2020 an inflection point for Singapore’s equity markets & economy?
2020 sees stakeholders in Singapore’s equity capital markets being cautiously optimistic, given the city-state’s recovery despite global headwinds. Worldwide, 2019 saw some of the lowest levels of new equity listings in recent years as capital markets contracted, with 2020 being up in the air.
However, information from Duff & Phelps Transaction Trail 2019 indicated Singapore’s IPO performance witnessed a significant recovery — capital raised in 2019 was US$2.3 billion — about four times the capital raised in 2018. This was driven by the listings of several large property trusts, which included Prime US REIT, Eagle Hospitality Trust, and Lendlease Global Commercial REIT, with the potential for this recovery momentum to continue into 2020. This was part of a broader pattern of ASEAN bourses providing resilient despite global headwinds.
While uncertainty over Brexit has ended, 2020 sees the potential for further fallout between Iran and the US, an upcoming US presidential election in 2H 2020 and continued strategic competition between China and the US. These factors may influence the market, resulting in a subdued year for Singapore, compounded by economic slowdowns in India and China.
Securities turnover in the equity markets of Hong Kong and London proved relatively resilient despite political turbulence, though cross-border initial public offers (IPOs) in London dropped by 75%. But underlying price action and turnover remained robust. Worldwide, data from Baker McKenzie’s Global IPO Index showed that total global IPO activity fell by 20% to 1,242 listings, with capital raised declining by 8% to US$206.1 billion.
Meanwhile, the IPOs of pre-profit technology firms like Uber and Lyft in New York underperformed, Saudi Aramco’s IPO failed to attract major international investment, and WeWork’s IPO was indefinitely suspended. This followed WeWork’s disastrous decline in valuation from US$47 billion to US$10 billion and the removal of its CEO, Adam Neumann. This compounded the depreciation of the IPO market as investor sentiment became more cautious.
Macroeconomic issues, as well as unexpected market and political events, significantly impacted IPO activity and investor sentiment through 2019. However, the underperformance of larger listings led to 2019 ending on a muted note.
Since 2015, the Singapore Exchange (SGX) has acquired the Baltic Exchange; introduced dual-class share structures; inked pacts with the NASDAQ, the Tel Aviv Stock Exchange (TASE) and New Zealand Exchange (NZX) for serial and concurrent listings — though no issuer has capitalized such links — and this year, it introduced a semi-annual corporate earnings reporting regime in a bid to reduce compliance costs.
It has also built out its “economies of ecosystems” through acquiring stakes in Trumid, an electronic corporate bond trading platform; BidFX, a specialist trading platform for global FX markets; Freightos, a digital freight platform and data firm; and CapBridge, a global investment syndication platform which also operates 1exchange (1X), a private securities exchange. FY2019 saw it post a net profit of S$391.1 million — its highest in 11 years — on a revenue of S$909.8 million, the highest since its public float in 2000.
More recently, it built on this apparent strategy this with its acquisition of a 93% stake in index provider Scientific Beta. The acquisition in context makes sense following the announcement on August 2019 of the London Stock Exchange (LSE) acquiring data provider Refinitiv, with the transaction set to close in 2H 2020.
By acquiring Refinitiv, the LSE sought to become less dependent on transaction-based revenues add financial data assets to reduce its reliance on its UK and European business. The LSE is also positioning itself to compete in the financial information services space with large US exchange operators, as well as Bloomberg.
The acquisition of a majority stake in Scientific Beta comes at a time when passive investing is growing in dominance. As at 30 September 2019, some US$55bn (€50bn) in assets from more than 60 asset owners and asset managers replicated Scientific Beta indices, up more than 10 times the amount in 2016.
This comes as index funds grow their assets under management, with the rise of passive investing positioning them as new ‘gatekeepers of capital’. It also complements the SGX-owned Baltic Exchange’s own indexes for grains, gas and air freight.
In “Steering capital: the growing private authority of index providers in the age of passive asset management”, published in the Review of International Political Economy in December 2019, by Petry, Fichtner, and Heemskerk, it observes that index providers play a vital politico-economic role, with players such as MSCI, S&P DJI, and FTSE Russell, being actors that exercise growing private authority as they steer investments through the indices they create and maintain. The growth of passive investing means that index providers can exert de facto regulatory power, with implications for corporate governance and economic policies.
It also introduces a new scope for the SGX to introduce new indexes as a means to attract companies, given that the Australian Securities Exchange (ASX) is launching a new technology index, the S&P/ASX All Technology Index, on 21 February 2020.
This is meant to drive listings as public markets compete with private equity, with a slowdown in IPOs. While a strategically sound initiative that will raise visibility in Australia’s domestic sector, expanding options for investors, such a new index might not be able to overcome Australia’s disadvantage of being distanced from the large investor bases in the US and Europe.
Since being appointed SGXs’ chief executive in 2015, Loh Boon-Chye has been focused on building the SGX into a multi-asset exchange. He has generally found momentum in domains where the ecosystem present, such as global commodities, freight-related activities, foreign exchange, and others. But private equity and the perception of a moribund equity market, despite improving liquidity, means companies are coming to the market later in their lifecycle.
Singapore’s equity market landscape
According to a Deloitte appraisal, Singapore’s IPO market saw a fourfold increase in funds raised in 2019, with the Singapore Exchange (SGX) raising US$2.26 billion in IPO proceeds from 11 IPO deals. This is compared to US$551 million funds raised from 2018’s 15 IPO deals, which coincided with a global equities slump. This included four trust IPOs on the Mainboard that raised US$2.22 billion and seven Catalist listings that raised US$43 million.
Meanwhile, the SGX reported that total securities market turnover value rose 20% year-on-year (YOY) S$20.2 billion in December 2019, as securities daily average value (SDAV) climbed 15% YOY to S$960 million, with the benchmark Straits Times Index (STI) generating a 9.4% total return of price appreciation and dividend payouts.
According to the SGX, issuers continued to tap the equity capital markets in 2019, with secondary fundraising rising 20% from 2018 to S$7.4 billion and primary fundraising posting S$3.1 billion, a 50% increase.
In a November 2019 parliamentary response, Senior Minister Tharman Shanmugaratnam, also the Chairman of the Monetary Authority of Singapore (MAS), explained: “Let me start very briefly with the equity derivatives market. We are a leading derivatives trading centre in Asia. Singapore-based exchanges offer a wide array of Asian and global derivatives products, including equity, foreign exchange and commodities derivatives, and with good liquidity in each segment.”
“The compound annual growth rate of trading volumes over the last three years grew by more than 12%. We are working continuously to grow this derivatives ecosystem — by broadening the suite of products, attracting more brokers, market makers, and liquidity providers, and attracting investors to Singapore.”
“However, Singapore’s cash equity market does not enjoy the same regional leadership position. While SGX is well regarded as a listing destination for Real Estate Investment Trusts (REITs), and the healthcare and consumer sectors, it has challenges in other segments. SGX, MAS, and the industry have been working on several initiatives to enhance the attractiveness of Singapore as a listing and trading venue for equities,” he added.
For all its strengths as a financial center, and leading position as a center for Asian equity derivatives trading center, fixed income and foreign exchange trading, Singapore’s cash equity market has structural shortfalls.
“The impact of stock market liquidity on economic growth in Jordan”, by Abdul-Khaliq, published in 2013 by the European Journal of Business and Management, highlights that while market capitalization to GDP has no significant effect upon economic growth, the turnover ratio (i.e. liquidity of equity market) does.
Meanwhile,”Do stock markets lead to economic growth?”, by Cooray, published in 2010 by the Journal of Policy Modeling, notes that “policy measures taken to increase the size, liquidity and activity of the stock market will further enhance growth”.
The last few years have seen the SGX, MAS and other stakeholders working to fortify existing strengths and resolving the shortfalls in cash equities, but a more aggressive strategy is needed to reinforce this segment of Singapore’s capital markets and boost liquidity, given its implications for economic growth.
To be globally competitive with the like of equity markets in Zurich, London and Sydney — all three have respectively posted daily securities turnover averaging CHF 5 billion, GBP 5 billion and AUD $5 billion over the last few years — Singapore’s daily securities turnover has to grow substantially, given it averages S$1 billion currently.
It has also been displaced by the Indonesia Exchange (IDX) as the largest equity market in the region, according to Bloomberg, which calculates market capitalization using only actively traded, primary stocks on each country’s exchanges. This excludes securities such as exchange-traded funds (ETFs). Indonesia did hold the most-valuable crown for several short periods between January and April 2019. Prior to 2019, Singapore led Southeast Asia the vast majority of the time since at least 2003, when Bloomberg began compiling the data.
Market perceptions at end-2019 remain of a lack of liquidity for high-growth firms in Singapore’s securities market, while other issues cited by industry observers include a perceived lack of enforcement by regulatory agencies in Singapore. By comparison, market regulators of the bourses in Kuala Lumpur and Hong Kong are seen are being more active in enforcement actions against corporate misconduct.
Moreover, the ascent of private exchanges and private capital markets has dislocated public markets. From the issuers’ perspective, despite potential issues with valuations, they permit more rapid access to funds with a lower cost of capital. Southeast Asia has also seen regional companies tapping their rapidly growing domestic public markets rather than the SGX, while Singapore-based firms now have the option of an overseas listing.
According to Deloitte, which has expressed guarded optimism on the outlook for 2020, public markets will remain a natural listing destination, with Southeast Asia’s markets to remain dynamic and attractive to investors given their growth potential.
Deloitte Southeast Asia forecasts a “strong pipeline of listings from the REITs and service-based companies in 2020”, arguing that while there is “no lack of liquidity in Singapore’s capital market”, evidencing the strong secondary fundraising market of S$5.8 billion (US$4.25 billion) S$3.1 billion (US$2.26 billion) raised from IPOs in 2019.
Given global trends, Singapore’s public markets can expect to continue competing with private capital as companies and investors seek out optimal means for generating strong returns on the value of capital invested. The question is whether its equity market stakeholders, such as MAS and SGX, can coordinate to capitalize on the momentum of this recovery, as well as implement key reforms in a timely manner.
A global recovery predicted by the IMF for this year could also boost its IPO count, with the global gross domestic product set to expand by 3.3% in 2020, up from 2.9% in 2019. This improved outlook is driven by a combination of aggressive monetary policy easing in 2019 and the detente in America’s nearly two-year trade war with China.
The IMF also expects trade volumes to rise 2.9% in 2020, with market sentiment has been boosted by tentative signs that manufacturing activity and global trade are bottoming out, as well as a broad-based shift toward accommodative monetary policy, intermittent favorable news on U.S.-China trade negotiations, and diminished fears of a no-deal Brexit. However, much of this depends on the phase-one U.S.-China trade deal remaining intact and not collapsing into new tariff escalations.
While 2020 holds promise for Singapore’s equity market, it is critical that the SGX and the public sector — Singapore’s Ministry of Finance, its’ central bank and other affiliates — build a roadmap and commit to growing the securities market to an aggregate market capitalization of US$1 trillion and greater, as well as augmenting its liquidity.
More aggressive and broader policy measures need to be implemented within a compressed horizon to achieve a turnaround. 2020 represents a key point to pursue this. The Jakarta bourse has emerged as the largest equity market in Southeast Asia, while the Bangkok bourse continues to surpass Singapore’s market liquidity in terms of daily securities turnover.
Given concerns about the future direction of Singapore’s economy and the structural shifts it is undergoing, there is overwhelming evidence that functionally efficient stock markets contribute meaningfully to growth in the real economy and employment. And the current state of Singapore’s equity market and IPO suggests aggressive interventions are needed in order to recalibrate it, as part of a broader economic shift.
IPOs are also crucial to generation employment, given the role that companies going public play in employment growth when tapping capital markets.
“Access to public capital markets and employment growth” by Borisov, Ellul, and Sevilir, published on SSRN in 2015, highlights how firms significantly increase post-IPO investment in human capital compared to the pre-IPO stage. This is due to financial constraints being relaxes, driving workforce expansion by the newly public company.
This is reinforced in a May 2014 white paper by NASDAQ Helsinki, “Economic Growth Through IPOs”, which observes: “In Sweden, the impact that listed companies have on employment has been studied: The number of jobs in companies that listed their shares on the First North market showed an average annual increase of 21% after going public, compared to an average annual growth rate of 1.5% for companies in the private sector. Furthermore, during this period  First North companies in Sweden have created a combined total of over 20,000 new jobs through market-based financing. In the United States, according to a study as much as 92%4 of job growth occurs after a company’s IPO. Therefore it is of vital importance in the society to create [a] favourable climate for listings.”
Though perhaps the contribution to employment by publicly-listed companies is overstated. A report commissioned by the Kauffman Foundation and published in 2012, “Post-IPO Employment and Revenue Growth for U.S. IPOs, June 1996–2010”, notes that in the US 2766 domestic operating companies went public. Prior to IPO, they employed 5.062 million people, and post-IPO, this grew to 7.334 million in 2010, an increase of 2.272 million employees, or 45%. This increase in post-IPO employment worked out to 822 jobs added per firm. However, most of these jobs were created prior to the IPO.
Does the Stock Market Benefit the Economy?”, published by Bae and Kang in 2017, concludes that concentrated stock markets dominated by a small number of large firms negatively affect economic growth.
Concentrated stock markets mean that capital is allocated inefficiently, with the consequence being “sluggish IPO activity, innovation, and economic growth” and translating to insufficient funds for emerging, innovative firms — a perception that Singapore's’ equity market currently experienced — as well as discourages entrepreneurship. Ultimately, this is detrimental to economic growth.
Higher rates of economic growth are stimulated by the real investments, which indirectly generate positive externalities on stock market indicators and in the real economy. This is also backed up by evidence from “Can stock market development boost economic growth? Empirical evidence from emerging markets in Central and Eastern Europe”, by Carp, published in 2012 by Procedia Economics and Finance.
Other research supporting this includes “The role of stock market development in economic growth: evidence from some Euronext countries”, by Ake, published in 2010 in the International Journal of Financial Research; and “Does the stock market cause economic growth? Portuguese evidence of economic regime change”, by L.M. Marques, Fuinhas, and A.C. Marques, published in 2013 in Economic Modelling.
At this point, any intervention that builds towards a trajectory which can augment the liquidity of Singapore’s equity capital markets and boost the turnover velocity of securities, and its benefits for broader economic growth and employment will be beneficial.