Senior Correspondent, Goh Eng Yeow, wrote an article “SGX, where have the investors gone?” He cited that economic slowdown and changing demographics are the main culprits. Perhaps these may be some contributing factors, but they have yet to fully explain why trading volume is getting much less. Personally, I think there is a confluence of factors that have been happening that lead to today’s plight.
(1) Low interest rate
First of all, we have been incubated in an extremely low interest environment for far too long. Banks are offering such a low deposit rates that it is no longer viable to keep money in the bank for a long time. These monies are starting to find its way into high yield instruments, such as bonds and notes, perpetual and REITs. Bonds & notes, unfortunately, do not involve the participation of stock remisiers as banks are the ones who brokered those deals. For perpetual and REITs, even though they appear to be trading instruments for the stocks dealers and remisiers, they are not really traded. In my opinion, many clients buy these securities to keep rather than to trade. These instruments offer a much higher yield and there is no point to trade. After all, many of these investments distribute dividends, some as frequent as every quarterly. It does not make sense to trade, especially when the most of these instruments were priced at least $0.70 and above during IPO. It is no point to trade based on a small change of 0.5 to 1.0 cents on a dollar compare to possibly 0.5 to 1.0 cents on a penny stock of say 20 cents per share. Surely, the quantum of these investments cannot be ignored in view of the amount and the number of notes and bond raised during the last few years. Even perpetual bonds were not lack of investors. As recent as just before Swiber defaulted in the bond coupon in end July this year, several perpetual bonds such as Hyflux was selling like hot cakes so much so that they upped the perpetual bond issue to $500m from the originally intended amount of $300m. The amount raised during the issue was even bigger than the company’s market capitalization of about $440m. Besides Hyflux Perennial Real Estate Holdings, Oxley Holdings, and Aspial Corp all managed to upsize their high-yield bonds due to a huge demand. Apart from these paper products, a big chunk of money could have also flowed into properties. Since the global financial crisis in 2008/2009, properties prices have been on the uptrend and the government had to introduce a series of curbs to contain the upward trend. It was only very recently that the trend seemed to have been arrested even though the transacted prices are still on the high side. So, in summary, there is actually a lot of money at the sideline waiting to pounce on opportunities that pop up from time to time. It is just that was not channelled via the stock market.
(2) Penny stock crash
Then there was the penny stock crash during October 2013, when stocks like Blumont Group, Asiasons Capital and LionGold Corp crashed, wiping out more than $5 billion in a single day on 4th October 2013. Within that week, a total of $8 billion had been wiped out. Surely, this had dented the retail investors’ confidence in trading stocks, particularly, the penny stocks. In the 12 months than followed, the trading volume and trading value shrunk by 60% and 30%. Apart from these stocks, many other unrelated penny stocks were also not spared. The crash had reduced many penny stocks to super penny stocks. So, even if the transacted did not change, the transacted amount would still be significantly lower.
(3) Minimum Trading Price (MTP) of 20 cents
The introduction of minimum trading price (MTP) of 20 cents on 1st March 2015 seemed to have taken place at wrong time and wrong place. News were then abound that the FED was considering increasing the interest rate, and this had taken a toll on the overall stock transaction volume. When the requirement was imposed, stocks have to be consolidated to meet this requirement. At that time about one-third of company stock prices on SGX were struggling below 20 cents. This requirement, forced many companies to consolidate their shares making them extremely illiquid. Even though grace periods are extended under certain circumstances, things cannot be changed overnight given that the global economy was only trudging along. Some company shares had to consolidate as much as 100 to 1 share. And after the consolidation, some share prices still fall significantly shrinking market capitalisation even further.
(4) Bond defaults
Before Swiber defaulted on its bond coupons, bond defaults were generally brushed off as isolated cases. The default by Pacific Andes Resources Development Limited (PARD) and PT Trikomsel was largely ignored. It was when Swiber defaulted that investors started to realise that the whole offshore and marine sector was at risk. Many of the related stocks started to tank and many have since become super penny stocks. Several stocks that were traded at around $1 or even more per share are now trading much lower, with some even trading below the MTP.
All in all many stocks are now at extremely low price. With a shrinking volume due to a confluence of these factors as well as extremely low price, it is no wonder than the trades via SGX keeps shrinking.
Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.