To this end, the Singapore Exchange has on Sept 22 launched the iEdge Singapore Next 50 indices, which comes in two variants, both of which track the next 50 largest stocks outside the 30 component stocks of the Straits Times Index (STI). The launch of the Next 50 is part of the broader government initiative that includes the allocation of $5 billion to fund managers to invest in smaller stocks under the Equity Market Development Programme, or EQDP.
A key reason cited by Ong for the previously low interest in small- and mid-caps is the self-reinforcing vicious cycle where lower interest led to less comprehensive coverage of these stocks. With interest resurging, investors are starting to “rediscover” names from the past. Ong also points out that the quality of small- and mid-cap stocks has improved over the past decade.
After all, these are the ones that have survived various cycles and are “probably the best”. If not, they would have gone under like many in the offshore and marine sector, or the ecosystem of tech suppliers. Ong says there are still some small- and mid-caps trading net cash, at very decent multiples. “Your balance sheets are clean, your operating costs are thin, and you’re really tight, and so when the market comes back, you have huge operating leverage. Or, they innovate, enter different markets, and there’s a revival of fortune. So, the quality is there, and the discovery is still there,” says Ong.
From a broader perspective, Ong is optimistic that geopolitical concerns, which have dogged investors in other markets, are actually something in Singapore’s favour, including for small- and mid-cap companies. As long as geopolitics remain uncertain, Singapore will continue to capitalise on this wave of global liquidity, providing a favourable macroeconomic backdrop. “In every market, you need the big caps to do well and make new highs, then the small caps follow, because small caps tend to start the liquidity cycle with domestic investors. If domestic investors do well in, say, the three big banks, you tend to take profit, and then you will go into the small- and mid-caps, right?”
See also: Hong Kong’s capital markets resurgence: Asia’s pre-eminent financial powerhouse
Ong describes the structure of the Singapore market as a “strange pyramid”. At the top, there are dozens of companies with a market cap of $10 billion and above. At the bottom, there are perhaps 500 companies with a market cap below $2 billion. In the middle stratum between $2 billion and $10 billion, there are maybe only 50 companies.
Ong’s interpretation is that this is a reflection of Singapore’s economy, with top-heavy government-linked companies and the three banks dominating industries in which they play a role. The relatively thin middle layer is a reflection of how Singapore lacks a critical mass of domestic demand for local small- and medium-sized enterprises to scale before going overseas, unlike the larger companies. Given this context, it is strategic for a country to ensure that there are more Singapore companies to fill this middle layer.
Ong says there should be more companies drawn to base their headquarters here, too, and in fact, current geopolitics makes this an “opportune” time. The tide is, in a sense, turning in Singapore’s favour. The geopolitical situation may not be favourable for other countries, but Singapore is a significant beneficiary in terms of how supply chains shift and money flows.
See also: Key theme: Someone wants the market higher
Growth leaders
With the market revival measures in full swing for months, the effect has been palpable. According to SGX, since the start of the year, the Next 50 has outperformed the STI, despite the flagship index reaching a record high.
Vincent Toe, co-founder of ICH Group, points out that while many small- and mid-cap companies that are well-covered have performed well, their respective valuation multiples have also risen. However, the gains should be seen in the context of the past decade, when most of these companies remained under the radar, suffering from minimal interest. Having said so, there are plenty of hidden gems, and Toe is actively taking a position in them. “We are constantly exploring this every week; we do want to deal, and I think there’s still a lot to discover in the market,’ says Toe, whose firm has recently taken part in the placements of small- and mid-caps such as ISOTeam, Food Empire and KSH Holdings. “I think there’s still a long way to go.”
Kenneth Tang, senior portfolio manager at Amova Asset Management, points out that while the three banks may have garnered recent attention, given their significant role in Singapore, yet, other sectors have provided higher returns. “When you start to go even smaller, it also gets brighter. You do see small- and mid-caps having a renaissance,” says Tang, whose firm was previously known as Nikko Asset Management.
Market observers can debate how long this will last, but for Tang, there has “definitely” been an impact on Amova’s funds, which were recently deployed in the likes of Food Empire and Info-Tech Systems. “We have a decent allocation to small, mid caps, and we have definitely seen more interest and even inflows,” he says.
However, for a more sustainable development of the market, Tang hopes to see some changes in the mindset of investors here. For too long, Singapore has been seen as a safe but unexciting place, offering a somewhat generous dividend yield but little else. Tang hopes to see one or two listings that can help whet the appetite of investors here for high-beta growth stocks. “A company that can trade from 20 times to 30 times to 40 times, because growth is truly delivering could set the path for other smaller aspirants of growth stocks to do well, and then the culture would change,” he says. “But for now, I think what at least we are thankful for is that even in the safe space in the more stable dividend yield story, which we have obviously been trumping in Singapore, has continued to grow from strength to strength,” says Tang.
Communication, research
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Making the market more vibrant is a shared responsibility. Toe says companies need to tell their stories well and do so clearly. Toe took a jab at Eugene Lim, founder and CEO of Assembly Place, a co-living operator who, at the same forum, hinted at capital raising. “Why do you hint about it? We should talk openly about it, right?”
Ong’s advice is for companies’ management to keep their growth stories simple and easy to understand. There may be five reasons to invest in a company, but what really drives the increase in its valuation multiple is usually one primary reason, with perhaps a secondary reason as the bonus.
For example, in the US, what makes Eli Lilly popular among investors is its weight loss drug, a product that is easy to understand, even though the pharma giant has numerous other products in its portfolio, along with a comprehensive product development pipeline. “When the story is very easy to understand, the valuation multiple just expands,” says Ong.
Ong too raises a point on research capabilities. Before he became a fund manager, Ong worked for a property developer. In 2008 or so, Singapore stocks with office exposure became “very, very hot”. However, drawing from his experience, Ong felt that something wasn’t quite right. He could already tell that rental rates were coming down, yet share prices were going up and were not reflected until months later.
“Sometimes, just having that industry expertise, you’re already six to nine months ahead. And obviously, if you’re senior enough in the industry, you can see two years,” says Ong, who adds that some really good tech analysts can see multiple cycles ahead.
In another anecdote, he sought views from a shipyard analyst here in Singapore about the industry’s prospects five years down the road, but to no avail. Ong then spoke to the analyst’s colleague in Brazil, who shared with Ong about the five-year plans, details of the oil fields and so on. “Can you share it with your colleague in Singapore?” Ong recalls saying.
Nonetheless, Toe is bullish, seeing what is happening. “I think there are encouraging signs that this is an early stage of a market rejuvenation. I think with a lot of effort from all industry players in the ecosystem. I think this is one of the best times in the last 10 years.”
However, he is quick to warn that painful episodes from the past, such as the entire S-chips debacle, ought not to be repeated. “We as industry players, opinion leaders, have a responsibility to gatekeep some of these companies,” says Toe.
In a more self-reflective mode, Tang says that a “grand design” of the EQDP is to help make active fund management play a more critical role again. If Temasek is excluded, BlackRock is believed to be the largest owner of Singapore equities. However, this is only because the US asset manager, acting as a passive manager in this market, mirrors its holdings according to the 1,320-constituent MSCI World Index, and Singapore accounts for 1% of that index. “Can you imagine if, instead of that 1%, it is owned by all the asset managers, and they’re all ready to perform, add value and add alpha. That is really the proposition I think we are going to step into, so that makes us really excited,” says Tang.
