CFA Society Singapore
Amid the slow pace of IPOs, the lure of private-equity funding, and a string of corporate scandals, it might seem like the local stock market has seen better days. Our distinguished roundtable panellists do not entirely share that perspective, but they do see some big challenges ahead.
SINGAPORE (Nov 26): The health and vibrancy of the local stock market has always been close to the hearts of everyone at The Edge Singapore. Our reporting on the corporate sector has traditionally been done from the perspective of stock market investors.
“Unfortunately, it seems like the local market isn’t the way it used to be,” says Ben Paul, editor-at-large of the newspaper, as he kicked off a roundtable discussion, The Future of the Local Stock Market, held on Nov 13. “I’m not just talking about the level of stock prices, or even the trading volumes in the market. I’m talking about the general interest that people seem to have in the market. It’s not quite the way it used to be as in the 1990s and early 2000s.”
Indeed, the stock market hardly comes up in casual conversation the way it used to. When the topic does come up, the same questions are often asked: Are public markets losing out to private equity? Why have retail investors in Singapore lost interest in stocks? Are Singapore companies living up to the public market’s expectations?
Helping us understand what is happening to the local market was a distinguished panel of individuals from across the corporate sector. From the Singapore Exchange was Chew Sutat, executive vice-president and head of equities and fixed income, and Tan Cheng Han, chairman of SGX’s regulatory arm, SGX RegCo.
From the fund management sector were Nicholas Hadow, head of institutional sales, Singapore, at Aberdeen Standard Investments and chairman of Investment Management Association of Singapore (IMAS), and Lai Yeu Huan, senior portfolio manager at Nikko Asset Management.
And rounding off the list of high-powered names were legal eagle Stefanie Yuen Thio, co-managing partner at TSMP Law Corporation, and Harold Woo, president of the Investor Relations Professionals Association of Singapore (IRPAS).
“Retail participation hasn’t really declined, and is consistent with that at the Hong Kong Exchange, where retail participation is also about 20% of the market,” Chew says. He adds that the 1990s and early 2000s were periods of the super bull run, with the Central Limit Order Book system and the dotcom bubble, respectively. “Of course, everyone on the street was talking about stocks. Unfortunately, what tends to happen after these kinds of periods is a lot of tears and pain,” he says. “It’s always easy to see the past through rose-tinted glasses… When you look back, it all looks good, because it used to be exciting.
“The assertion that the capital markets haven’t grown over the last two decades is a false one. When I look at the markets today, where everyone bemoans a lack of liquidity, we actually have trading volumes that are far larger than in the 1990s or early 2000s.”
Picking up on Chew’s point, Hadow too disputes the commonly held view that Singapore has not grown as a capital-raising centre. “While IPOs may have been a bit scarce, the secondary market raisings remain remarkably strong,” he says. “We’re seeing in the institutional space, in our own business [at Aberdeen], that the investment chain is getting longer.”
According to Chew, capital markets in Singapore raised US$360 billion ($494 billion) last year, including fixed income and secondary fundraising. “We look at capital markets quite narrowly, as just IPOs,” he says. “For companies, it is really the ability to access supportive secondary fundraising that is key to going public. Otherwise, why bother with AGMs and dealing with Joe Public shareholders?” And while he concedes that the number of IPOs has indeed fallen over the years, he clarifies that this is not a Singapore-specific phenomenon. “Globally, the number of IPOs over time as public equities has come down,” he notes.
Far from languishing behind other markets around the world, Chew argues that Singapore has over the years developed a unique marketplace, playing to its strengths. “We have had, on average, better valuations than many of our peers in Asia, and some very strong sectors where we have built niches for ourselves,” he says.
One of these successes has been in the real estate investment trust sector, in which Singapore has grown to be an international hub. “Singapore does have certain areas in which it shines,” says Lai, noting that Singapore companies are generally well managed and have corporate governance standards that are superior to other regional markets. “Within certain sectors, such as REITs, it is very well structured, very clear and delivers very predictable yields.”
Chew points out that international investors account for some 70% of Singapore’s REIT market, which is “highly unusual”. For example, he says, the REIT markets in Japan, Australia and the US are mostly domestic. “That’s international investors — cornerstones from Japan all the way through to Europe and the US — doing international transactions in Singapore… because international investors trust Singapore.”
The way Woo, who was formerly head of investor relations at property group CapitaLand, sees it, there are a number of success factors that have contributed to the growth of Singapore’s REIT sector. “First of all, you had a very strong regulatory framework. And, obviously, there was a very good demographic of investors looking for yield. I think the third factor would be that you had very strong sponsors. Lastly, you have created a strong track record,” he says.
Even then, it has not always smooth sailing for Singapore’s REIT market. There is also the issue of small and mid-sized REITs in Singapore that have had trouble growing, and eventually give up trying to grow in the public market and drop out. As Woo explains, REITs often need to have deep pockets to succeed here. “It’s interesting that in real estate — certainly in Asia — a lot of real estate is actually held by family, big groups, and because of whatever reasons, it’s very difficult to acquire assets from a third party. Nobody wants to sell to you,” he says. “So, the only way is, you need the financial strength to grow your own tree, so to speak.”
Despite the relative success of certain niche segments, such as REITs, in propping up a vibrant market, the Singapore market still seems to have lost its lustre.
Watching the pendulum swing
“I practise in the space of IPOs, [and] the talk on the street is a lot people would rather list in Hong Kong, for reasons other than the vibrancy of the stock market,” says Yuen Thio. “There’s also talk about how there’s over regulation in the Singapore market. It costs too much to stay listed in the Singapore market; there isn’t sufficient institutional or local investor base support in the Singapore market.
“I remember back then [in the 1990s] when the IPOs were so over-subscribed, there would be pictures of boardrooms filled with balloting envelopes and people would go in and pluck one from here and one from there. You don’t hear of that in the IPO markets anymore. Nowadays, there is difficulty filling the book. It used to be 90% public tranche, 10% placement tranche. It is now the other way around.”
Chew explains that this is not a Singapore-specific phenomenon but can also be found in Australia, Hong Kong, the US and London. “But the issue is a real one, because the perception and impression is: ‘Hang on, if I go to a much larger market like Hong Kong, there are so many investors there, I would get something,’” he says. “Companies that have gone to Hong Kong [find] it’s not El Dorado.”
Indeed, the way Tan sees it, the problem could be one of perception amid changing times. “The reality of it is that the entire Singapore community has changed. When I grew up, frankly, we were looking at 7% to 8% growth every year. And you know, one year when you were talking 6%, it was such a disaster. Today, we can average just 3% every year, and you would think that’s pretty good already,” he says. “In the past, you could throw a stone [at any stock in the market] and you would make money. Because everybody was being levelled up by a vibrant economy: Singapore in the growth phase. Today, it’s at a very, very different stage, so people are not so excited.”
He adds: “[Now,] it just doesn’t have the same buzz, because a lot of the plays today are much more dividend-based than growth-based, compared with the past. So, I think it’s partly a matter of perception… But it is this perception and the changes that have perhaps driven companies to private-equity funding.”
To be sure, the slowdown in stock market activity has been in no small part attributable to the rise in preference for private-equity markets. “In the last couple of decades, we have seen a lot of alternative ways of financing,” says Chew. “We are seeing — certainly in the last five to six years — a lot of capital allocated to private markets.”
But he thinks the pendulum will eventually swing back to the public market. “The ebb and flow between the public and private markets have always been constant. There have been times in the past when public markets have done better, and there have been times in the past when private markets have done better,” he says. “There is always the right time, right place and right type of capital structure,” he says.
While private markets create the “illusion” of the opportunity to invest without the mark-to-market, Chew says this does not always pan out, as companies will still be subject to what investors are willing to pay for them — both in the public or private spaces.
“What we do see certainly is there are a lot of different kinds of mechanisms and avenues available to investors to invest in new and different types of structures. And we at the exchange are obviously trying to ensure that we have the right levels of access to these opportunities, and the right levels of ability to create structures that can help many of these private companies eventually exit to the public markets,” he says.
He adds: “At some point, private capital is going to require liquidity beyond ‘can we please get Series D earlier?’ At some point, they are going to require liquidity options, which is why we work with CapBridge. We hope, through our interactions with CapBridge as a corporate finance fundraiser, that some of these companies will eventually be pipelined into listings.” Private capital platform CapBridge on Nov 22 received approval from the Monetary Authority of Singapore (MAS) to operate a securities exchange.
At the same time, “companies that have been forgotten by the public markets, so to speak… [could] privatise the company, do something else with it and again be able to create new value and come back to the public markets”, Chew says.
Before the public market can flourish again, however, steps need to be taken to address a seeming lack of liquidity. While Singapore has grown rapidly as a wealth management hub, it still struggles to be seen as a capital-raising centre.
“There’s an argument on the street that there’s insufficient internal sovereign wealth support for our listed companies. And SMEs [small and medium-sized enterprises] are not getting the support that they need,” says Yuen Thio. “There was a time when I first started out, that GIC was Singapore money that was invested overseas, and made sure that Singapore’s capital was well protected and diversified geographically [while] Temasek was invested internally here to develop the stock market. And there were Temasek-linked companies, which were the government’s and the Singapore funds’ way of making sure that the Singapore market was well developed. Temasek has now gone overseas as well, for whatever commercial reasons it may have.”
According to Lai, the fact that Temasek has not really supported the listed environment is something that firms such as Nikko do take into account. “I wish some of these larger assets that the government has can find themselves to the market — companies such as Changi Airports and PSA, even though it’s challenged by many ports in Asia. But a structure like an infrastructure trust can be created out. I would like to see from the government a lot more consideration in developing the local capital markets,” he says.
Hadow brings up another point: monies held under the Central Provident Fund. “One of our problems here is the whole structure and the whole thing about CPF, because that’s where most retail wealth resides in this country. It is incredibly immobile, very static money,” he says. “Many of my competitors would come here thinking: ‘There are billions in CPF, which should be available, addressable for investment.’ They are not.”
Yet, Hadow points out that the wealth management sector in Singapore is “distinctive”— and offers some hope for the markets. “Now, it’s not the fact that the money is here that is important, because that money is invested around the region, if not around the world… The really important thing to attract companies here is that the wealth allocators, the capital allocators [are also here].”
The way Hadow sees it, there are two hot spots for investors in Asia: Hong Kong and Singapore. “I think my money will be on here longer term, [and] for more of it to be here. You go where the people who decide where the money goes [are],” he says. “And that’s why I will still be relatively optimistic. With good regulation, with the growing ecosystem generally, we will do okay here, and the pendulum will swing.”
Gaps in the system
Hand in hand with working up interest in the public market, Singapore also has to grapple with falling investor sentiment amid a spate of controversies. For instance, the penny stock crash saga of 2013 — dubbed the largest stock manipulation case in Singapore’s history — rattled investor confidence as $8 billion in value was wiped out from the stock market almost overnight. Then last year, Keppel Corp, one of the largest and most trusted Singapore conglomerates, was slapped with massive fines for paying bribes in Brazil. Meanwhile, minority shareholders who have exercised their rights to question the boards of companies they are invested in have been threatened with defamation suits.
“I think it is natural for a large business centre to have a lot of cases, to have things go wrong,” says Yuen Thio. “Singapore tends to be the holding company for a lot of these businesses, so it naturally flows up to the mothership. But I don’t think Singapore is where the lawlessness is actually happening. It’s just where it’s felt because this is where they are listed.”
Tan, who was formerly dean of the Faculty of Law at the National University of Singapore (NUS), believes the law does try to maintain a sensible balance when it comes to defamation suits. “We are in a sense a litigious society when it comes to defamation, because of the philosophy behind it. [But looking] at defamation law, I don’t think it really poses that much of a problem,” he says. For example, he explains that investors or analysts can point out and pose fair questions, which the market can then draw inferences from.
“But the moment you go beyond that and allege as a fact that there is accounting fraud involved, you’ve got to be able to justify it. Because you can’t say that, just because someone operates in the public space, that gives everybody the licence to make every allegation possible against such a person with no possibility of a comeback,” he says.
But does Singapore have the right sorts of laws and enforcement mechanisms to deal with issues as they come up? Or, do things need to be changed? And, how far can we go when it comes to keeping everyone in line?
On this point, Yuen Thio believes there could be gaps in the system. “What Singapore does rely too much on is to have MAS or [the Commercial Affairs Department] be the only enforcement agent,” she says. “We don’t have sufficient laws that allow independent shareholder activism to come forward [unless] you have a minority shareholder with deep pockets, as Noble Group did… Minority shareholders who think something has gone wrong in the company face a lot of hurdles.”
Among the difficulties, Yuen Thio says, is the high costs incurred to take legal action against a listed company. “If you don’t allow minority action lawsuits, class action lawsuits in Singapore, you will have a problem, because you will not be able to fund [the action against a listed company]. If you are not able to come to that, then shareholders again are hamstrung. So, unless you are a very rich private-equity or fund firm that is able to pay for the litigation it will take, you will have a problem. That’s the missing piece in Singapore.”
Adapt or die
Looking ahead, Chew believes SGX displays “signs of a healthy market”. However, he says “it takes a village for us to be able to create the market that we want, that we all want, here”.
“I have listed companies that will come and say: ‘You know what? My valuations and my liquidity suck. No one is buying my stock, no one is covering me,’” Chew says. He would like to pose these questions to them, in turn: “Do you want, dear CEO of a listco, to talk to The Edge? Do you want to talk to brokers? Do you want to get yourself covered? Do you want to participate in our roadshows for different segments and investors?”
He continues: “Very often, you find that the answer is ‘No’.”
Indeed, the problem for some companies might be that they are not ready to be a public-listed company in the first place. Woo explains that, often, smaller companies fail to see the value of investor relations. “I think it’s the mindset. But I have handled a couple of companies recently, particularly the ones that entered the market through a reverse takeover — I think they are not ready to be a listed company. They encounter a storm and they try to find a shortcut. They are limited in resources; they don’t believe in committing to a good strategy because they are very impatient. And they want to get their money back to cover the premium they paid. [But] sometimes, life doesn’t work out that way.”
That said, there is a general belief that SGX will continue to do well.
“In terms of quality, I would say that Singapore companies, compared with our Asean neighbours, are certainly of very high quality. They may not be the most exciting in terms of growth… but from time to time, we would have very exciting stories,” says Lai. “We may just have to dig a little bit deeper.”
Says Tan: “Sometimes I just wonder whether the complaints are really ultimately about the fact that the markets have changed, and the people involved in the market have not changed sufficiently together with it. But [if] that is in essence the complaint, then really it’s a complaint that can lead to no good outcome... People just have to adapt.”
This story first appeared in The Edge Singapore (Issue 858, week of Nov 26).