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Commentary: An ASX-SGX Stock Connect the way forward?

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Note: An edited version of this article was first published by Silvercliff Capital Partner Shiwen Yap in Venture Views.


The Singapore Exchange (SGX) will need to develop greater international connectivity in order for its equity capital markets to remain competitive, and forging a stock connect with the Australian Securities Exchange (ASX) could serve to boost both markets in a meaningful manner.

With the SGX-Bursa Malaysia (BM) stock market link already at risk of being discontinued, pursuing a tie-up with the ASX could be the natural step given the deep and long relationship of the countries across a number of levels. Arguably, the link would have benefited retail investors in both countries, despite the shadow of the CLOB debacle from 1999.

In an interview with the Singapore Business Review, Oriano Lizza, a CMC Markets sales trader, had argued that the “mentalities of investors remain strong in Singapore” and that its postponement or discontinuation would have minimal impact on investment flows in Southeast Asia.

With the SGX maintaining a primary focus on developing external flows through various initiatives (e.g. dual listing policy & dual-class share structures), Lizza observed: “I feel that there are no major concerns surrounding the move to halt/cancel the arrangement. The move is not so much directed to Singapore but more a move to restore Malaysia’s confidence in the new regime.”

An SGX-ASX Stock Connect could enhance the economic relationship of Singapore and Australia — as well as Australia’s connection to Southeast Asia — as well as augment the integration of Singapore and Australia’s capital markets, given both states are members of the Regional Comprehensive Economic Partnership (RCEP) and Comprehensive & Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Secondary markets playbook

Recent developments have seen the SGX seek to build out a private secondaries market ecosystem around itself, with a medium and long-term focus on growing its IPO pipeline in a sustainable manner, as well as introducing dual-class shares. However, this has raised concerns of a ‘race to the bottom’ and the dilution of investor protections.

Its associated private financing platform CapBridge announced plans to utilise blockchain technology in a private secondaries exchange called 1exchange, while it recently partnered with Third500 in a move meant to build a pre-IPO (initial public offering) and an IPO market for emerging growth companies.

Meanwhile, equity crowdfinance platform FundedHere, which is partnered with the SGX, has launched FundedX, a secondary broker platform for trading shares in high-growth startup ventures.

Estonia’s Funderbeam is also in the process of negotiating with the Monetary Authority of Singapore (MAS) for the appropriate licensing, while private investment platform Fundnel is exploring the viability of a private secondary exchange.

Data up to October 2017 of global limited parnter (LP) fundraising. Source: PitchBook

These developments also reflect the evolution of the liquidity landscapeworldwide. Secondary market platforms have emerged as channels for LPs seeking to manage and rebalance their portfolios, even as abundant capital allows companies to stay private for longer.

With private market investors such as family offices, pension funds, state funds, foundations, endowments, venture capitalists, private equity funds and other institutional investors evolving their exit strategies, stock exchanges and other market participants will have to adapt to this shifting landscape.

China’s stock market links

Hong Kong’s skyline at night.

China has committed to opening up its capital markets over the next few years. Peter Ganry, the Head of Equity Strategy at Saxo Bank, has observed: “The Shanghai-Hong Kong Stock Connect programme launched on November 17, 2014, as the first direct channel for foreign investors to invest in mainland China A-shares, but only eligible stocks under the programme. Later, on December 5, 2016, the Shenzhen-Hong Kong Stock Connect was launched, expanding the A-shares offering to international investors. “

“The two Stock Connect lines to mainland China through Hong Kong were part of an orchestrated effort by the Chinese government to open up their capital markets. The main goal for China is to become the world’s new superpower with corresponding global influence. This can only be achieved if the world can invest in the country and the currency is free-floating,” he adds.

While the HK-Shenzhen Stock Connect has seen weak demand, the HK-Shanghai Stock Connect has seen various capital market stakeholders in China reap the benefits. The stock connect scheme has gained traction over the years, benefitting both retail and institutional investors as well as Greater China issuers.

However, as of July 2018, mainland Chinese stock exchanges have ruled out further expansion of these stock connects amid competition with Hong Kong for public listings as the bourses of Shanghai and Shenzhen chip away at the HKEx. But some, such as Securities and Futures Commission chairman Carlson Tong Ka-shing, maintains that Hong Kong’s main rival in this domain is Singapore.

At an industry event earlier this year, Tong commented: “The stock exchanges of Shanghai and Shenzhen have never been competitors of Hong Kong as we always cooperate with each other. Rather, Singapore is a competitor of Hong Kong.”

Performance of Greater China market for Q2 2018. Credit: EY.

The Hong Kong Exchange (HKEx), which was ranked as the fastest growing bourse in Asia, has emerged as the largest IPO market in the Indo-APAC region and on a global basis. And the HKEx is unlikely to lose ground to the SGX anytime soon.

Moreover, reforms that enable dual-class share structures (DCS), referred to as weighted voting rights in Hong Kong are also expected to drive an increase in mainland Chinese technology firms across a number of sectors listing there to trade their H-shares.

China plans to link the Shanghai bourse with London, with the stock connect modelled on the mechanisms seen in the stock connects linking Hong Kong to Shanghai and Shenzhen.

While it may provide a bridge to the capital markets of New York, at least one observer has opined that the London-Shanghai stock connect will not yield the same impact as those connected to Hong Kong.

Beyond the seeming lack of investor interest and awareness — the Shenzhen and Shanghai stock connects reportedly see less than 15% of their daily quota being used as at April 2018 — brand recognition of companies, time differences and continued capital controls, coupled with information asymmetry between regulators in London and Shanghai will reduce the impact of such a move.

Columnist Nisha Gopalan, whose prior experience includes stints at the Wall Street Journal and Dow Jones, argues: “Two words explain why a London Connect is problematic: home bias.Once you allow investors on both sides to trade in each other’s markets, the question becomes: Has your average Londoner heard of Kweichow Moutai Co., the distiller of baijiu that’s now more valuable than McDonald’s Corp.; or how famous among Shanghai retail investors is BP Plc, one of the largest stocks on the FTSE 100 Index?”

“The biggest of the FTSE components, HSBC Holdings Plc, is a big name in China. But mainland investors seeking a stake in the largest foreign bank in the mainland can already do so by buying its Hong Kong-traded shares through the Shanghai or Shenzhen Connect. In fact, they already account for 6 percent of HSBC’s Hong Kong-listed market value.”

“The reverse holds true for international investors wanting mainland stocks: Why buy Moutai via the London Connect when it’s already available through Hong Kong, a free market open to traders worldwide?”, she adds.

Christopher Beddor of Reuters Breakingviews notes: The plan is to create a British complement to existing “stock connect” programmes linking Shanghai and Shenzhen bourses with Hong Kong’s exchange — the latter of which operates outside the mainland’s capital control regime. Those conduits pulled a net $81 billion of mainland money south into the special administrative region in the nearly three years after the first scheme launched in 2014, according to exchange operator data; the “northbound” links to mainland markets together recorded nearly $70 billion of turnover last month.”

“Such successes helped MSCI justify allowing mainland stocks into its benchmark emerging markets index. The question for financial institutions is how many new transactions the London leg might generate. It should allow Chinese investors to trade more genuinely foreign companies: in theory London offers better opportunities for diversification than Hong Kong, where most listed firms are either Chinese or heavily dependent on China.”

Beddor notes that mainland Chinese investors are ”less enthusiastic about foreign stocks than tangible assets like offshore property”, while international institutions can access China’s capital markets via Hong Kong, meaning a London channel may be marginal.

Moreover, the London-Shanghai link is not indicative of substantive capital market reform by Beijing but is more symbolic in nature.

Strategic calculus

View of the Indo-Pacific. Credit: Wikimedia Commons.

The SGX will have to earn buy-in and trust from foreign stock exchanges, especially the ASX, if it wants to tap their liquidity. Given the larger geopolitical and socioeconomic context, an ASX-SGX stock market connection makes sense in enhancing integration of the capital markets of the Indo-Pacific , also known as the Indo-Asia Pacific (Indo-APAC).

Canberra seeks to deepen its ties with Southeast Asia while maintaining a balance of power in the region; it relies on the US for its security but trade with China underlies its economic prosperity. Therefore, it is seeking tocalibrate and sustain a balanced approach.

Canberra’s Foreign Policy White Paper, published last year, stated: “To support a balance in the Indo-Pacific favourable to our interests and promote an open, inclusive and rules-based region, Australia will also work more closely with the region’s major democracies, bilaterally and in small groupings. Our alliance with the United States is central to Australia’s approach to the Indo — Pacific. Today, China is challenging America’s position.”

Since October 2017, the SGX has announced collaboration listing agreements with the Tel Aviv Stock Exchange (TASE) and the NASDAQ. In December 2018, it is due to launch a joint trading facility with India’s National Stock Exchange (NSE) by December, according to a report by India’s Business Standard, though negotiations remain ongoing.

With the city-states’ bourse eyeing global partnerships and expanding beyond the IPO space, as well as maintaining offices in Beijing, Hong Kong, London, Mumbai, Shanghai, Tokyo and Chicago, its chief executive, Loh Boon Chye has not ruled out exploring potential opportunities to work with the ASX Loh’s predecessor, Magnus Bocker, had tried to acquire the ASX in an A$8.35 billion in 2011. However, this was scuttled by the Australian government in Canberra.

Forging a stock market connection with the ASX could synchronise with this desire — and avoid the political friction of a merger — as well as build upon existing efforts at the SGX, particularly given the recently announced partnership with multi-currency trading platform M-Daq.

Politically, it strengthens the links of Australia’s capital markets to Southeast Asia and Asian markets as a whole. The move could also make up for the decommissioning of the ASEAN Trading Link, which was redundant due to brokerages already maintaining their own links to counterparties prior to this.

From a regulatory perspective, the common origin of Australian and Singapore regulations in British common law will also make developing the contours of a stock market connection easier.

Australia’s strategic interests in the formation of the Indo-Pacific Quad, which to date lacks tangible economic weight and is strongly focused on the military element, could also benefit from having a link to an Asian financial centre that connects its more deeply to Southeast Asia’s capital markets.

SGX Assessment

Extract from “Singapore IPOs lag Asian peers as homegrown firms rush to list abroad”, Singapore Business Review. Information from Thomson Reuters.

Data from StockMarketClock indicates the exchange maintains an aggregate market capitalisation of US$766.53 billion as at March 2018 and ranks as the 21 largest stock exchange globally, with a market capitalisation to GDP ratio of 259.22%. This gels with claims by senior executives of the bourse about its strong performance relative to the size of its domestic market.

In terms of liquidity, while trading volumes have trended upward since 2015, the fact remains that international connectivity and stock market links are are what will drive a recovery in the equities market of the SGX, often described as lacklustre and moribund by market observers.

Monthly securities turnover of SGX in SGD from January 2015 to July 2018. Source: SGX

In March 2018, the SGX reported that the average value of securities traded in February was S$1.7 billion, a 22% increase from the same period last year and the highest since May 2013.

However, this tends to be concentrated around large listed corporates on the bourse. R. Sivanithy, an editorial consultant with The Straits Times, noted: “This is welcome news, especially to the broking industry which anecdotally, requires daily turnover of around $1 billion to break even. It might therefore be tempting to conclude that the local stock market is in good shape — certainly better than it was a year ago, at least.”

“Yet one suspects that if volume is broken down to show which stocks have had the largest gains in liquidity, the data would reveal a concentration in the 30 Straits Times Index (STI) constituents, and only a marginal improvement in the rest of the market.”

Monthly securities turnover of SGX in SGD tracked from July 2009 to April 2014. Source: SGX
Monthly securities turnover of SGX in SGD tracked from May 2014 to May 2018. Source: SGX

In addition, concerns still surround the SGX’s regulatory functions. In an account by Splash247, Julie O’Connor, an Australian who has campaigned for greater transparency among Singapore-listed entities, opined a greater need for equity researchers and investigative journalists to contribute to enhanced investor protection in Singapore.

She elaborated: “My advice to anyone thinking of investing either in shares or a business in Singapore, is if you don’t have the funds to take on a legal battle in Singapore, you are putting yourselves at risk. You may not be able to rely on the regulatory bodies to assist you, should trouble arise. Also, bear in mind, it is very risky to blow the whistle whilst in Singapore.”

The Singapore-Australia relationship

Given the current political climate in the wider region, an SGX-ASX stock market connect could be compelling, given pre-existing relations between the two countries, which the Australian High Commission in Singapore characterises as “…one of Australia’s closest and most comprehensive in Southeast Asia.”

Given the “strong and vibrant relationship” that Singapore shares with Australia, and which has been quietly enhanced since 2016, a stock market connection could underpin the strengthening of Austalia’s connection with Southeast Asia, as well as their joint partnership in the CPTPP and RCEP blocs. Beyond such a stock connect potentially boosting liquidity across both markets, it also aligns with the Singapore-Australia free trade agreement, SAFTA, which was upgraded in December 2017,

Data from Singapore Ministry of Trade and Industry indicate that bilateral trade reached S$18.2 billion in 2016. Australia was Singapore’s 13th largest trading partner in 2016, while Singapore was Australia’s seventh largest trading partner.

The city-state is also reportedly Australia’s fifth largest investor, with an estimated A$98.9 billion (S$102 billion) worth of investments in real estate, telecommunications, tourism and utilities sectors across Australia. Meanwhile Australia’s foreign direct investment (FDI) into Singapore is S$15.5 billion, mainly in the financial and insurance services sectors.

With the transformation of China’s capital markets, the SGX will have to evolve a response and develop a deeper niche — as it has in the REIT, the business trust and property space — in order to remain globally competitive and avoid the risk of its securities market becoming an investment backwater.

SGX-ASX dynamics

Back in 2010, The New York Times noted about the SGX-ASX merger, which later fell through, that: “A Singapore-Australia union makes some sense for both exchanges. Asia lacks a big non-Chinese trading platform. Both countries face outside pressure.”

“Singapore has been losing China-related listings to Hong Kong. Australia struggles to benefit from the Asia boom, as it is culturally and physically remote. Together, they offer investors access to 2,700 companies from 20-plus countries, and the world’s second-largest grouping of resources stocks.”

A stock market connect avoids much of the political friction that a takeover could generate while also building on existing economic relationships and addressing matters of concern related to Australia’s interest in the Indo-Pacific.

In an email exchange with Venture Views, Dr Alex Frino, a capital markets researcher who argued in 2011 that the ASX-SGX merger failing served to negatively impact Australian interests opined: “An ASX-SGX stock market Connection-style arrangement would be a way in which the benefits of an outright merger could be harnessed without actually attempting a politically contentious merger.”

“ A key benefit of such an arrangement would be the ability of Australia’s huge pool of superannuation capital — the world’s fourth-largest pool of pension funds — to capitalise on global opportunities through the SGX.”

FTSE ST All-Share Index (dark blue) and FTSE Straits Times Index (purple) compared to the S&P/ASX 200 Index (light blue) and S&P/ASX 100 Index (orange) from 4 September 2013 to 4 September 2018. Credit: WSJ

Dr Frino has argued that while the ASX has excelled at attracting Australian domestic capital and savings, it has not strategically focussed on attracting international capital through international order flows, the SGX excels at attracting and distributing international capital flows.

ASX technology success & future competition

Due to its strong domestic franchise, the ASX is disinterested in merger and takeover activities and may be unlikely to pursue partnerships, given the failed merger with the SGX in the 2010/2011 period.

For instance, in the mid-2000’s it withdrew from an agreement with the SGX for the cross-trading stocks that it attributed to cost reasons. Signed in 2000, the deal was meant to increase liquidity and interest but failed to live up to expectations.

Recent years have seen the ASX’s aggregate market capitalisation grow past the US$1 trillion mark to reach US$1.46 trillion as of March 2018. Data from StockMarketClock ranks it the 16th largest stock exchange in the world with a market capitalisation to GDP ratio of 98.04%.

Moreover, its emergence as a key listings venue for technology enterprisessince the listing of Xero Ltd. in 2012, with insights for the SGX. 2017 also saw it perform robustly, with the largest number of ASX listings since the global financial crisis (GFC) and strong performance overall with 115 companies successfully listed, compared with 94 in 2016.

ASX IPO performance for 2016 and 2017. Credit: OnMarket
ASX technology cluster. Credit: ASX

Since 2015, US tech startups from Silicon Valley have been heading to the ASX for public listings and has seen the ASX compete to establish itself as the ‘Nasdaq of the Asia Pacific’.

It mainly targets small and mid-cap tech firms and in December 2017 predicted that 2018 would see a rush of foreign tech listingswith valuations of between A$100 million and A$1 billion.

In an exchange with the Australian Financial Review, Principal and partner at Carthona Capital Dean Dorrell noted: “There is a large pool of capital searching for growth stories, and a long history of funding early-stage companies on the ASX, although most have been miners until recently.”

He added, “We now have tech-savvy, local, listed-fund managers and a series of successful tech floats recently. NASDAQ requires companies to have a much bigger market cap and the ASX is getting a global reputation for being a good place for foreign companies to list.”

Technology and Telecoms stock performance on ASX as at January 2018. Credit: Bloomberg & ASX.

But contrary views suggest these tech firms chose an ASX listing to access cheap capital, rooted in the abundant pension funds and other savings that underwrite the liquidity of Australia’s securities market. The listing of many pre-profit tech stocks has also seen counter-intuitive ‘land-grab investing’ affect the ASX investment community.

This sees some market participants (i.e. venture funds) prioritise the growth of market share over entrepreneurial ventures generating healthy revenues and being profitable. The success of prior technology enterprises which have generated substantially high pay-offs does validate this growth strategy to a large extent.

However, the SGX’s collaborative listings agreement with the Nasdaq, announced in October 2017, as well as the introduction of dual-class shares for SGX Mainboard-listed firms, could also erode the ASX’s advantage in attracting technology listings in the longer term.

The ASX’s lack of a specific growth board for emerging enterprises — it maintains only a single board , a move that offers benefits and disadvantages— also means that emerging companies have to compete with much larger and established firms in terms of building and sustaining institutional and investor interest, as well as securing media and analyst coverage.

Credit: SGX

An SGX-ASX Stock Connect?

A stock market chart on a computer.

The SGX-BM stock link would reportedly have benefited retail investors across Singapore and Malaysia, with CIMB Research indicating that the trading link would have encouraged more cross-border research reports and greater retail liquidity, replicating the Hong Kong-China stock connect in terms of “higher cross-border trading and investment flows”, boosting trading turnover across both markets.

Looking at precedent, the main beneficiaries of the Shenzhen-Hong Kong Stock Connect were institutional investors, who leveraged the gap between share prices. One observer noted that it served to “boost stocks with good fundamentals that now offer greater liquidity”.

The entry of mainland Chinese investors into Hong Kong’s stock market, beyond simply boosting trading volumes and overall liquidity, increased overall volatility across both Shanghai and Hong Kong equities and distorted share prices.

Looking at the anatomy of China’s growing equities market, its increasingly sophisticated consumers will drive the growth of opportunities in environmental services and consumer brands, and new services such as healthcare, travel, entertainment and media sectors.

The Shanghai-HK Stock Connect, besides leaving a divide that Singapore has yet to bridge, has also led to higher valuations and stock market volatility for HK-listed firms.

Meanwhile, the Shanghai-London stock link will see specific LSE Mainboard firms issue Chinese depository receipts (CDRs), with Shanghai-listed firms able to issue global depository receipts (GDRs) on the London bourse. But there is a risk of the stock market link being marginal — it could fail to generate significant transactions — and Beijing continues to remain concerned over capital outflows that could shift liquidity away from Chinese A-shares.

Unlike Singapore’s securities market, Australia’s equity capital markets are underwritten by the support of its pension funds (i.e. superannuation funds), which are cited by some observers in the UK as a model to follow.

A March 2018 report by Business Insider noted that superannuation funds owned closed to half of all shares issued in the equity capital markets of Australia from less than 40% in 2013.

This mirrors developments in Japan, which see’s Japan’s main pension fundbeing major underwriters of its liquid equities market. Since enabling its pension funds to invest in equity capital markets,the Japanese public sector has emerged as a major market participant in Tokyo’s securities market.

Credit: Business Insider.

Beyond an ASX-SGX Stock Connect connecting the 16th and 21st largest stock exchanges global exchanges, it could add further weight to the robust economic ties between the two countries. It augments the capacity of the Australian investment community to access the opportunities available through Singapore as a financial centre set to rival London.

The move also offers Australian technology enterprises and their founders access to a well-positioned Asian capital platform that permits them to retain control of their companies (i.e. dual-class shares) while still being able to access Australian capital pools.

An ASX-SGX Stock Connect could also leverage the ‘East-West channel’ that the SGX has created through its co-listing agreements with Nasdaq and the Tel Aviv Stock Exchange (TASE), as well as the collaboration with India’s National Stock Exchange due for the year end. In addition, it could amplify the appeal of their capital markets as capital-raising destinations for large enterprises within the CPTPP/RCEP sphere.

There is a risk of an Sydney-Singapore stock connect failing to come to fruition, given the failure of the ASEAN Trading Link and the history of the failed merger between the two stock exchanges. There is also the risk that it could fail to generate any substantive developments across both markets and fail to live up to its potential.

But a successful Sydney-Singapore stock market link could strengthen the competitive positions of the ASX and SGX relative to the likes of the Hong Kong-Shanghai-Shenzhen axis that has emerged, as well as add an economic underpinning to the Indo-Pacific Quad.

Given the shared strategic perspective of Canberra and Singapore, there are many compelling reasons for Singapore and Australian regulators, as well as the bourses involved, to explore such a partnership if feasible.

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