Rejuvenating the stock market will not be easy because the problem stretches back over 20 years
THE Business Times editorial of Sep 6, 2001, “A worrisome hollowing out’’, focused on the delisting of 23 profitable medium-sized companies with S$25 billion in market value in 18 months at a time when new listings were mainly small caps with no established profit record. It said: “If this trend continues – and by all accounts it will – one probable outcome is the emergence of a two-tier market: a handful of large caps that make money and attract institutional interest, and masses of small caps that don’t make much money and attract no institutional interest.’’
Low liquidity and a gloomy outlook were cited as the reasons why stocks at the time traded for years at large discounts to asset values.
More than 23 years have passed, but conditions in the local market today appear to be the same as they were in 2001. I know this because I wrote that editorial.
Since then, there have been many attempts to improve the market’s attractiveness. These include periodic tweaking of the Code of Corporate Governance, the introduction of dual-class shares and special-purpose acquisition companies, the appointment of market makers, various research initiatives, the entry of discount brokers, the capping of the tenure of independent directors, the introduction of stock-market derivatives, the tweaking of the rules to protect minorities in a delisting and the creation of the Singapore Depository Receipts and secondary-listing frameworks. Each has had only muted impact, while, collectively, there has not been any appreciable improvement. Why?
First, Singapore in the 1990s and early 2000s used to be an attractive destination for foreign listings because of superior market microstructure, strong governance and an efficient financial system relative to regional peers.
Over the past 20 years, these peers have caught up, leveraging on technology to strengthen their infrastructure and settlement systems while simultaneously raising their governance standards.
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Much is made of the fact that neighbouring exchanges have had many more initial public offerings (IPOs) than the Singapore Exchange (SGX) in recent years, but the reality is that firms from around the region will today be much more likely to list on their home exchanges where there is greater investor familiarity and research coverage than opt for a listing here.
By the same token, most probably because of investor unfamiliarity, promising Singapore companies which have listed overseas may have enjoyed better valuations at their offer stages, but the post-IPO performance of the majority has been dismal.
Second, this leaves SGX to tap the domestic market for new listings. Since this comprises mainly startups and small-to-medium enterprises, the pickings are relatively lean.
Third, is the rapid rise in the popularity of exchange-traded funds (ETFs) and online trading. Active investors are more likely today to trade in seemingly more exciting markets such as the United States (where risk is minimal because the market is backstopped by the US Federal Reserve’s guarantee to print money in case of crashes), or highly volatile assets such as cryptocurrencies, than in a sedate market like Singapore’s. Meanwhile, passive investors would simply opt for ETFs.
The biggest challenge is therefore overcoming these structural changes, or formulating complementary solutions.
Since the announcement of a high-level committee’s formation in late August to study ways to rejuvenate the local stock market, several observers and market commentators have weighed in with suggestions. Each should be studied with a view that everything is fair game, and that nothing is sacred. Given that this a problem more than 20 years in the making, the task facing the committee clearly won’t be easy.
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