Recent announcements of the MAS review group’s second set of measures to boost Singapore capital markets have been met with excitement and applause from some market observers, particularly the proposal to set-up a $5 billion co-investment fund, the Equity Market Development Programme (EQDP) to motivate fund managers to focus on Singapore-listed equities.
Broadly, the MAS review team’s latest proposals fall into three categories:
First, injection of funds into the market via the $5 billion EQDP and $50 million from new Global Investor Programme (GIP) applicants to set up family offices in Singapore, to focus on small and mid-cap companies. Next, tax rebates and incentives; and finally, the move towards a more disclosure-based regime, market-friendly regulatory stance and an easier IPO process
Let’s examine these proposals from an unbiased data-based perspective to assess the viability and likelihood of success in boosting Singapore’s equity markets.
Capital injection via EQDP and family offices
At first glance, the $5 billion EQDF fund and $50 million requirement for new family offices to invest in the Singapore stock market appears to be a promising initiative to develop the local fund management sector in Singapore and increase market liquidity.
The MAS mentions that the EQDP will channel the funds to asset managers with a “strong investment track record” and a focus on Singapore-listed equities. While further details on how fund managers can tap the EQDF fund have yet to be released, existing fund managers already focusing on Singapore will benefit most from this measure. New fund managers will likely take a wait-and-see approach before deciding whether to take advantage of the EQDP fund.
Demand-side measures
These proposed measures are essentially demand-side initiatives, and assumes that building up buy-side capabilities and requiring them to focus on small/mid-cap listed companies will boost the Singapore equity market.
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While the $5 billion fund may seem a lot to some market observers, this needs to be put into context.
The $5 billion EQDP fund represents just 0.56% of SGX’s total market capitalisation of $900 billion and less than five days of Singapore’s average daily trading value (ADTV) of $1.2 billion. In contrast, PBOC’s stimulus package of US$114 billion ($152.6 billion) to boost its stock markets in 2024 equalled 1.2% of Hong Kong’s total market capitalisation.
Assuming that the $5 billion of EQDP funds are equally co-invested with fund managers in a 1:1 ratio, doubling the effective liquidity injection to $10 billion, this only increases the ADTV to $1.24 billion, a 3% increase from the current ADTV — hardly a market-moving event.
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A regional comparison notes that the Hong Kong exchange has an ADTV of about US$17 billion, $1.3 billion on Bursa Malaysia and US$1.1 billion on the Indonesian stock exchange. This huge disparity in liquidity between Singapore and Hong Kong has created a self-reinforcing cycle — low trading volumes deter new listings, which further reduces investor interest.
Secondly, the revisions to the GIP requiring $50 million investment in local equity stocks only applies to new family offices. The existing family offices remain unrestricted and are not subject to this rule. Assuming about 10–15 family offices apply for GIP status annually, this means a potential capital injection of about $500–750 million, or $2–3 million of additional ADTV (+0.25%), marginal compared to current ADTV of $1.2 billion.
Lack of good-quality companies
However, the amount of funds deployed into the stock market (demand-side) is a red herring. The real issue lies on the supply-side. There are two major issues here that need to be addressed.
Firstly, there are simply not enough good-quality companies on the Singapore Exchange (SGX). Only 12% of Singapore-listed companies are investable if we only consider profitable companies with sufficiently high ROEs above COE (cost of equity) and a market capitalisation above $200 million.
From an institutional buy-side perspective, the first filter that all fund managers will do to ascertain the potential investability of the Singapore equity market is to assess the universe of profitable companies with a higher ROE (net profits divided by shareholders equity) than COE (Singapore COE is about 8%).
Some purists may argue that internal rate of return (IRRs) should be used instead of ROE. Strictly speaking, that is correct. However, computing an IRR requires doing up a discounted cash flow (DCF) analysis for all listed companies, something that is not practical. Secondly, it is also correct that companies with high growth potential can have low ROEs at the moment and potentially grow their returns in future. However, most listed companies on the SGX are mature and stable companies, having been listed for many years with stable ROEs. Hence, it is not unreasonable to use ROEs as a proxy for returns.
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This results in the following observations.
Based on SGX data as of Feb 21, there are 622 listed stocks, of which only 88% (547 stocks) are available for trade, with 8% (51) suspended and 4% (24) on the watchlist. Only 56% (346) of listed companies on the SGX are profitable; 32% (201) are loss-making and 12% (75) suspended or on watchlist.
If we assume that fund managers will only be interested in profitable companies with a ROE above 8%, only 23% (145) listed companies meet this criteria. If we consider only those with a market capitalisation of higher than $200 million (most institutional fund managers prefer to focus on the larger market capitalised stocks), only 12% (73) are investable.
Furthermore, if the MAS strictly enforces its desire to focus beyond the index stocks on small/mid market capitalised companies ($200 million to $1 billion), this lowers the number of investable stocks in Singapore to only 7% (39).
In reality, most existing fund managers in Singapore have much stricter due diligence and investment criteria covering growth prospects, capital structure and allocation, governance, quality of management, financial resilience, etc., further lowering the potential universe of investable stocks in Singapore.
Small free float
Secondly — and this is perhaps the bigger challenge — even if the EQDF wanted to deploy significant funds into the stock market, they would struggle to do so. The limited free float available beyond the larger listed index companies limits the potential for increased market trading.
Approximately 80% of listed companies in Singapore have free floats of less than one-third of their shares. Close to 65% have free floats of less than half their shares. This reflects the dominance of controlling shareholders in listed companies in Singapore, many of which are family-owned businesses.
This is one of the reasons why trading liquidity in Singapore, beyond the larger index stocks, is so low. About 95% of market trading is concentrated in companies with a market cap above $1 billion. Many smaller market capitalised companies have almost no liquidity, with many days of no share trading at all, given the low free float available.
Hence, it will be challenging for the EQDF to deploy any meaningful amount of funds into the Singapore stock market in a practical manner, simply because there is so little free float available.
Tax incentives
On the tax front, the proposed tax measures lower Singapore’s effective tax rate for listed entities to 13.6% (from 17%), lower than Hong Kong’s 16.5% rate, and Thailand’s 15% rate for firms listed on the Stock Exchange of Thailand. However, Dubai’s 0% corporate tax and Hong Kong’s 0% offshore fund taxes remain more attractive for certain types of investors. Tax measures will certainly help make the decision to list in Singapore easier, but will not fundamentally change the decision-making process, which depends on the potential liquidity and multiples achievable on the stock exchange. Tax incentives alone cannot offset SGX’s liquidity gap or high trading costs.
A more disclosure-based and market-friendly regulatory system
Second Minister for Finance Chee Hong Tat mentioned that the move towards a more disclosure-based regulatory system for Singapore’s equity market does not mean that protection for investors will be relaxed. He added that a second set of measures is expected to be announced by the end of this year.
Notwithstanding the Minister’s optimistic views, proposals to move further to a more disclosure-based regime without addressing current shortcomings will only worsen the perception of poor enforcement in Singapore.
Effective disclosure-based regimes need three elements: First, high-quality meaningful disclosures; second, accountability with penalties for false or misleading disclosures; and third, legal and/or regulatory recourse to protect minority investors and hold issuers accountable.
The current disclosure-based regime in Singapore lacks all of the above and does not provide any legal or regulatory avenue for the minority investor. Unlike other regimes like the US or UK, Singapore investors do not have any legal or regulatory recourse if companies make false or misleading disclosures.
The UK regulatory structure — where stock exchange operations, under the London Stock Exchange, are totally separated from regulatory oversight and enforcement of the Financial Conduct Authority — is a good example of how an effective disclosure-based regime works. Minority shareholders can seek legal recourse if the company’s affairs are conducted in a manner unfairly prejudicial to their interests, sue directors for breach of fiduciary duties, and various other protection mechanisms.
In contrast, in Singapore, SGX Regco is a wholly owned subsidiary of SGX and is now proposing an even lighter touch and more market-friendly regulatory regime.
We look forward to the next set of measures from the MAS review team to address these shortcomings in Singapore’s disclosure-based regime.
Removing the watchlist
Lastly, proposals to remove the watchlist are regrettable. Even though the SGX only conducts reviews twice a year, without it, poor companies can stay hidden under the radar for much longer.
In any case, failing companies are hardly ever removed from the SGX. Over the past 10 years, 17 Mainboard companies were demoted to the Catalist board where there are no profitability or financial track record requirements.
On the Catalist board, there are 77 loss-making companies listed for over 10 years, 21 loss-making companies listed for 5–10 years and 10 loss-making companies listed for less than five years. Three Catalist companies with nil revenues for the past three years are still listed today.
With 44% (276) of listed companies either loss-making or suspended/on the watchlist, this is one of the reasons why overall valuations on the Singapore stock markets are so poor and why some market wags are calling the Singapore stock exchange a zombie graveyard for loss-making companies.
Conclusion
The proposed measures may boost short-term market returns but it is unclear how sustainable this is. A few low-profile companies and the fund management sector may benefit.
However, the proposed measures are heavily demand-side focused and address only the symptoms but not the cause of the poor performance of the Singapore stock market. Fact-based analyses of the performance of the stock market suggest the issue lies more with poor-quality listed companies and a reluctance to delist loss-making companies, low free float available for trade, conflicted structure of stock exchange and poor design of the Catalist board, with few avenues for minority investor protection.
Lee Ooi Keong is the founding partner and Managing Director of Clover Point Consultants, an independent board and C-suite advisory and consulting firm. He is also a member of the Singapore Institute of Directors.
