The Incredible Shrinking Singapore Stock Market

Robson Lee had a decision to make. In his more than two-decade career as a capital-markets lawyer in Singapore, he’d helped more than 30 companies list on the country’s stock exchange, bringing to market everything from a grocery store chain to a pawnbroker. Business had been good, but it was starting to dry up. Lee decided he had to get out. “I saw the decline,” he says. “That’s why I moved.”

That was in 2014, when more companies left the Singapore Exchange than joined it, with S$8.4 billion ($6.43 billion) in value disappearing from the public market. Lee, now 50, quit his job and became a partner in the Singapore office of the U.S. law firm Gibson, Dunn & Crutcher LLP. While he still works on SGX listings, he spends more than three-quarters of his time helping companies throughout Asia to restructure and make asset purchases.

The exchange’s fortunes have only gotten worse. For the last five years, delistings have outnumbered listings in the market, which had 741 companies at the end of December last year, down from a peak of 782 in 2010. In 2018 the money raised from the 15 SGX initial public offerings, excluding depositary receipts, fell to just S$710.6 million, while 19 companies departed—a net outflow of S$19.2 billion in market value. While money has been leaving the public markets, Singapore has strengthened its position as a leading wealth hub in Asia, with private banks overseeing more than $2 trillion in assets and providing alternative investment opportunities in structured products, real estate, and private equity.

Many of the businesses that have left the exchange in the past few years are well-known in Singapore. They range from GLP Pte., one of the world’s biggest warehouse owners, to Osim International Pte., Asia’s largest maker of massage chairs. Some chief executive officers who’ve taken their companies private, lamenting what they see as low valuations in the city-state, are seeking more liquid markets that can generate higher stock prices. For example, Lee says, sofa maker Man Wah Holdings Ltd. was taken private in September 2009. Within six months, it was relisted in Hong Kong at about eight times its market value.

Chew Sutat, SGX’s head of equities and fixed-income businesses, says delisting is a global trend. What’s more, he says, it’s a healthy market function that weeds out weaker companies. Unlike some exchanges, Chew says, SGX doesn’t refrain from delisting zombie companies just to keep its numbers up.

But that doesn’t tell the whole story. As of the end of last year, the market capitalization of companies with primary listings in Singapore had fallen by S$97.5 billion, or 14 percent, from the end of 2014, according to SGX data. The bourse’s average daily turnover has been halved since 2007. “These trends are worrying,” says Ngoh Yi Sin, an analyst at Singapore’s CGS-CIMB Securities International Pte.

More worrisome, perhaps, some homegrown champions are bypassing SGX altogether. Take gaming company Razer Inc., one of the country’s few recent consumer-technology successes, led by Singaporean-born CEO Tan Min-Liang and backed by sovereign wealth fund GIC Pte. When it listed in November 2017, it opted for Hong Kong, which has benefited markedly from its proximity to China and its “stock connects”—authorized cross-boundary investment channels—to mainland China exchanges.

While Singapore and Hong Kong vie for the mantle of Asia’s premier financial hub, the Southeast Asian nation has always lagged behind in terms of listings, because it has a smaller pool of domestic companies and no hinterland to depend on. And the gap is widening as Hong Kong cements its position as the venue of choice for Chinese companies. Hong Kong raised $33.5 billion from IPOs in 2018—more than any exchange anywhere—as big name after big name came to market. China Tower Corp., a state-owned infrastructure company, raised $7.5 billion in what was at the time the world’s biggest IPO in two years. Smartphone maker Xiaomi Corp. raised $5.4 billion, and Meituan Dianping, a food delivery giant backed by Tencent Holdings Ltd., procured $4.2 billion.

Hong Kong’s market is now so much larger and more vibrant than Singapore’s, the two can’t even be compared, says Tham Tuck Seng, PwC’s head of capital markets in Singapore. The imbalance is practically impossible to right, because companies naturally gravitate to bigger, more liquid markets. “They’re two different fishes,” Tham says. And it’s not just Hong Kong that’s overshadowed Singapore. In 2018 even Southeast Asia’s regional exchanges left Singapore in their wake: The Ho Chi Minh Stock Exchange in Vietnam raised $2.9 billion; Thailand’s bourse, $2.6 billion.

All the while, markets in Shanghai and Shenzhen have become much more accessible to overseas investors. James Thom, an Asian equities fund manager at Aberdeen Standard Investments Ltd. in Singapore, says his firm has been selling its Singapore holdings to buy Chinese A-shares over the last three years. “It’s home to some good-quality companies,” he says of Singapore. But, he says, “if you think about the center of gravity in Asia and where it’s going, it’s all shifting to mainland China.”

Singapore once seemed on the verge of becoming the public-market investor’s gateway to Asia’s emerging economies. But in recent years it’s been increasingly cast aside as Southeast Asian companies opt to list on their own exchanges, Hong Kong scoops up much of China’s IPO pipeline, and markets such as Shanghai and Shenzhen open up to foreign investors through stock connects with Hong Kong.

The world still sees Singapore as a remarkable success story: the island nation Lee Kuan Yew turned into the world’s third-richest country in a single generation. A low-tax regime, transparent legal structures, a highly educated workforce, and a welcoming attitude to multinational corporations all helped turn the city-state into one of the world’s leading financial centers despite its small size (it’s about half as large as Los Angeles) and population (5.6 million). In some quarters, Singapore, with its ability to attract foreign investment, has even been cited as a model for post-Brexit Britain.

But the fate of the stock market—once the undisputed Southeast Asian powerhouse, broadening its reach into China—raises questions. As China outpaces most of the world economically, largely to the benefit of Hong Kong’s capital market, where does that leave Singapore’s? And where does that, in turn, leave the country?

Singapore’s stock exchange dates to 1973, when it split from the Malaysian bourse. By the end of 1999, 335 companies were listed on the main board. Shortly thereafter, the exchange moved into its iconic headquarters, the twin-towered SGX Centre on Shenton Way, which then housed some of Singapore’s biggest financial institutions.

In the 2000s, SGX brought in many Chinese companies. With a population that’s more than 70 percent ethnically Chinese, the city-state became a natural alternative venue for such businesses. The so-called S-chips, Singapore-listed Chinese companies, continued to dominate the IPO market until a series of high-profile scandals in the 2010s, similar to the frauds uncovered at Chinese companies that listed via reverse takeovers in the U.S. Singapore, eager to welcome foreign listings, had eased the requirements for companies to join the bourse. Some of them were fraudulent, says Mak Yuen Teen, an associate professor at the National University of Singapore. Domestic investors got burned.

Then, in 2013, local punters experienced another crash. A penny-stock rout wiped out S$8 billion, in what the authorities called the “largest market manipulation case in Singapore’s history.” Three individuals illegally pumped the shares of three smaller companies, which surged at least 800 percent in nine months before plunging over three trading days. Again, local investors bore the brunt of the losses. The Catalist market, the exchange’s venue for smaller, growth companies, never quite recovered, says Gibson Dunn’s Lee: “It came to a grinding halt.”

These days, Mak says, retail investors account for an estimated 30 percent of the market. The number of S-chips has greatly diminished. What are left are the safe, steady companies that form SGX’s backbone. These are mostly stocks favored not for their growth prospects but for their dividends—backed by state investment firm Temasek Holdings Pte. or a wealthy family such as the Kweks (financial services and property) or the Wees (banking and property). “They appeal to a certain kind of investor,” says Carmen Lee, head of investment research at Oversea-Chinese Banking Corp. (OCBC). “A lot of private bank money is now in Singapore, and they actually like the core, somewhat boring, defensive stocks,” she says.

Three big banks—DBS, OCBC, and United Overseas Bank Ltd.—account for more than 40 percent of the benchmark Straits Times Index (STI). Property and telecommunications companies make up an additional 23 percent. The STI also includes some big foreign listings, such as Thai Beverage PCL and parts of the Jardine Matheson conglomerate, which moved to Singapore three years before the British handed Hong Kong over to China in 1997.

But when it comes to technology companies, there’s only one in the STI: Venture Corp., a 34-year-old provider of electronics manufacturing services. “There is a real dearth of new interesting companies,” says Kelvin Tay, regional chief investment officer at UBS Wealth Management in Singapore. “Nothing that I can think of.”

Even the neighborhood around Shenton Way is changing. The Monetary Authority of Singapore is still there, but the Central Provident Fund, the national pension fund, has sold its building and relocated outside the central business district. DBS has moved to the newer Marina Bay area, joining the Asian headquarters of Facebook Inc. and LinkedIn Corp.

Ron Tan is chairman and CEO of Cityneon Holdings Ltd., which mounts exhibitions modeled on blockbuster movies such as Marvel Entertainment LLC’s The Avengers and NBCUniversal Media LLC’s Jurassic World. In 2018, even though Cityneon’s SGX-listed stock had been surging since a low three years earlier, Tan decided to take the company private. He says he was dissatisfied with Cityneon’s valuation. Growth stocks such as his, which don’t pay dividends, are misunderstood in Singapore, he says, because investors have become so accustomed to the steadier, dividend-yielding companies that make up most of the market, as is the case in Zurich and Dubai.

It’s a stultifying mindset, he says, and it applies to everyone involved. “It’s the ecosystem—the exchange, the fund managers, the retail investors, even the way I’ve been brought up,” he says. “I’m a Singaporean, so I myself am programmed this way, so I cannot blame the rest of the people here when they look at my own company.”

Beyond the concerns about low valuations and thin trading, a closer look reveals that some of the factors often cited as driving Singapore’s economic success are the very ones holding back the stock market.

First, there’s the education system. Singapore has gained international recognition for producing high-achieving students in math and science, but it’s done so through an emphasis on following rules and rote learning. That, says UBS’s Tay, impinges on creative thinking and leads to a lack of people starting businesses that might eventually list on the exchange. “We ask ourselves why we don’t create enough entrepreneurs and creative people,” he says. “It’s not that we don’t have them. It’s just that the system does not allow it. If you have to spend so much time becoming exam-smart, you have very little time to be creative.”

Homeownership—revered in Singapore—is another drag on the stock market. Former Prime Minister Lee reasoned that if Singaporeans owned their own property, they’d be more invested in the country and its economy, and he instituted policies to encourage just that. Today, Singapore has one of the highest levels of homeownership in the world, about 90 percent. Its people have a staggering $949 billion invested in real estate, accounting for 44 percent of household assets. This is the “traditional path,” says Jaime Pang, a 31-year-old lawyer. “You get a job, you get married, you put all your money into a house, and there isn’t much left over to invest in the stock market.”

As a result, stocks and securities account for just 9.6 percent of household assets, according to government statistics. That compares with 48 percent in the U.S. And Singaporeans who do put money into equities increasingly turn to options beyond the city-state, a diversification that’s facilitated by exchange-traded funds, among other things. “Local investors are savvy and have more international options,” CGS-CIMB’s Ngoh says.

SGX has taken steps to arrest the market’s decline. In 2018 it introduced dual-class shares that provide some company owners with superior voting rights. It’s formed co-listing partnerships with Nasdaq Inc. and the Tel Aviv Stock Exchange. It’s also expanded an in-house research team dedicated to highlighting the exchange’s small and mid-cap stocks, while the government is launching a S$75 million grant to help companies go public. But the slide continues.

In the end, says Chua Hak Bin, a senior economist at Maybank Kim Eng Research Pte., Singapore “will just be a very niche market.” And maybe that’s enough. Chua cites SGX’s strengths: an established real estate investment trust market; notably high valuations for medical-services companies; and a good track record in listing consumer stocks. For his part, SGX’s Chew points to the exchange’s success in helping companies raise funds beyond their initial offerings, and he says that Singapore is still the market of choice for firms looking to expand regionally and tap international investors. About half of the companies listed on SGX are foreign, and institutional money trusts the Singapore market, he says.

Like many of its peers, SGX has diversified beyond equities into derivatives, says Michael Wu, a senior equity analyst at Morningstar Inc. in Hong Kong. According to his calculations, SGX got 40 percent of its revenue from futures and options from Sept. 30, 2017, to June 30, 2018, compared with just 26 percent from cash equities.

Does it matter if the Singapore stock market shrinks?

The economy is thriving as Singapore prepares for its third leadership transition in 53 years, with Minister for Finance Heng Swee Keat set to take over by 2022 from the current prime minister, Lee Kuan Yew’s son Lee Hsien Loong. The World Bank ranked the nation second out of 190 countries for ease of doing business in a 2018 report. Its gross domestic product per capita, based on purchasing power parity, ranks third in the world: $98,260 as of 2018, according to the International Monetary Fund. GDP, which is driven by manufacturing, trade, finance, and business services, has grown consistently—albeit at a moderate pace—since the global financial crisis. And the country was ranked Asia’s most competitive wealth management center—ahead of Hong Kong and second only to Switzerland globally—in a Deloitte report last year.

The government has invested billions in nurturing industries such as health care and biomedical sciences, and in creating an attractive environment for technology startups. It’s also pursuing its plans for a “Smart Nation” that runs its roads and industries and everything in between on cutting-edge technology. Some of those bets have already paid off. Since the early 2000s, Singapore has doubled the number of jobs in the biopharmaceutical industry, to more than 6,000, as GlaxoSmithKline, Merck, Roche Holding, and other companies set up local bases.

None of this is particularly dependent on the health of the stock market. A smaller pool of companies limits the choices investors have even as the fund management industry continues to grow, and Justin Tang, the head of Asian research at United First Partners, says having a sleepy stock market does little to burnish Singapore’s reputation as a financial hub. But in the grander scheme of things, Chua of Maybank Kim Eng says, the stock market isn’t as important as it used to be. “A vibrant capital market is an added advantage or added benefit to the economy,” he says. “It’s not the only thing.”

Indeed, the delisting trend could be a good sign, says Tamara Henderson, who covers Southeast Asia, Australia, and New Zealand for Bloomberg Economics in Singapore. It creates a situation in which unlisted companies, free of the constraints of quarterly reporting, are more able to focus on long-term growth, thereby stabilizing the economy. “It’s probably a sign of wealth,” she says.

And in Singapore, wealth definitely matters: It’s one of the cornerstones of the economy. As far as Aberdeen’s Thom is concerned, the stock market has little bearing on the “tremendous growth” in Singapore’s wealth management sector or the vibrancy of the financial industry generally. What’s more important, he says, is the perception that the country is a safe place to park money, with access to good advice and good money managers. And a thriving stock market? “A nice-to-have rather than a need-to-have.”