The ground beneath the world of capital funding is shifting.
Local bourse operator, Singapore Exchange Limited (SGX: S68), highlighted several major developments within its industry in its latest annual report which investors should take note.
These trends may last for years, and not months. Our actions in response to these winds of change will be important.
1. Companies remaining private longer
In its fiscal 2019 annual report, SGX noted that:
“Numerous sources of funding are now available to companies, which is delaying their need to tap the public markets.”
Traditionally, stock markets function as a source of capital for new companies. Today, however, public markets are competing with the abundance of private capital that is readily available for start-ups. SGX added that:
“With such competitive capital, Singapore and regional companies could remain private and tap the private markets for a longer time. While the need for a liquidity event remains, there is no longer any urgency.
As such, companies are delaying their IPO until private funding dries up, or until they reach a significant size.”
In effect, companies are choosing to remain private longer compared to the past.
The impact is being felt around the world. The number of publically-listed companies has been falling. According to the latest McKinsey & Company report, the number of listed US companies has fallen from 5,100 to 4,300 since 2002.
In response, SGX has invested in Capbridge, the operator of 1exchange (1X), the world’s first regulated private securities exchange.
2. Investors turning passive
Passive investing in the US, using inexpensive index funds and exchange-traded funds (ETF), has eclipsed actively managed funds this year.
According to ETF.com, assets under management by US ETFs crossed the US$4 trillion mark earlier this year. We should expect the same trend to play out in Asia next. SGX said:
“Another trend driving financial markets is the growth of passive investing. In Asia Pacific, PwC [Price-Waterhouse Coopers] expects passive investing to grow by more than 10% annually to US$5 trillion in 2025.
The growth of passive investing will lead to higher demand for portfolio risk management solutions using equity index products on exchanges.”
For its part, SGX has partnered Factset Research Systems (NASDAQ: FDS) to launch thematic indexes covering Asia healthcare, global cybersecurity, global robotics, Asia technology, and global robotics and artificial intelligence (AI).
These indexes can then be licensed to ETF providers.
Case to point: in late October, Nikko Asset Management licensed the SGX’s iEdge-Factset Global Internet Index which will be listed as an ETF.
3. Competition is global, not local
Today, investors can access any stock market around the world at the click of a mouse.
Said another way, SGX may be the sole stock exchange operator in Singapore but it is not the only platform where investors buy and sell stocks. As such, the onus is for SGX to carve out its own niche.
In its FY2019 annual report, SGX noted that it has offices in 17 cities around the world and is recognised and regulated by regulators from several major countries:
“We are regulated by the Monetary Authority of Singapore, the US Commodity Futures Trading Commission, and the Hong Kong Securities and Futures Commission.
We are also recognised by the European Securities and Markets Authority and the UK Financial Conduct Authority in various capacities. Our ability to meet standards on a cross-border basis is a competitive advantage that enables us to achieve our growth objectives.”
In other words, SGX cannot afford to rest on its laurels. The company will have to continue looking for its niche in its industry and keep integrating itself with key players around the world.
Get Smart: Your behaviour will make the difference
The selection of stocks available for investors is declining. And passive investing is gaining. That is what is happening.
But your behaviour is the key factor in determining whether or not you will be a successful investor.
As I explained in last week’s edition of Get Smart, I believe that the investor’s own behaviour is far more important than the choice of investment vehicle that he or she uses.
In simple terms, using passive funds does not make you a passive investor, especially if you actively trade in and out of the fund. The positive characteristics of an index fund will be rendered useless by the actions of an active trader.
In my view, maintaining your discipline to hold for the long term, whether you are investing in stocks directly or using passive funds, will be the key determining factor getting the results that you desire.
As such, think and act always with the long term in mind. If you can do that, I reckon that your future self will thank you.
None of the information in this article can be constituted as financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. Disclosure: Chin Hui Leong owns shares in SGX and Factset Data Systems.