I read recently that MAS was launching a $75m grant for the equity market. The aim is to encourage listing and to also boost equity research coverage.
I must admit I am pretty pessimistic about its future success.
The woes of the Singapore market are well known – poor liquidity, a lack of quality companies and even poor cooperate governance.
SGX has taken steps to improve corporate governance in recent months. This should be commended but the problems in my mind about the Singapore market are much more deeply rooted.
Our domestic market is really really small
Singapore has an incredibly small domestic market for businesses. Government linked corporations dominate many of these large businesses as is, and it is extremely hard for local businesses to achieve a large scale.
Imagine you were the owner of a coffee shop franchise.
At the end of the day, there are just so many coffee shops you can open in the whole of Singapore to replicate this concept.
In contrast, if you were Starbucks in its first couple of years, you have a huge domestic market internally that you could continue scaling in different cities and states before even considering international expansion.
International expansion is always predated on a successful core business in a company’s home market.
Venturing overseas is always an option – but going to Malaysia, Indonesia, Thailand is much easier said than done.
Different work norms, legal rules and social conventions make expanding extremely costly and risky. I have seen very few SMEs successfully navigate their expansion into one country, much less multiple.
In contrast, US companies have a huge domestic base that they can focus on internally. Sure, there are going to be variations between cities and states – but you have a lot of homogeneity in terms of language, culture and legal rules.
But competition is intense nonetheless..
Despite our small domestic market, I’ve noticed that competition is extremely intense nonetheless.
Singapore is a financial hub, and there’s plenty of money sloshing around.
What happens when you take a tiny market and plenty of capital sloshing around?
The bike sharing wars in Singapore are probably the most extreme example.
But you see plenty of different examples (tuition centers, bubble tea, food catering, salted egg chips etc).
How does this affect investment returns?
Stock market returns are ultimately dependent on underlying business fundamentals – and here is the real problem.
Plenty of businesses that are initially successful are unable to continue reinvesting their profits back into the business.
Incremental returns on capital are low and get lower because competition drives down these returns – and having a small market really makes this situation much harder as it is not hard to raise capital.
For companies which are larger, the most common step is to go into property development which is in a reasonable business – but not one that generates high returns over the long run.
Take for example SPH – a company that was earning double digit ROEs (before its core business died). There is no way that property development can deliver the same returns leading to a discount in valuation.
There are really few businesses in Singapore that are able to compound their capital over the long run. Long time readers of the blog will know that I really like the three local banks because of their ability of compound capital.
However, these companies are certainly the exception to the norm in the Singapore market.