Mar 19, 2018
SGX needs international partnerships to remain competitive: Alex Frino, University of Wollongong
The Singapore Exchange (SGX) need to be aggressive in forging international connections and partnership as it seeks to remain relevant amid competition with the likes of Hong Kong, according to Professor Alex Frino, Deputy Vice-Chancellor (Global Strategies) at the University of Wollongong Australia.
Frino was previously CEO of the Capital Markets Cooperative Research Centre Limited and has held visiting academic positions at universities in Italy, New Zealand, the UK and the US, as well as positions with financial market organisations that include the Sydney Futures Exchange, Credit Suisse and the Commodity Futures Trading Commission in the US.
Frino discusses his views on the ASX and SGX merger that fell through in 2011, as well as shares his views on developments involving the two stock exchanges and the growing prominence of tech stocks.
Note: An abridged version of this interview was first published on Deal Street Asia.
Edited excerpts
The ASX is planning to promote more foreign technology listings this year and has seen its emergence as destination for companies valued between $100M and $1B, particularly in the technology space, with Chinese enterprises warming to the bourse. What’re some of the factors you reckon that have propelled the ASX to become a supra-regional, if not international exchange of sorts or the Indo-Asia Pacific?
Historically, technology stocks have gone to the US, specifically the NASDAQ. However, it has become increasingly apparent that unless your company is a mega-cap capable of making it onto the S&P500, then it will not get good exposure in the US markets.
In contrast, in Australia a company worth upwards of $A250 million will make it onto the ASX 200 Index and thus get valuable exposure to potential investors. This translates directly into the amount of capital a company can raise.
My team has done research that demonstrates that all else being equal, smaller companies will raise 15–20% less capital in the US than if they list on the ASX. Obviously that message is getting through to companies considering where they should list.
Looking back at history, you commented back in 2011 in that the rejected bid by the SGX to merge with the ASX would be against Australia’s interest. How has the situation evolved since then for the ASX and SGX in your view?
I have always said that a merger between the SGX and ASX would have been a positive for both exchanges. Australia has a large and deep pool of capital (underpinned by the Superannuation industry’s assets in the order of $A1.5 trillion) which is largely serviced by the Australian financial services sector which has insufficient and costly international exposure.
Singapore, on the other hand, specialises in distributing capital internationally. On that basis I believed a merger between the two Exchanges would have been highly synergistic — providing international exposure for Australian capital and benefitting Singapore by giving it access to a bigger pool of funds.
Nothing that has happened since has led me to change my view, and I am sorry that the merger didn’t proceed.
Investors today have a preference for companies with fewer physical assets. Is this something you see happening in the Indo-Asia Pacific?
This certainly applies to technology stocks, but I am not sure it holds true across all sectors. For example, the big global mining companies such as BHP and Rio Tinto have massive physical assets and are still attractive to many investors. Most successful investors consider diversification to be of great importance, and that will include companies with substantial physical assets.
You’ve observed the market for a number of years. The SGX is planning a Stock Connect with the Bursa Malaysia to launch by end-2018, is implementing a dual-class share structure and has entered into a listings collaboration agreement with the NASDAQ as part of a broader technology push, creating an ‘east-west’ capital connection as part of its ambition to establish itself as a global technology centre. Given its key role in the Singapore financial ecosystem, would a development like a third market for the SGX — perhaps something modelled after the Nasdaq First North — for nano-cap and micro-cap stocks make sense?
That is an interesting concept, but not without its problems. Small to Medium Enterprise (SME) boards have been notoriously unsuccessful around the world, although I note that the London Stock Exchange’s AIM (formerly the Alternative Investment Market) claims to be have been very successful since it was launched in 1995.
SME boards generally fail because of a lack of risk capital able to tolerate the volatility of the SME sector. The ASX’s various incarnations of SME boards all struggled because of a lack of risk capital. The US market clearly is among the deepest and most liquid globally, with ample risk capital, and any connection which enables US risk capital to access opportunities at low cost in Asia has considerable merit.
So a third market along these lines in Singapore could work, but a critical ingredient to its success would be engaging US and also UK capital markets.
Despite the strong IPO pipeline for 2018, the SGX’s equities market is lacklustre and the IPOs of Razer and Sea Limited abroad also highlight that it competes with the ASX and HKEx for listings. Given the listings collaboration agreement with the Nasdaq, should it consider similar collaborations with the Japan Exchange Group (JPX), Nasdaq Nordic and the ASX, as well as other stock connects, in order to remain relevant?
Yes, the SGX should consider more international collaborations. Capital markets are becoming more and more global, and global capital and issuers of securities increasingly find it cost-effective (and therefore attractive) to circumvent their traditional home exchanges to maximise access to capital.
Any initiative that lowers the cost of access to capital and maximises opportunities is a step in the right direction.
Fatfish Internet Group has argued that ASEAN bourses cannot support the high valuations of technology enterprises. Meanwhile, Loh Boon Chye, the CEO of the SGX, maintains that the market is sufficiently large for various stock exchanges to benefit from the surge technology listings but that no single exchange dominates it. Any take on a tech hub in the Indo-Asia Pacific? For instance, the Taipei Exchange is seen as venue of choice for biotechnology listings.
The question is about risk: whether individual stock exchanges can support capital raising by technology enterprises and whether the risk preferences of investors in particular geographical areas are consistent with the risks associated with technology-driven enterprises.
One of the notable aspects of the SGX is that its capital flows from international investors. Therefore it provides an interesting value-proposition for technology enterprises which require access to higher risk capital. Being able to facilitate that access could see Singapore become a hub for capital-raising by technology enterprises, but much work needs to be done before that is a reality.
In 2016, you published a study, “The efficiency in pricing of initial public offerings: A comparison of SG and US markets” where you noted the greater efficiency of Singapore’s capital markets relative to the US. How do markets such as South Korea, China, Australia and Hong Kong compare in terms of efficiency for capital raising?
The value proposition provided by smaller stock exchanges compared to the US is based around the concept of providing opportunities for smaller companies to be noticed, which is very difficult to achieve in the US market.
To be listed on the S&P 500 in the US, a company must have a market value of at least $US2.5 billion. If your company is outside that top 500, it gets lost. The most important element of our research showed that companies that make it onto the top index of a small market will create greater attention and do much better in capital raising than those outside the S&P 500 in the US.
So there are definitely opportunities for the markets you have listed to outdo the US and UK markets in terms of raising capital for smaller enterprises.
With the emergence of cryptocurrencies, do you reckon that traditional stock exchanges partnering with cryptocurrency exchanges and offering specific stocks for that can securitise cryptocurrencies can be a way forward, at least in terms of extending financial inclusion to cryptocurrency investors and boosting the liquidity of local bourses?
Bitcoin and other cryptocurrencies remain a highly volatile proposition, and in my opinion traditional stock exchanges should tread with great caution in this area.
The ASX investor base has demonstrated a strong appetite for both high-risk ventures, as well as nano-cap and micro-cap stocks. However, such stocks need to put greater effort in order to maintain investor interest on the Mainboard. Does the ASX need a growth market or does its single-board structure remain its competitive edge?
The ASX has had a few attempts at boards for smaller stocks, but has reverted back to a single-board structure. And while it is true to say that micro-cap and highly risky stocks have different requirements for trading, transparency and regulations in order to be successful, it is not so much a question of whether you have one board or two.
Rather, it is whether your regulations and market structure are suitable for nano-cap and micro-cap companies and whether there is a demand for these stocks in your investor market.
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