland equities directly via Hong Kong, appears to facilitate recycling of domestic capital generated. The lack of maturity in having wider derivative instruments and broader domestic institutions does mean that in moments of extreme volatility, the regulators are rumoured to have called up funds to stop redemptions and not sell but buy.

Not too different are the Hong Kong government’s intervention during the Asian Financial Crisis in the form of the now-massive Tracker Fund of Hong Kong, and the past vanguards of Kuomintang funds that have propped up a more volatile Taiwanese market from time to time.

Ecosystem re-booted

Right now, the market value of stocks listed on the SGX is around $900 billion. In contrast, the total assets managed in Singapore as of 2020, according to MAS, was $4.7 trillion. This includes our sovereign wealth funds, the successful asset management industry, and the hub of private banking and family offices anchored here by MAS and EDB.

This commentary is not an argument for state support of liquidity in the stock market. We do not need to be like Malaysia where the likes of the EPF (Employees Provident Fund), Khazanah Nasional and Kwap (Kumpulan Wang Persaraan) account for too significant a part of daily turnover; or like South Korea with its NPS (National Pension Service of Korea) and KIC (Korea Investment Corp).

On the other hand, we are also not like the US where pots of money pour in everywhere from deep and broad sources, and help fund already leading US companies to consolidate their global hold. The funds range from teachers’ pensions to ETFs that suck in institutional, private and retail money from across the rest of the world by virtue of “asset allocation”. As a default weightage, US markets will command 54% of any global portfolio. The tilt is even more pronounced given how American institutions and retail 401k’s have a huge home bias.

Similarly, we need different pools of domestic-managed money beyond the handful of captive local insurance funds, to start thinking about Singapore, deploying in Singapore and providing the liquidity in Singapore.

We don’t have to be like Australia with 80%-90% of capital recycled domestically. But some 5%-10% of this — a very minor home bias — could help, say from GIC (which is the external manager that helps deliver the guaranteed returns for Central Provident Fund monies that we benefit from).

There are already the likes of Fullerton Fund Management and Sevoria Holdings, but likewise, the market can make do with a bit more active rather than passively held strategic stakes by Temasek-seeded funds. By doing so, not only is it catalytic for domestic retail confidence, it will also help attract more active funds globally, as the stock market here (re)gains significance and relevance.

For the high-value jobs created in finance, and high-net-worth individuals, and capital attracted here by MAS and EDB, is it also time to tie the fiscal and other incentives to a minimum allocation to Singapore?

Collectively, this may be a more sustainable way to engender the animal spirits, without only drawing on the national coffers. It may become truly catalytic as a follow-on step beyond what has been announced by Minister Gan last month.

Do not let the cautious optimism stew in the backroom as IPOs or secondary listings take their time to cook. The market’s appetite might change. Let’s take the steps to ensure that we have the bullets lined up for this inflection to become a virtuous cycle.

Let’s not nickel and dime about $1.5 billion or $30 billion. If 5% of $4.7 trillion becomes more active in the local equities, that is the train about to leave the station. Let’s all get on board and join the Aussies for a barbecue.

Chew Sutat retired from Singapore Exchange (SGX) in July this year. He was senior managing director of SGX, and member of SGX’s executive management team for 14 years. He serves on the board of ADDX and chairs its Listing Committee. Chew was awarded FOW Asia Capital Markets Lifetime Achievement Award this year

Cover photo: Bloomberg

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