Will Singapore reform its equity capital markets to drive the next phase of economic growth?

Singapore is the largest financial hub in Southeast Asia. Touted as one of the fastest growing centre for private wealth in the world, Singapore is home to the largest number of millionaires per square kilometer. While Singapore’s private wealth sector has grown quickly, its capital markets have underperformed when compared to its rivals in the Asian region.

Today, Singapore ranks sixth in the global league table for the number of ultra-rich individuals, defined as being worth $30 million and above. Singapore is only behind New York, London, Hong Kong, Moscow and Los Angeles. But Singapore’s capital markets and public exchanges are performing relatively poorly. In a report by the Wall Street Journal in 2015, Singapore’s stock market turnover was shown to be underperforming in relation to most of the major stock exchanges in Asia.

Singapore has had an impressive economic growth record since independence in 1965. Its private wealth and fund management sectors have also growth rapidly. Its policymakers have often questioned where the next phase of growth will come from. One possibility is growth through the advancement of its capital markets. Singapore can benefit from partaking in higher value added activities in the entire value chain of its capital markets.

One must first understand the objective of capital markets. Capital markets are the primary source of funds for listed firms. Firms may choose to raise money for various reasons in relation to corporate financing, through retained earnings, debt or equity. For firms who prefer to raise cash through equity, the deal making process starts with the selection of their agent, typically an investment bank. Depending on the firm, the consortium of banks, legal firms and consultants can choose to list on one of the major markets. The decision as to where to list is a competitive one. Managers will typically want to list on capital markets that perform efficiently. And this really depends on the turnover of the markets and the size of the market capitalisation.

Singapore has one of the lowest stock turnovers in the world. It also has one of the smallest markets in the world. The chart above compares Singapore’s stock exchange to the larger markets in Asia. This means that Singapore may not always be the first choice for bigger listings. Why would senior management choose to list a project or their firm in Singapore, rather than a more efficient city like Hong Kong?

A larger stock turnover simply means a larger pool of buyers and sellers, implying a stronger price discovery system. If Singapore wants to be an Asian gateway for investments, the strategy must change. Singapore cannot simply depend on government agencies like its Economic Development Board (EDB) to bring in huge infrastructure investments. Neither can Singapore challenge global forces by bringing in top billionaires.

The more sustainable method is to build efficient public markets for commodities, stocks and fixed income instruments. If the Singapore government is serious about sustainable growth, it is imperative that it actively poaches firms to consider listing in Singapore and shifting their corporate finance teams over to the city-state. It is not adequate to mitigate small, inefficient exchanges with tax-friendly laws.

The Singapore Stock Exchange (SGX) has been known globally to be suffering from low liquidity, high transaction costs and price inefficiently. In 2014, the Financial Times highlighted penny stock crash on the Singapore stock market. The characteristics of the SGX mirrors the stock exchanges of developing nations – 10% of firms on the exchange are large, well-traded conglomerates, while the rest are relatively untraded.

Singaporean regulators will need to urgently work on policies to enhance the competitiveness of their capital markets. One way is to introduce low trading cost. Today, US brokers are offering free trading (such as the Robinhood app) to induce trading and participation in the stock market. Meanwhile, Singaporean brokers continue to charge a minimum commission of $25.
Another concern is the quality of listing. Perhaps the Singapore should go for quality of listings and not quantity of listings. After all, stock participants are generally rationally minded. Why would they pay the minimum $25 in commissions if US brokers are offering better traded stocks for less than 10% of what Singaporean brokers are charging?


By: Alex Lew, CFA
Alex Lew graduated from St. Hugh’s College, University of Oxford with an MBA. He is a CFA Charterholder and the Past President of the Society of Financial Service Professionals, Singapore Chapter. He is also a committee member on the Oxford Business Alumni, Singapore Chapter.