SGX-backed independent research firms a solution to better stocks coverage

Singapore

THE equity research space has recently seen some brokerage houses here ceasing the coverage of certain stocks due to a reallocation of resources, which calls into question of where smaller cap stocks stand today and the impact on retail investors.

In the later part of last year, brokerage houses RHB Research Institute Singapore and OCBC Investment Research began ceasing the coverage of certain listed stocks.

"We ceased coverage on some stocks at end-2017 and early-2018 to allow our team to better focus their efforts on identifying new stocks that will help our investors profit in 2018," Shekhar Jaiswal, head of Singapore Research at RHB Research Institute, told The Business Times in an e-mail recently.

RHB Research Institute has stopped the coverage of some stocks including SingHaiyi Group, Mapletree Logistics Trust, Kingsmen Creatives and Overseas Education Limited.

The team covers companies with a market capitalisation ranging from US$30 million to US$47 billion. It wasn't able to provide the number of companies it covered last year compared to this year.

Mr Jaiswal added that the team will continue to cover sectors including consumer, property and banking.

In OCBC's case, head of OCBC Investment Research Carmen Lee told BT that her research team ceases coverage for reasons including analyst departure, low trading liquidity, and a lack of interest in the sector for a "prolonged period of time".

Some stocks that are no longer under OCBC's coverage include Midas Holdings, Health Management International, and PACC Offshore Services Holdings.

Figures for staff strength last year and this year were not disclosed by RHB. OCBC said that its current team of seven analysts now focuses on Singapore and Hong Kong stocks.

Focus on large caps

Research houses have long faced cost pressures, and as these pressures continue to build, the move to do selective coverage with less manpower means that more smaller cap stocks are ousted from the competition, and large cap stocks and blue chips grab the limelight.

"There is real risk that smaller listed companies would not be covered, as most analysts gravitate towards larger cap stocks for liquidity and lower forecasting risk. Investors would need to do their own independent homework in analysing stocks," a Maybank Kim Eng equity sales representative told BT.

Currently, brokerage houses like Lim and Tan Securities, NRA Capital, CIMB Securities, and Maybank Kim Eng Retail Research cover small cap companies listed on the Singapore Exchange (SGX).

Stefanie Yuen Thio, joint managing partner, TSMP Law Corporation, said that the squeeze on stockbroking margins has led to overall cost cutting, with research coverage on smaller cap companies falling victim.

"This is a pity as the smaller cap companies are the ones whom the market needs more information on. On the Catalist board, which targets high-growth companies, good investor information could be the difference between its development or its demise," she added.

Another factor leading to the cease in coverage seems to be the lack of investor interest.

"Essentially, research teams and stock brokerage firms are a call centre. If there's a lot of interest in these small caps, then you will suddenly see research houses focusing more on the small caps," Vasu Menon, vice-president and senior investment strategist of OCBC Bank's Wealth Management Singapore, told BT in a phone interview.

"Analysts will cover according to what they see, what the market wants, and what the clients want. It's still attached to a business."

What now and who pays?

The lack of investor interest can be attributed to insufficient education about the market. If more research houses start to practise selective coverage by leaving out the small caps, retail investors have limited choices to be able to make an informed decision.

A solution to bring back the coverage of stocks left out by RHB and OCBC is setting up independent research houses with financial support from the SGX, which David Gerald, president and CEO of the Securities Investors Association (Singapore) suggests.

"If you want to increase interest in mid and small caps, SGX must find a way to set up an independent research body that would provide the necessary guidance for small investors. SGX will benefit because (retail investors) will invest if they have guidance to help them make decisions, and the market volume will increase," Mr Gerald told BT in a recent phone interview, adding that the trading volume on SGX "can improve".

He said that SIAS is currently covering about three to four small and mid cap stocks, and this is due to limited funds and the lack of resources.

One way to counter the lack of manpower is for SGX, as a regulator, to establish the independent research bodies and collaborate with smaller institutions like SIAS to put out good quality research reports since there will be a bigger labour pool and funds dedicated.

Past problems

In 2003, the SGX and the Monetary Authority of Singapore established the SGX-MAS Research Incentive Scheme that encouraged each participating research firm to provide regular research coverage on at least 15 stocks, and each participating listed company would be covered by at least two research firms.

Each research firm also received an annual sum of S$60,000 for every 15 stocks covered.

But some participating companies were issued "sell" calls, and were not going to pay a nominal annual fee of S$4,000 for that back then as part of the scheme.

There was also the SGX Equity Research Insights scheme which helped to address the concerns but most companies participating in it chose a non-rated analysis, which then questioned the purpose of the scheme since analysts didn't issue a rated recommendation.

Perhaps then, it would be a good time now to consider a new scheme with the establishment of the independent research houses that will boost investor education and get the market moving even more.

For the scheme to work, the independent research houses have to be given breathing space, too.

Mr Menon said that if the SGX backs this initiative, it needs to give the research houses independence by not putting pressure on them and questioning the calls they make on companies.

"The Exchange needs to fund it but the independents (are given) the leeway to call it a "sell" if it's a "sell", he said.