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It's time to consider injecting CPF capital into the Singapore bourse
AS competition between capital markets across the Indo-Asia Pacific grows, it is time Singapore's Ministry of Finance reviews the policy of not allocating pension fund capital to underwrite liquidity in Singapore's equities markets. Such a move would also complement current efforts to build up the city-state's entrepreneurial ecosystem as it seeks to transition towards an innovation economy.
Information from Willis Towers Watson indicates Singapore's government has abundant capital under management. Sovereign wealth fund GIC (US$359 billion), pension fund Central Provident Fund (US$269.1 billion) and state investment firm Temasek Holdings (US$230.3 billion) are ranked among the top 20 global asset managers this year.
The Monetary Authority of Singapore (MAS), had official foreign reserves reported at US$398.06 billion as at September 2018. In aggregate, this amounts to US$1.256 trillion in assets under management.
Rather than a scarcity of capital, it seems to be a lack of political will that inhibits the Singapore government from allocating capital from this large corpus of state funds to the city-state's securities market. Private markets are a different matter, with the MAS recently announcing the allocation of US$5 billion to local fund managers investing in private enterprises and infrastructure projects.
Oriano Lizza, a Singapore-based sales trader with financial derivatives dealer CMC Market, observed: "The current reasons, although not made public, seem to centre around the concern over clients' money and the risk profile of citizens' money.
"Unlike the Australian stock market, where the superannuation makes up a large percentage of holdings on the ASX (Australian Securities Exchange), the Singaporean government internalises a lot of its investments through government funds GIC and Temasek. The government seems intent on not overinvesting in riskier assets, with a concern that the population is ageing.
"You can look at the UK, for example, where the pension pool is diminished and the government continues to increase the age of retirement and access to pension funds. This is not to say that CPF is not invested. The protectionist approach was outlined, whereby the government pools all of its funds from CPF, Special Singapore Government Securities and land sales in order to create a buffer in front of CPF should returns diminish," he adds.
The Singapore Exchange (SGX) had been in a slump since the 2013 penny stock crash and oil price shock the year after that, with capital market observers citing its shrinking IPO pipeline, delistings and low liquidity levels over the last few years.
However, this delistings and privatisation trend is a global phenomenon, while lower liquidity levels can be traced to reduced trust of and participation in Singaporean securities by retail investors due to events in the first half of the 2010s.
While last year marked a turnaround year for the bourse and saw it lead the revitalisation of South-east Asia's IPO market, this momentum was disrupted by the market turbulence and uncertainty caused by the US-China trade war.
Despite this, it has shown its strength in the derivatives space and inked co-listing partnerships with the Nasdaq, as well as the bourses of Tel Aviv and New Zealand, creating a highly connected east-west corridor that offers potential issuers access to significant liquidity pools.
With a market capitalisation of US$787.28 billion in 2017, Singapore was the 16th largest equity market in the Asia-Pacific. However, its growth is lacklustre when compared to regional rivals. Data from the World Federation of Exchanges shows the SGX's aggregate market capitalisation grew only 13.6 per cent from 2016, compared with Hong Kong's growth of 37.3 per cent and Thailand's 15.7 per cent gain.
On the Stock Exchange of Thailand (SET) - South-east Asia's most liquid bourse with an SDAV (securities daily average value) of US$2 billion, twice that of Singapore's - retail investors account for upwards of 55 per cent of average value traded. The Bangkok bourse credits this to a number of factors, such as a broad array of investment products, use of technology to enable different investment channels and large number of retail brokerage firms.
However, a notable element is SET's policy of encouraging listed enterprises to establish a provident fund for employees, who can set different risk profiles for their provident fund investments. Via this scheme, the SET works with listed enterprises to enhance investor literacy about investments that align with their retirement needs, as well as augmenting liquidity on the bourse.
In Singapore, the presence of robo-advisors like Stashaway, robo-investing service Algomerchant and robo-advisor solution provider Bambu indicate there is room for the SGX to explore implementing a similar scheme.
But the injection of pension fund money into Singapore's equities could be a game-changer. It would generate positive market signals and boost market liquidity; it also has the potential to enhance minority shareholder protections.
Institutional investors, information asymmetry and stock market liquidity in France, by Ajina, Lakhal and Sougné, published by the International Journal of Managerial Finance in 2015, analysed a sample of 162 French-listed firms from 2007 to 2009. Its findings indicated that institutional investors' ownership and stock liquidity are endogenous (that is, institutional investment has a positive effect on stock-market liquidity). Moreover, in the French institutional setting, such investors have a key role as a control device protecting minority shareholder interests; French minority investors are often less protected than their Anglo-American counterparts.
The liquidity observed in the study was traced to the high levels of trading activity by these institutions, which favourably affected broader market liquidity. This consequence is observed in the dynamics of Australian and Japanese equities, which both feature deep markets, the liquidity of which is underwritten by pension fund investment.
In Australia's case, this liquidity has attracted listings from technology firms within South-east Asia, as well as from Israel and Silicon Valley. Research by Credit Suisse indicates Australia's domestic stock market is supported by its US$2 trillion superannuation pool, with pension funds owning nearly half of all shares on issue in Australian equities in 2018, up from less than 40 per cent of stocks in 2013. This is further supplemented by a large universe of exchange-traded funds (ETFs) that enable widespread distribution of liquidity across an array of market segments and sectors.
The participation of such large institutional investors, who manage substantial assets, facilitates reductions in transaction costs and augments overall share liquidity. Additionally, their participation sends positive signals to the market about transparency, suggesting lower levels of informational asymmetry.
With its current focus on innovation and entrepreneurship, Singapore's securities markets need to enhance their appeal to modern enterprises that derive their earnings and productivity from high technology intensity. Already, Singaporean enterprise such as Razer and Sea Ltd have chosen share sales in Hong Kong and New York respectively; the ASX has emerged as a leading destination for technology startups in South-east Asia.
Data from venture fund Golden Gate Ventures indicates that in the 2001-2015 period, five out of 11 Asean technology IPOs, including Singapore brands like Netccentric and Migme, opted for an ASX listing. This is coupled with a perception that Singaporean investors are less literate and lack an appetite for tech stocks, preferring large-cap blue chip equities.
If the government's investment into Singapore's entrepreneurial ecosystem is to see long-term returns, the SGX has to establish itself as a platform where capital can be raised by growth enterprises and investors can realise a compelling liquidity event. Such capital can be recycled into the local venture ecosystem, creating a virtuous cycle comparable to what the stock markets of Japan and Australia facilitate.
In the long run, there is more to gain from investing CPF monies into Singapore's equities market. The evidence suggests that beyond the boost to liquidity and market depth that would occur, greater pension backing would enhance protections for retail investors in the local market and enhance investor confidence.
If Singapore is to benefit from its current efforts to establish itself as an entrepreneurial hub and global technology centre, then injecting CPF capital into the local bourse may be the crucial boost needed to move it into higher orbit as its capital markets and entrepreneurial ecosystems mature.
- The writer is a partner in Silvercliff Capital.