It’s time to employ innovative strategies to boost valuations in Singapore stocks
INVESTORS often lament that most Singapore stocks are undervalued. To some extent, it is easy to appreciate their frustration.
Over 600 stocks are listed on the Singapore Exchange, but only under a third of them trade above book value, according to Bloomberg data. The median counter has a price-to-book ratio (P/B ratio) of around 0.6 times.
Even when considering counters with a market capitalisation of at least S$200 million, it’s notable that over half of them have a P/B ratio below 1.
The situation is marginally improved for blue-chip stocks in the benchmark Straits Times Index (STI); 18 of the 30 counters trade above book value. The remaining dozen, primarily in the real estate sector, trade below book.
By comparison, over 90 per cent of the counters in the S&P 500 index in the US trade above one time their P/B ratio.
Maybank analyst Thilan Wickramasinghe noted at the start of this year that valuations in Singapore were “ultra-cheap”, with the STI trading at a 50 per cent discount to the S&P 500 on a price-to-earnings basis.
That was the lowest level in history, even when considering the global financial crisis as well as the Covid-19 pandemic, he said.
Liquidity lacking
An often-cited factor for the poor valuations in Singapore has been insufficient liquidity.
The market capitalisation of the SGX-listed companies amounted to some S$756.5 billion as at end-February, larger than the market capitalisation of stocks on the Stock Exchange of Thailand, which stood at around 17.4 trillion baht (S$643 billion).* (see amendment note)
But the securities’ daily average value traded in Singapore last year amounted to around S$1 billion, around half that of the Thai bourse.
Part of the reason could be that not many institutions invest in local stocks.
Singapore is a successful financial hub, attracting many financial institutions to set up base in the country, including over 1,000 licensed or registered fund-management companies.
But many of these institutions may not have an investment mandate to deploy funds into domestic equities.
The Monetary Authority of Singapore (MAS) asset management survey of 2022 found that asset managers in the city-state had some S$4.9 trillion in assets under management (AUM) – but that 88 per cent of these funds were being invested outside the Republic, with the biggest proportion being deployed to the Asia Pacific, ex-Singapore.
On the retail investor front, anecdotal evidence suggests that many prefer real assets such as residential properties, leaving less capital to deploy in stocks. Others have also pointed to low investor protection and corporate governance enforcement as a reason fewer are investing in local stocks.
Building a vibrant public equity market is important for a financial hub, especially as more local and regional companies mature. Already, many of the high-growth startups in Singapore have opted to look to the US markets for better valuation and liquidity.
To realise Singapore’s ambitions of attracting such companies, it’s crucial to first address the chronic undervaluation in the local market.
Key driver of rally
Some market observers, including my colleague Ben Paul, have pointed to the example of Japan, where corporate governance reforms have been said to be a key driver of the Japan stock market rally.
Last year, the Tokyo Stock Exchange called for companies listed on its Prime and Standard segments to pay attention to capital costs and stock prices. It called for those with P/B ratios below one to publish plans on how they would raise their stock prices and update these plans at least annually.
When the initiative was announced, more than half the companies across the two segments in Japan at the time fell short of the threshold.
Given that the Singapore market faces similarly low valuations, it is worth considering whether doing something similar might prompt some soul-searching among boards and management.
Directors would be forced to identify where their companies are falling short, and to come up with concrete plans to resolve the issue, preferably with some skin in the game.
Of course, this would also need to be implemented in a manner that ensures they do not simply provide template explanations without material efforts to effect change.
It is also important to go beyond individual companies’ efforts to figure out what ecosystem improvements would address market liquidity concerns.
Last year, MAS expanded its scope of fund tax incentives for single family offices to encourage them to deploy more in Singapore.
Among other things, it said that it would tweak the criteria such that funds invested in Singapore-listed equities and eligible funds would count twice for the purpose of meeting capital-deployment requirements.
But observers noted that this may not be sufficient to make the SGX attractive for investment, as investors could still choose to plough funds into non-listed businesses and private debt.
Given that much of the AUM of fund managers in Singapore is not deployed locally, it is worth considering other ways to nudge more financial institutions to deploy part of their capital in the local stock market, either through tax breaks or other means.
Even in 2016, there were debates over whether Central Provident Fund (CPF) monies should be used to help revive Singapore’s lagging stock market.
The Singapore Business Federation (SBF) noted at the time that CPF money was pooled with other reserves and managed by GIC.
Calling the local share market “moribund”, SBF said then: “Unlike other jurisdictions where pension funds have provided strong support for their stock market, Singapore rides against the wave by specifically stating as a policy that the funds managed by GIC are to be invested abroad.”
Eight years on, the same conversations over lacklustre market valuations continue. It is perhaps time to think of new ways to drive improvements in the local market. * Amendment note: The article has been updated to reflect the market cap denomination to be billions.
