SGX, where have all the investors gone?

The answer may lie in economic slowdown, changing demographics

A remisier friend from my army days 30 years ago quit stockbroking several months ago - hardly the only one to throw in the towel. All over the profit-crimped industry, scores of others are doing the same.

As stockbroking commissions get pared to the bone and trading activity grinds to a snail's pace, they see little prospects in hanging on as they face difficulties in meeting trading quotas set by their firms.

In my friend's case, the failure to meet these targets meant having to reimburse the broking firm for the ancillary expenses incurred for the use of the office space and computer. "It is just not worth it. My clients are not interested to trade. Business hasn't been worse in the past 20 years and I have been through several market crises. Better to call it a day," he said.

A market strategist noted that until Swiber's collapse in July, high-yield bonds and perpetual securities had been the toast of retail investors.
A market strategist noted that until Swiber's collapse in July, high-yield bonds and perpetual securities had been the toast of retail investors. PHOTO: REUTERS

But the broking firm he was with and others like it are not having an easy time either as they struggle to break even in an environment of declining stock market turnover.

A stockbroking director said: "Any time when the daily volume falls below $1 billion, I lose money because I can't cover my fixed costs like rental and salaries for backroom staff. And hitting $1 billion in stock market turnover is now becoming the exception rather than the rule."

Their plight epitomises some challenges faced by the Singapore Exchange (SGX) as it unveiled a lacklustre set of results last week, showing that profits for the first quarter ended Sept 30 slipped 16.3 per cent to $83.1 million from a year earlier. This was on the back of a 13.1 per cent drop in operating revenue to $190.8 million, as the bourse operator suffered a fall in income from both its securities and derivatives businesses.

And the outlook does not look too bright either. HSBC analyst York Pun wrote: "We don't expect the outlook to improve any time soon. Quarter to date, the securities average turnover was $969 million - similar to last quarter's levels."

DBS Vickers analyst Ling Lee Keng concurred, noting that the SGX still faces challenges in both its securities and derivatives businesses.

Now what is it that ails the Singapore stock market ? Where have all the investors gone?

Some market pundits will say that the answer lies in the fact that, despite the big number of foreign listings on the SGX, the stock market still acts, to some extent, as a proxy for the local economy.

"Upside could come from an improved economic outlook, while further news of a slowdown may imply further downside," Citi Research's Robert Kong wrote.

But the Singapore economy has become a big concern for many, as it shows signs of a slowdown, with growth decelerating in the third quarter to just 0.6 per cent from the same period a year earlier.

In an environment where all the main engines of economic growth seem to have stalled and the macro-economic outlook looks uncertain, people are sitting tight on their cash and holding back on big-ticket purchases such as houses and cars. Given this, they are unlikely to be in an investing mood.

This dour "wait-and-see" mindset also dampens the appetite of another class of traders - high-frequency traders, or algos - who use superfast computers to try to make money from tiny differences in share prices.

As trading slowed and the Straits Times Index found itself confined within a tight trading range in the past few months, the algos' machines also fell silent. This further reduces market liquidity.

What can be done? A strategy used by the SGX in 2003 to bring life back to the market was to ramp up the number of initial public offerings (IPOs), which lured hordes of new investors into the market.

But the timing of the move was fortuitous, given the backdrop of the biggest commodities boom in 50 years, triggered by an explosion of demand from China, which needed more of everything from cooking oil to steel.

Currently, China's growth has also slowed down considerably, as it tries to shift from an export-led economy to a service-oriented one. This has, in turn, dampened the demand for products produced by the firms that used to make a beeline to list on the SGX.

The changing demographic profile of investors in Singapore has also dealt the SGX a blow.

As the population ages, the average investor becomes more risk-averse and tends to trade less. He also goes for investments - such as bonds - that offer him a steady stream of income as he squirrels away savings for his retirement and his children's college education.

A market strategist said: "You must seriously ask what investors want and whether the products now available on the SGX meet their demand." He noted that until oil services firm Swiber's collapse in July, high-yield bonds and perpetual securities (perps) had been the toast of retail investors. Water treatment specialist Hyflux, for instance, was able to raise $500 million selling perps - a bond-like instrument - in May. The market strategist asked: "Could Hyflux have raised the same sum selling shares, considering its market capitalisation was only $440 million when it issued the perps?"

For the Singapore investor, what matters is that an investment must be relatively risk-free with a good dividend payout. Merely drawing more IPOs to make the number may not necessarily result in a much more vibrant stock market.

As it turns out, out of the 15 new listings so far this year, the big selling point for the two largest - Manulife US Reit and Frasers Logistics & Industrial Trust, raising US$519 million (S$723 million) and $903 million, respectively - was their attractive dividend yield.

Also, relying on retail investors and algos to stir up interest even in a market as small as Singapore's may not be sufficient. In major markets such as London and New York, institutional investors account for as much as half of the trades on a given day. Many of them are pension funds which provide a bedrock of support for their domestic markets through regular stock purchases.

In Japan, the central bank goes one step further, by pledging to plough 6 trillion yen (S$80.5 billion) a year into funds tracking widely watched market indicators such as the Nikkei 225 index and Topix, whose component stocks are among the largest Japanese firms.

Seen in this light, the suggestion last year by the Singapore Business Federation for Central Provident Fund (CPF) monies to be invested in the stock market makes very good sense. This would send strong signals about our market to other investment professionals, it argued.

But it is a strategy that may be opposed by CPF members who are reluctant to take any risks on their hard-earned retirement nest egg.

Now, CPF monies are pooled with Singapore's other reserves and managed by GIC. But unlike other markets, Singapore goes against the grain by specifically stating as a policy that the funds managed by GIC must be invested overseas.

In Deutsche Bank's report on the SGX's latest quarterly results, the bourse operator is described as "being powerless against weak market forces". While the German lender lauded SGX chief executive Loh Boon Chye's efforts to control costs, it said the "lack of revenue opportunities is difficult to ignore".

But then the SGX has confronted even graver crises in the past - such as the shutdown in 1998 of the Clob market which traded Malaysian counters - and come out stronger.

No doubt it is now also facing big challenges in finding new ways to draw back the investing crowd. But I have no doubt that it will persevere and succeed. That must be the fervent hope of remisiers sitting out the trading drought.

A version of this article appeared in the print edition of The Straits Times on October 24, 2016, with the headline 'SGX, where have all the investors gone?'. Print Edition | Subscribe