The SGX grows stronger from its challenges and is on the cusp of a turnaround

The Singapore Exchange (SGX) has struggled with poor IPO performance and an upcoming Federal Reserve Interest hike. Nonetheless, its future is still promising.

By Oliver Ward, Edited by Joelyn Chan

Since the start of August, the Straits Times Index has been creeping back down from the highs it enjoyed in the last week of July.

Trading flow has been stagnant, and the daily average securities turnover has steadily decreased annually since 2013. With less buying demand, the market loses liquidity. It becomes harder to sell stocks quickly so the stocks within the market will typically trade at lower prices. This lack of liquidity has made it difficult to complete large trade deals in listings outside the very top stocks.

The decrease in daily average securities turnover has been indicative of a lower volume. When it comes to online trading, a decrease in volume deters many investors, keeping the market prices lower. When a market has a lower volume, less money is moving a stock price, which leaves the market open to more volatility.

Recent measures are diversifying derivatives and pushing volume up

The acquisition of the UK’s Baltic Exchssange in late 2016 was a welcome move for the Singapore Exchange. It represented an opportunity to diversify their derivatives revenue and gave much greater commodities coverage. It also now puts Singapore in prime position for negotiating with the post-Brexit UK. Without the constraints of the European Union, the UK’s shipping industry will be looking to forge new links with global shipping hubs, like Singapore. With the Baltic Exchange now part of the SGX, the strong economic connections will already be in place.

Delisting and privatisation have also affected volume in recent years. When the number of listings decreases, so does the volume and the attractiveness of the SGX. The reduced number of listings on the SGX is one of the reasons Singapore-based companies are looking to other markets to list in. Razer, the Singapore-founded gaming company, for example, will look to Hong Kong to file their IPO. But this too is beginning to show signs of improvement at the end of Q2 in 2017.

The second half of 2017 should show signs of improvement

The SGX has a healthy flow of IPOs for the remainder of 2017, including healthcare and technology sector listings, both from Singapore and internationally.

ERA Realty, which left the SGX in November 2012, is returning to the market. As the second-largest real estate company in Singapore, the listing is a big result for the Singapore stock market. The IPO sale shares will include 44.1 million vendor shares and 4.8 million new shares.

The freshly inked partnership with Infocomm Media Development Authority (IMDA) came to fruition in May to assist tech companies listed on the exchange. It should begin to deliver results by the end of the year and bring more tech IPOs to the SGX in 2018. Market strategist for IG Asia, Jingyi Pan, called the initiative a “significant move to reverse the trend” of reduced IPO activity on the SGX.

On top of the usual public consultations to improve procedures, the newly established Singapore Exchange Regulation Unit (SGX RegCo), began operating in August 2017. The unit will examine the existing rules governing and controlling the SGX, which includes the rising costs of listing, mandatory sustainability reporting, quarterly reporting and will revise the rules surrounding the minimum-trading price. Streamlining the market’s regulations and increasing competitiveness will secure IPOs and slow the rate of delisting.

This is a necessary move for the SGX, whose listing prices and annual fees stand higher than their competitors.

In another attempt to attract more IPOs, the SGX is considering permitting companies with dual-class share structures conduct their primary listing on the SGX. These companies become publicly listed, but the company founders retain control by holding a separate type of shares with more voting control within the company. For example, Google sells class A shares to the public which carry no voting powers. Class B shares are reserved for Google insiders and carry ten votes each.

Many tech startups prefer a dual-class structure as it allows the founders to retain more control in the business. As competition heats up for IPOs, Singapore would be well placed to secure more listings from tech startups if they allow the dual-structure on the SGX as a primary listing. The market Directors will decide before the end of 2017.

Global events will not cause lasting turmoil

The 12-month projection for the SGX looks healthy. While Brexit has caused turmoil and uncertainty in European markets, Singapore should remain unaffected. The initial response to the United Kingdom’s referendum result was a weakening of the Singapore dollar against the US dollar. Currency weakening occurs in uncertain global situations, but the consistency of the nominal effective exchange rate (S$NEER), suggests that Brexit will leave the Straits Times Index unaffected.

Concerns over a projected Federal Reserve interest rate hike in December caused the recent decline in the market, but any resulting downturn is only temporary. Stocks will still be cheap in comparison to bonds. Interest rate projections for 2019 have also decreased, which should allow the market to recover quickly.

If there is a hike in December, Singapore’s financial holdings could benefit. An environment of rising interest rates will increase net interest margins for companies like United Overseas Bank and Oversea-Chinese Banking Corp.

The market directors are exploring ways to get the edge on regional competitors

Between May 2016 and May 2017, over a dozen Singapore-based companies considered an IPO on the Hong Kong Exchange (HKEx). The HKEx holds an allure for companies looking to set up factories in China and extend their market reach north. The market is also more active with a higher trading volume and more liquidity, allowing listed company funds to grow at a faster pace.

The Thai market also has more volume than the SGX, with THB50.24 (US$1.5 million) changing hands in trades last year. The high volume is maintained by a high percentage of retail investors. On the Stock Exchange of Thailand, 50% of trading activity comes from retail investors.

The SGX is addressing the volume problem. In May 2017, the SGX attempted to improve its poor liquidity by introducing a minimum allocation of 5% or S$50 million (US$37 million) of each IPO to retail investors. The result has been a slight improvement of retail access to the market and improving retail inclusion.

The Singapore stock market can gain a competitive edge over the HKEx and other regional rivals through a swift decision to approve dual-class primary listings. The HKEx still have not discussed the matter, but will do so shortly. If the SGX allow dual-class listings before their regional rivals, they may capitalise on an influx of tech startup listings before the HKEx follows suit. Falling further behind, the HKEx also scrapped plans to reform the listing procedure.

The market will become more attractive to potential IPOs

Dual-class share listings, coupled with the existing IMDA partnership could firmly establish Singapore as a leading technology listing market and pull in some big-name IPOs next year. With attractive IPOs luring in investors, volume and liquidity will improve and drive significant growth for the SGX.

The Asia-Pacific region accounted for 70% of the global IPOs in Q1 2017. Singapore’s location in the hub of global IPO activity puts the SGX in the perfect position to capitalise on opportunities. Singapore’s isolation from other global events, such as Brexit, which are causing uncertainty in other markets also puts them in a good position for a strong finish to 2017 and start for 2018. Generating IPO interest is key, and 2017 has seen the SGX make promising strides to put them ahead in 2018.