Vibrancy of Singapore Exchange should be everyone’s concern

THE United States has the world’s largest and most liquid equity market, so it is only natural that the world’s largest companies aspire to list there.

Energy giants TotalEnergies and Shell have in recent months spoken publicly about the possibility of moving their listings to the US.

If they do, they would join a growing list of European companies in the process of moving, or that have already done so, in hopes of addressing a perceived valuation gap.

This perceived valuation gap exists not just in Europe, but across the world. It is perceived undervaluations that have persuaded the governments of Japan and South Korea to take unprecedented steps to revive their public markets.

It is tempting, therefore, to view the difficulties of other countries as reassurance that Singapore is not doing anything wrong.

Yet, all sorts of solutions are being put forward in various countries. This is probably the right reaction, because it is impossible to pin down a single reason for underperformance.

Undoubtedly, a strategy of throwing everything against the wall to see what sticks is haphazard and even dangerous. At the same time, there are no established playbooks and few success stories. Considered experimentation is probably the best tool in hand.

To be fair, Singapore’s various regulatory and market development institutions have not sat on their hands. Several initiatives calculated to generate deals, stimulate investor demand and improve the quality of companies have been announced.

In 2021, the government committed S$1.5 billion to a fund supporting “promising high-growth enterprises and market leaders” in their initial public offerings in Singapore.

In 2022, a minimum capital deployment requirement was introduced for family offices that want to qualify for a resident fund tax exemption. Investments into stocks listed on the Singapore Exchange are among the assets that count towards this minimum requirement.

Singapore Exchange Regulation, the market regulator, has also introduced several rules to improve corporate governance as part of a focus on shareholder value.

However, none of the stock market participants I have spoken to recently believe these actions have moved the needle.

This may be because it takes time for any initiative to bear fruit. Also, higher interest rates in the last 18 months have made stocks unattractive relative to bonds.

Is it better to wait for the US Federal Reserve to raise rates, see if Singapore equities pick up, and then adjust national market development strategies accordingly?

Maybe. Meanwhile, other countries are not sitting on their hands either.

There is global competition for equity market listings and investor funds. Singapore, with a small domestic market, has a natural disadvantage that is not sufficiently countered just by being a regional wealth management centre.

Is having a vibrant stock exchange even important? Could Singapore thrive as a hub for wealth, for trade or for travel without a thriving stock market?

One iconic study by the economist Ross Levine found that countries with relatively liquid stock markets tended to grow much faster. Size and volatility were less important than the ease with which shares could be traded.

The data used for this study was from 1976 to 1993. A more recent study published in the International Journal of Financial Research used data from 1995 to 2008.

The recent study – which looked at a different set of countries – found a positive link between the stock market and economic growth for countries with liquid markets, but no causality where a stock market is small and less liquid.

These studies, and others like them, suggest that Singapore is feeling the loss of its stock market vibrancy acutely because years of growth created and supported an ecosystem of bankers, stockbrokers, lawyers, accountants, auditors and fund managers that touched the domestic equity markets in some way. That support is crumbling.

A liquid market is an incredible economic lubricant. Companies raising money via an initial or follow-on offering need to hire many professionals to do so. A listing gives management currency for a deal, or eases the way for gearing up to expand.

Bankers, lawyers and investors working on deals create demand for travel, hospitality and restaurants. Healthy stock markets also create wealth that, if poured back into the capital markets, will keep the virtuous circle going.

So, yes, Singapore can be realistic and accept, as newly appointed Prime Minister Lawrence Wong said, that companies “tend to gravitate to the United States”, and that the government cannot interfere too much with commercial sensibilities.

To do so, however, will also mean accepting that a large engine of job creation and economic growth will gravitate elsewhere too.