Is Singapore losing its IPO appeal?

Singapore’s stock exchange, SGX, has been facing a challenging period, with low volumes and concerns over corporate disclosure practices.

The exchange has seen a trend of delisting’s outpacing listings, and a concentration of businesses with significant stakes held by state investor Temasek, as well as asset-heavy companies that have not fared well with rising interest rates.

This has led to SGX being one of the quietest global exchanges in terms of deals and funds raised.

In response to these challenges, the Singapore Venture & Private Capital Association (SVCA) has put forward a proposal revitalising SGX. The suggestions include mandating stock market participation from private capital, such as family offices, and allowing pension and sovereign funds to invest in the stock market, akin to practices in Australia and Thailand.

There is also a consideration for more collaboration with Southeast Asian stock markets and potentially hosting a regional exchange.

The industry has mixed reactions to the proposals to revitalising SGX. Some believe that mandating private capital investment in SGX may not address the core issue of attracting attractive companies to the exchange. Others argue that while sovereign and pension fund investments could boost the bourse, it may not significantly impact smaller-cap stocks. There are also concerns about the risks to CPF investors if more corporate failures occur.

Impact of proposed changes

Introducing mandates for private capital investments and allowing pension and sovereign funds to engage more directly, as part of plans revitalising SGX, could alter the risk landscape:

• Compliance Risk: New regulations may impose stricter compliance requirements, increasing the operational burden on companies. This could particularly affect smaller firms that may not have robust compliance systems in place.
• Market Volatility: Increased participation by large institutional investors could lead to greater market volatility, as these players often make substantial trades that can move market prices.

Attractiveness of SGX in Question

Despite Singapore’s rise as a financial hub, the performance of its stock market has not matched up, with new economy and technology companies preferring to list in the US for better valuations and liquidity. The government and SGX are now considering aggressive moves to enhance the stock market’s appeal, recognising that a vibrant exchange is crucial for Singapore’s status as an international financial centre.

There is no doubt the Singapore government and SGX are at a crossroads, seeking to implement reforms that could potentially reshape the stock exchange.

The proposals for revitalising SGX under consideration aim to increase trading volumes, attract listings, and maintain Singapore’s reputation as a global financial centre. However, the success of these reforms will depend on addressing fundamental issues such as corporate governance and regulatory enforcement to restore investor confidence in SGX.

Market Dynamics

Changes in market dynamics due to increased collaboration with Southeast Asian markets and the introduction of new financial instruments or sectors:

• Foreign Exchange Risk: Greater integration with other Southeast Asian markets could expose SGX-listed companies to foreign exchange risks, particularly if they engage in transactions involving multiple currencies.
• Sector-Specific Risks: Emphasizing certain sectors, such as technology or green energy, could skew the market risk profile, making it more sensitive to sector-specific downturns.

Technological Advancements

With potential technological upgrades to improve trading mechanisms:

• Cybersecurity Risk: Any technological advancement introduces risks related to cybersecurity. As trading systems become more sophisticated, they also become potential targets for cyber-attacks, which can lead to financial and reputational damage.
• Operational Risk: Transitioning to new technologies can lead to operational challenges, including system downtimes or failures, which can disrupt trading activities.

Strategic Considerations for CFOs

To manage these risks effectively, CFOs should consider:

• Risk Assessment and Mitigation Plans: Regularly update risk assessment strategies to incorporate new risks arising from market or regulatory changes. This includes developing robust mitigation strategies that address both internal and external risk factors.
• Diversification: Diversify investments and funding sources to mitigate potential negative impacts from market or regulatory changes.
• Continuous Monitoring: Implement continuous monitoring systems to track the impact of changes in real-time, allowing for quick adjustments to strategies.

Comparison with other exchanges

Over time, several exchanges have implemented strategic changes successfully.

The New York Stock Exchange (NYSE) and NASDAQ have significantly embraced technological advancements to improve trading efficiency and attract tech-savvy investors. These include better trading platforms, real-time data analytics, and blockchain experiments for secured transactions.

The London Stock Exchange (LSE) has implemented several regulatory changes to enhance transparency and corporate governance. This not only helps in restoring investor confidence but also attracts high-quality listings.

Exchanges like the Hong Kong Stock Exchange (HKEX) have diversified their product offerings to include derivatives, commodities, and a variety of equity products. This diversification helps in attracting a broader investor base and enhances liquidity.

Some exchanges, like those participating in the UN’s Sustainable Stock Exchanges Initiative, have focused on promoting sustainability. These exchanges work to advance sustainability in capital markets, which can appeal to a new generation of socially-conscious investors?.

The Canadian Securities Exchange (CSE) and the Social Stock Exchange (SSE) initiatives in various countries have created specialized platforms for specific sectors like technology startups or social enterprises, which provide tailored support and visibility to these entities?.

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