Tim Talks Money AMA #4

Navigating the Ups and Downs of the Singapore Stock Market

With the Christmas break coming up, this week I thought I’d answer something that I’ve been asked a lot; what’s holding back the Singapore stock market?

The Singapore Stock Exchange (SGX) has long been regarded as a trusted and transparent market, attracting both local and international investors. However, in recent years, it has faced a series of challenges that have hampered its growth and appeal. 

From declining IPOs to low liquidity, these issues have sparked discussions about the exchange's future and how it can remain competitive in a rapidly evolving global market. I thought I’d address some of those issues here.

The rise and plateau of SGX

Historically, the SGX has benefitted from regional dynamics, including the rapid ascendancy of China in the 2000s. At that time, Singapore hosted a wave of Chinese "red chip" IPOs, generating excitement but also significant liquidity. That was good for the market and for investor participation.

However, scandals involving penny stocks and increased competition from Hong Kong had the effect of slowly diminishing investor confidence, diverting capital to larger markets.

Today, the SGX primarily serves as a stable, dividend-focused market, underpinned by mature companies such as DBS, UOB, and OCBC. While these companies have performed reliably, the market's small scale and limited growth opportunities make it less attractive for high-growth and innovative companies as a listing destination.

Why companies are choosing other exchanges

Many Singaporean companies have opted to list on international exchanges, particularly in the United States. Two primary factors drive this trend:

1. Higher Valuations: The US market offers significantly better valuations due to its vast pool of institutional investors and unparalleled market depth.

2. Superior Liquidity: The US markets, such as the NASDAQ and NYSE, see daily trading volumes exponentially higher than SGX. This liquidity is a powerful draw for companies seeking active investor participation and higher fundraising potential.

This phenomenon is not unique to Singapore; markets in the UK and Europe are also experiencing similar capital migration to the US given low trading volumes.

At the moment, it’s almost like the US market “sucks up all the air in the room” in terms of attracting capital away from global stock markets.

Characteristics of a healthy stock exchange

A robust stock exchange typically exhibits the following:

• Frequent and Varied IPOs: A steady flow of initial public offerings, spanning diverse sectors like healthcare, technology, and renewable energy, attracts investor interest and builds market momentum.

• High Liquidity: Active trading ensures that investors can buy and sell shares efficiently, bolstering confidence and participation.

• Global Appeal: An exchange that can attract international companies or facilitate secondary listings strengthens its standing as a competitive global platform.

In comparison, SGX’s low IPO numbers and declining funds raised highlight the need for a turnaround and fresh thinking.

Efforts to rejuvenate SGX

Singapore’s policymakers have taken steps to address these challenges, including:

1. Boosting Liquidity: Proposals to involve state-linked funds like Temasek and GIC aim to inject more liquidity into the market. Similar strategies, such as leveraging pension funds, are being explored in the UK.

2. Regional Partnerships: Initiatives like Singapore Depository Receipts (SDRs) with the Thai Stock Exchange and, more recently the Hong Kong Stock Exchange, allow investors to trade Thai- and Hong Kong-listed stocks in Singapore, promoting cross-border market activity.

3. Encouraging Secondary Listings: SGX has positioned itself as a destination for secondary listings, attracting companies like NIO, a Chinese electric vehicle maker. These efforts can help diversify the market and bring in global names.

Final thoughts

The SGX remains a respected and reliable market, known for its transparency and robust regulatory framework. However, to regain its former dynamism, it must address its structural limitations and adapt to the changing needs of both companies and investors. 

That’s not an easy feat given the success of the whole capital markets ecosystem relies on nurturing everything from venture capital (VC) right through to the IPO listing process.

That’s going to take more concerted efforts by policymakers that may require state involvement in some form, either through GIC or Temasek. Whatever happens, Singapore’s policymakers will need to tap into their (deserved) reputation as problem solvers and find long-term solutions for a local stock market that finds itself in a rut.

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