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Can MAS equity grant lift market malaise?
THE Monetary Authority of Singapore (MAS) wants to bring sexy back to Singapore's small- and mid-cap stock universe by funding more research initiatives and subsidising fresh hires and re-hires at equity research desks.
Both schemes are part of the new Grant for Equity Market Singapore (GEMS), to which MAS is committing S$75 million over three years, starting this February.
The assumption here is that fading retail interest in penny stock-punting is linked to the secular decline of the equity research industry. So giving sell-side analysts the resources to broaden their coverage will help bring to light more hidden gems, and liven up trading in stocks that have fallen off the market's radar.
But if you believe in efficient markets, then this logic has to be faulty or Singapore's investing public is totally hopeless.
The truth is that investors have good reason to stick with the bluechips while regarding smaller-cap stocks with fear and loathing. By definition, the small- and mid-cap space has always been more prone to scandals.
Here are some recent highlights:
E-commerce startup Y Ventures discovered last week that it had mistakenly overstated its net profit by S$1.3 million in the first half of last year, and is in fact loss-making. Its chief financial officer has resigned. Of Y Ventures' four covering brokers, one has suspended coverage while another has downgraded to "sell".
Two months ago, coffeeshop manager Kimly was forced to cancel a S$16 million acquisition of a drinks company from an ex-Pokka employee, amid an internal audit by Pokka. It's unclear if Kimly's ex-director, who was also a chief executive of Pokka, had helped broker the deal, which was sealed after he left Kimly but continued to own five million shares in Kimly. but continued to own five million shares in Kimly. Kimly is also being probed by MAS and the police. The stock has been downgraded to "neutral" by its sole covering analyst. (see amendment note)
Notably, Y Ventures and Kimly both enjoyed snap gains upon their listing debuts in 2017 but are now down 88 per cent and 37 per cent, respectively from their peaks.
Generally, the quality of new listings that bankers bring to the Singapore market is in decline.
To avoid inadvertently funding the promotion of dud stocks, MAS needs to complement its grant money by taking action against issuers and their Catalist sponsors that damage the market.
Don't blame SGX
Some have also described MAS's equity grant as a generous attempt to tick all the boxes it can, without actually getting to the root of the problem.
Over the years, many high-net worth individuals, aided by their private bankers, have migrated from the Singapore market to places where it doesn't take you a few weeks to accumulate a S$1 million position in a S$150 million market-cap stock. And these people have no good reason to look back, said an investor who spoke from his own experience.
Ultimately, the dearth of local equity research is a symptom of a moribund market, where there are not enough buyers and sellers matching trades and sparking joy.
But this is not the fault of the Singapore Exchange (SGX).
In its 50-year history, Singapore simply has not produced any "systematically significant" companies in the industrial sector, or international champions that have started from nothing to become bellwethers in their industry, this investor said.
Years may pass before this changes.
In the meantime, MAS is doing what it can to keep the fire burning, and the new equity market grant definitely helps.
For instance, taking some cost pressure off the shoulders of brokerage firms' research teams gives them room to track more companies and produce more varied reports. It is helpful if they can worry less about how their call affects the level of corporate access they get, which is what key clients pay fees for.
For many people, analyst reports are essential reading because they teach you the factors that drive a stock's price and what the consensus view is.
SGX could do the investing community a big favour by aggregating research reports from different houses on its web portal, and maintaining a decent database of research, especially stock initiation reports as they often tend to offer the most in-depth coverage.
SGX looks like it is trying to do this on the "Analyst Research" page of sgx.com, but the page is not well maintained.
Getting this right is a low-hanging fruit and potentially more impactful than exploring "innovative ways to distribute research", as the research initiatives grant is intended to do.
Finally, as Singapore's research ecosystem matures, expect activist investors, governance advocates and even short-sellers to play a larger role as well.
While sell-side analysts tend to err on the side of being bullish, more alternative voices will make for a more vibrant market where capital is allocated efficiently to true "growth" companies.
Amendment note: An earlier version of this story wrongly said that Kimly’s acquisition was sealed after its ex-director left Pokka.