Singapore exchange losing out to regional competitors

Singapore’s equity market is looking increasingly unloved. Last year the city-state’s stock exchange suffered the indignity of being overtaken in terms of trading volume by its Thai counterpart, knocking Singapore into second place in southeast Asia for the first time. More recently it was also overhauled by Japannext, a relatively small trading platform that competes with the Tokyo bourse.

This makes SGX, the Singapore exchange, Asia’s ninth-largest share market – a frustrating state of affairs for an exchange that prides itself on being “the Asian gateway” for investors in the region.

Singapore’s problems – a combination of low trading volume, or liquidity; relatively high transaction costs; and a dearth of big-ticket initial public offerings – were highlighted on Wednesday when SGX reported a 22 per cent fall in net profit for the third quarter.

It blamed “a challenging quarter for our securities business”. Average daily value of shares traded in the third quarter fell 37 per cent, year on year, to S$1.1bn.

The last time Singapore hosted a large IPO was the $1.3bn listing in 2013 of Mapletree, a real estate investment trust and unit of Temasek, the city-state’s investment company. Hopes of a listing by the owners of the Formula One racing business, mooted for Singapore for about two years, have faded.

These and other issues were brought into sharp relief this month by a criminal probe by the city-state’s police into the cause of a “penny stocks” crash in November last year.

Around S$8bn (US$6.3bn) was wiped off the collective value of three small-cap stocks – Asiasons Capital, Blumont Group and LionGold Corp – in as-yet unexplained circumstances. That hit investor confidence, sending the value of equities traded on SGX to a two-year low at the time.

The police and Monetary Authority of Singapore have in recent weeks called in dozens of people for questioning over “suspected trading irregularities” in the three companies’ shares, market sources say.

Meanwhile, the Straits Times index – whose largest constituents include SingTel, southeast Asia’s largest telecoms group, Singapore Airlines, agribusiness Wilmar, DBS Bank and units of the Hong Kong-based Jardines conglomerate – has underperformed the region by 1.5 per cent so far this year.

The MAS and SGX have proposed a set of sweeping reforms that would make it harder to speculate in small-cap stocks. The hope is to restore confidence among ordinary investors – and thus boost liquidity.

These proposals include setting a minimum trading price for a stock of S$0.10 to S$0.20, and requiring traders to put up collateral, or insurance, to trade, in an effort to curb the kind of speculation that some suspect was a cause of the crash.

David Gerald, head of the Securities Investors Association, says: “We had far too many traders who were gambling, so we need to change the mindset of the Singapore markets. If it is to mature further it must have investors who are not gambling.”

Yet fixing the speculative side of the market still leaves Singapore suffering from lack of institutional interest, especially in mid-cap stocks.

Asset managers complain that low liquidity means it is hard to get large-sized trades done on SGX, forcing some to get brokers to work such trades through the market on their behalf. “To do any kind of [deal] size outside the top half-dozen stocks is a real struggle,” says the head of dealing at an asset manager.

We had far too many traders who were gambling, so we need to change the mindset of the Singapore markets. If it is to mature further it must have investors who are not gambling

SGX is moving to tackle such issues, including encouraging such off-exchange trading back on to the bourse. “We do think there are things we need to do to improve our liquidity and market depth,” says Muthukrishnan Ramaswami, SGX president.

The exchange will in June cut its clearing fees by 20 per cent and launch incentives to attract electronic market-makers. Such incentives were introduced in SGX’s derivatives markets in 2009, with the result that volumes in that market have almost tripled since then.

“We are confident that our securities market will recover over time,” Magnus Böcker, chief executive, said on Wednesday, adding that the bourse had a “stable, strong IPO pipeline”.

Yet the new measures will need to work fast. Last week, CapitaLand, Singapore’s largest listed property group, said it would take private CapitaMalls Asia, one of Asia’s largest listed shopping-mall developers, in a S$3bn offer. It has not been the only recent delisting from SGX.

Ultimately, the biggest threat to Singapore will come from regional competition. The announcement of a “mutual connectivity” agreement between the Hong Kong and Shanghai bourses this month will add further pressure on Singapore to ensure its equity market remains attractive as those of its neighbours – such as Thailand – mature.

“Singapore is largely counting on international listings and they are competing with the likes of Hong Kong, which is that much bigger,” says Lee Porter, managing director of Liquidnet Asia, which operates trading platforms. “They are in a tough market.”’