News analysis

Seeking capital to spur local stock market

If the solution is to let more CPF money flow in, the current investment scheme needs tweaking

If there is one injection that the local stock market needs, it is capital.

That was the admission from Singapore Exchange head of equities and fixed income Chew Sutat at Thursday's SGX Equities dialogue.

Capital drives valuations, which in turn drives interest and trading opportunities, said Mr Chew.

It is a virtuous circle - the more capital that flows into a stock market, the healthier it is.

The question is how and where will this capital come from?

For most stock markets, the major movers of capital in andout of listed companies have been big institutional players like sovereign wealth funds orpension and mutual funds.

Although there are no figures for Singapore, institutional funds are the biggest chunk of the stock market, dwarfing retail investors.

Worryingly, a lot less of this big money has been flowing into the Singapore equities market over the years, said UOB Kay-Hian senior executive director Esmond Choo.

He noted that figures from the Investment Management Association of Singapore show that there has been about $13.4 billion of net flows into Singapore since 2011 but just $450 million of that made it into equities.

"It's shocking," said Mr Choo.

To make up for that, he wants some of the Central Provident Fund (CPF) money to flow into the local market, a suggestion also made by the Singapore Business Federation (SBF) a few weeks ago.

Some CPF funds do flow to local equities under the CPF Investment Scheme (CPFIS), which allows individual investors to invest their savings in stocks approved by the CPF Board.

Over time, this has also dwindled. In 2012, about $1.73 billion of CPF Ordinary Account funds were withdrawn for CPFIS. This dropped to about $1.48 billion in 2014.

The main problem with this scheme is that many CPF members are not very good at investing their money.

Only 15 per cent of them made a profit larger than the guaranteed annual 2.5 per cent interest rate for Ordinary Account (OA) savings in 2014 when they sold their investments that year.

Another 45 per cent made profits of up to 2.5 per cent. The remaining 40 per cent made a loss. In other words, 85 per cent of CPF members would have been better off leaving their cash idle.

Mr Choo, like the SBF, is calling for a fixed percentage of the funds to be channelled to a professional fund manager who can invest in the local stock market.

Based on the latest data, there is about $299 billion sitting in CPF funds. About $109 billion was in the OA, as at Sept 30 last year.

Even a small percentage of that will help the stock market, Mr Choo said, adding that beating 2.5 per cent OA returns is not difficult for a long-term professional investor.

But there are problems with this approach.

One is whether it is advisable to expose CPF members to market volatility, including losses on their accounts, if they did not choose to.

The other is that the costs of managing this fund will have to be kept low as they will eat into CPF members' hard-earned savings.

Third, the task of raising capital for the stock market should not be forced on CPF members.

A better approach would be to tweak the CPFIS by setting up default pension plans that correspond to different risk profiles.

A manager could be appointed to manage the fund but the decision for CPF members to opt in would have to be entirely voluntary. The investment mandate should be global but include Singapore's companies.

There should also be a cap on the monthly contributions a person can make to the fund so that the bulk of the savings is preserved.

If executed well, the flexible pension plan could boost the capital levels of both the stock market and individuals' retirement savings.

A version of this article appeared in the print edition of The Straits Times on January 30, 2016, with the headline 'Seeking capital to spur local stock market'. Print Edition | Subscribe