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S'pore risks fading into investment backwater as market cap shrinks

Analysts cite evaporating liquidity, decreasing depth and dearth of fund-raising

"For the more thorough investor, small markets and small companies can be a profitable hunting ground ... Size is not everything." - Hugh Young, Asia managing director of Aberdeen Asset Management


FRESH off its worst year for listings in at least two decades, the Singapore stock market now faces the threat of fading into an irrelevant backwater for global investors as large privatisations, small floats and a broad-based equities slump continue to erode its market value and appeal, market watchers warn. 

With the number of initial public offerings (IPOs) here falling in 2015 to its lowest annual level since the Singapore Exchange (SGX) opened its doors in late 1999, the local share market has been left in the dust by regional rival Hong Kong as of late, while its neighbours in South-east Asia have begun to nip at its heels.

One crucial and worrying sign is that the sharp slide in Singapore's total market capitalisation in 2015 reflects evaporating liquidity, decreasing depth and a sore lack of interest in raising funds here as attention turns to markets with brighter prospects, analysts and asset managers say, adding that this trend could well turn into a vicious cycle.

The total market value of stocks listed on the Singapore Exchange added up to about US$463.46 billion at the close of trading on Dec 31, 2015, going by a Bloomberg gauge based on actively traded primary securities and stripping out exchange traded funds and ADRs (American depositary receipts).

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This number would make the entire Singapore market cap smaller than that of Nasdaq-listed Apple, which weighed in at around US$586.86 billion at the end of last week. It also marks the Singapore market cap's lowest level since hitting US$464.41 billion at the end of 2011.

Singapore's market cap shrank a sharp US$107.18 billion or 18.8 per cent from a year ago, according to Bloomberg data. The bulk of the drop was due to a broad-based equities slump that also put a dent in other bourses across Asia. The Straits Times Index fell 14 per cent in 2015 to finish the year at 2,882.73 points, down from 3,365.15 at the end of the previous year.

But another significant factor is a handful of big delistings that has occurred alongside a persistent dearth of sizeable initial public offerings (IPOs), analysts say.

"Privatisations of many large companies in the last few years, especially in the property sector, have shrunk the investable pool of stocks in Singapore," said Kum Soek Ching, head of Southeast Asia research at Credit Suisse Private Banking Asia Pacific.

"The absence of large and meaningful IPOs in recent years have also not been supportive to the total market cap of Singapore ... With less market participants, a smaller-cap market can suffer from liquidity issue during periods of stress."

Large delistings in 2015 included that of conglomerate Keppel Corp's property arm Keppel Land in July. KepLand had a market value of S$6.56 billion, based on 1.55 billion shares outstanding and the takeover price of S$4.38 per share that KepCorp paid.

Engineering firm UE E&C, which was worth S$337.5 million based on an offer price of S$1.25 for 270 million shares, was taken over by a private equity firm and delisted in March. Bookstore chain Popular Holdings also delisted in May. It had had a market value of around S$255.07 million, based on offer price of S$0.32 and about 797.09 million shares outstanding.

The declining total market cap points to an increasing lack of interest from companies in tapping equity capital markets here.

Against the market values of the delistings last year, there was just S$339.18 million in total IPO fund- raisings in 2015. All but one of the 13 public floats here last year were Catalist listings, and the average IPO size worked out to around a puny S$26 million.

The number of IPOs and the total IPO funds raised last year were the smallest in at least two decades, going by newspaper reports. Up until 2015, the SGX had not seen fewer than 20 public floats a year. In the depths of the global financial crisis, the year 2008 had 22 IPOs raising US$931 million while 2009 had 23 floats that raised about S$3.21 billion, according to media reports then. Even in 1998, with the Asian financial crisis, SGX managed to rake in 20 IPOs that raised about S$406 million.

Several Singapore-based companies are also eschewing a local listing for an overseas float. Aircraft leasing firm BOC Aviation said last year that it wanted to list in Hong Kong. A Singapore medical company that develops treatments for Alzheimer's also said recently that it was gunning for a Nasdaq IPO, according to media reports.

The recent trend of substantial privatisations and tiny IPOs could continue to reduce Singapore's market cap this year, which market watchers say does not bode well for local stocks' investment appeal.

"Investors, especially foreign institutions, like liquid markets, and market liquidity correlates with market size. Institutional investors take a silo approach and allocate to illiquid private equity and liquid listed equity, where they seek and expect liquidity," said Bryan Goh, chief investment officer at wealth manager Bordier.

Dealmakers have already hinted that they expect 2016 to be characterised by Catalist IPOs, and a couple of large delistings are already on the cards. French shipping firm CMA CGM is trying to privatise Neptune Orient Lines (NOL), which had a market cap of S$3.2 billion at end-2015. Singapore Airlines is also trying to delist Tiger Airways, which had a market cap of around S$1.03 billion as at Dec 31.

Ms Kum added that the size of a market's total capitalisation would determine its weighting in indices such as the MSCI that institutional investors use as benchmarks. "A market with a small weighting may become irrelevant for institutional investors, unless it has a very compelling story.

"With a lower index weighting, the Singapore market risks losing its relevance and importance to institutional investors. Private investors may also increasingly need to avail themselves of more investable options in overseas markets, in order to preserve or grow their wealth, creating a vicious cycle in diminishing the market size and relevance."

According to Bloomberg data, Hong Kong had a total market cap of US$4.105 trillion at end-2015, nearly nine times that of Singapore. It also eclipsed Singapore in terms of IPO fund-raising last year, raising more than 160 times the total figure in the Republic. Japan's market cap is nearly 11 times that of Singapore and the US is nearly 51 times as large.

To makes matters gloomier, other countries in South-east Asia, which have so far remained smaller than Singapore in terms of total market value, are beginning to catch up.

The gap between Singapore's and Malaysia's market cap was US$117.98 billion in 2014; that shrank 27 per cent to US$86.35 billion in 2015. For Indonesia, the gap with Singapore narrowed 24 per cent from US$148.68 billion to US$113.34 billion, while the gap between Singapore and Thailand was reduced by 16 per cent from US$154.85 billion to US$130.53 billion over the same timeframe.

IG market strategist Bernard Aw noted: "We are always in competition with other bourses, and failing to increase or retain investors' interest is akin to a kiss of death. This is why Singapore is trying to attract investors' interest back via initiatives such as the introduction of new equity indices which are sector-specific."

However, some market watchers said there were still things to like about the Singapore stock market.

"Singapore does not necessarily lose its shine as an investment destination as a result of its market cap declining or being relatively smaller than that of other global financial hubs," said Andrew Wood, head of Asia country risk at BMI Research.

"It is really the quality of the firms listed in that market as well, the maturity of the financial markets framework, along with other factors such as the political risk and macroeconomic risk environment in that country. Singapore scores very well for the last three criteria."

Though he cautioned that Singapore "could lose out if it is seen as a less attractive environment for IPOs, and a shrinking market cap could speak to a relatively shallower capital market", Mr Wood said Singapore could still remain attractive for investors due to its regulatory environment and its macroeconomic and political stability.

Hugh Young, Asia managing director of Aberdeen Asset Management, also remained optimistic. Though he noted that "the reality is that for many of the world's largest investors, Singapore is a backwater given its size and relative lack of liquidity", he said market size should not matter for "true investors looking for great investments".

"Of course for the more thorough investor, small markets and small companies can be a profitable hunting ground as they can be overlooked and neglected ... All in all, it's not something I would overly worry about although for many it can be a matter of pride - 'we're better because we're bigger'. Size is not everything."

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