Corporate Finance

ANALYSIS OF THE SINGAPORE STOCK EXCHANGE (SGX)
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Definition
Market efficiency is defined as the degree to which stock market and other stock market reflect all available relevant information. Efficiency generally signifies a degree of performance that shows a process that uses the lowest amount of inputs to create the greatest amounts of output CITATION Inv16 l 1033 (Investopedia, 2016). It shows how well money that is invested in each product produces a particular outcome or revenue. There are various types of efficiency. Informational efficiency is the degree to which market prices correctly and quickly reflect information and thus the true value of an underlying asset CITATION Inv16 l 1033 (Investopedia, 2016). Operational efficiency entails a combination of processes or procedures, machinery, technology and people working to optimize and promote the growth of a business. The Efficient Market Hypothesis entails all available information such as public information, previous prices in the market and current prices which reflect all available information in the market
There are three forms of efficient market hypothesis ranging from weak, semi-strong to strong. Weak form stipulates that knowledge of past volume and prices in stock cannot be useful in the prediction of future prices of stock CITATION Dan10 p 23 l 1033 (Dealbook, 2010, p. 23). It is generally useful for people who are interested in the development of investment strategies basing arguments on previous or histological prices and data.

The semi-strong form is the most widely argued. It entails past data as well as current information that is available to the public CITATION Asw10 p 21 l 1033 (Domandarail, 2010, p. 21). Investors compare both and choose their investment paths. The Strong form holds that investors with any form of prior and privileged information cannot use this knowledge to make an investment to make an excess return.
The Singapore Capital Market.
The Singapore Stock Exchange started in 1999 December the 1st. It is an investment holding company. It is the major and main exchange platform for shares and stocks, bonds, debentures, and exchange traded funds in Singapore and it is highly diversified. Very strong external, international position, with reserves at 100% of the total GDP, implies that Singapore is among the three countries in the world outside Europe and the UK, to sustain high sovereign rate by Fitch S&P and Moody CITATION Geo12 p 23 l 1033 (Howic, 2012, p. 23). On its history, it came into existence as a result of a merger between the Stock Exchange of Singapore and Singapore International monetary fund to form The Singapore Stock Exchange.
There is a total of 378 holders with an outstanding 85% shares. The total shares held are 44,974,088 with the main holder being Southeastern Asset Management. It has different divisions such as Electronic Trading System, Derivative trading, and clearing as well as securities trading with all stocks listed on Singapore Stock Exchange.
In comparison with other stock markets Singapore Stock Exchange has come a long way. In comparison to New York Stock Exchange, NYSE has a larger and more global bearing than Singapore Stock Exchange. Both NYSE and SGX are alliances between two or more companies. NYSE merged with Euronext in 2005 creating the very first ever global exchange. Whereas SGX is a local merger between Stock Exchange of Singapore and Singapore International monetary fund to form The Singapore Stock Exchange CITATION Bou16 l 1033 (Boundless, 2016). To add onto this a 5% stake of SGX was purchased by Tokyo Stock Exchange. In terms of statistics, as of 2007, the number of listed companies in NYSE was 2122 while that of SGX was 688.
In comparison with regional markets SGX is a major player in the Asian market competing with Hong Kong Stock Exchange as well as Tokyo stock Exchange and Thailand Stock exchange. The SGX is regarded as the gateway to South East Asia as it has maintained the position of leading market for a long time CITATION Ken89 p 12 l 1033 (Ewert, 1989, p. 12). However emerging markets such as Thailand Stock Exchange are proving to be viable competitors. In 2014 Thailand overtook SGX as the leading stock exchange market in South East Asia, reducing investor confidence in SGX. The competitiveness in the region will lead to greater market policies and more opportunities for investors.
3. Research reports on measures of market efficiency
In recent years (10-15) years, there have been a lot of changes and improvements in the SGX which has greatly and positively lead to a positive impact and growth of the SGX. The SGX has been actively looking for mergers and partners in other markets so as to grow its presence. For example, Tokyo Stock Exchange bought a 5% stake in SGX and this has helped open up SGX to more chances as it is associated with another reputable company. It has also expressed interest in cross-border initiatives such as an interest in purchasing 26% share in Bombay stock exchange, a memo of understanding with Abu Dhabi Security market and an interest in Bursa Malaysia. There has also been a development of an Alliance called Joint Asian Derivative Exchange (JADE), which is a joint venture between Chicago Board of Trade (CBOT) and SGX. This has opened up more markets for SGX.SGX has also shown an increasing interest in Chinese listing as it can be seen by recent collaborations with provincial and municipal authorities of China such as LiaoningCITATION Ant06 p 12 l 1033 (Carter, 2006, p. 12).
In order to increase listings and maintain a higher competitive notch, the SGX in 2007 proposed a focus on the main board on quality and size transformation into a new liner and sponsor-supervised board so as to target foreign and local companies. This has greatly contributed to the formation of partnerships as well as cooperation’s with other markets since the decision-making body is now more focused.
Part B.
4. Implications of market efficiency.
There are various implications of market efficiency. The main implication is that it is difficult to beat the market and expect returns that are above average. Market efficiency enables potential investors to make sensible investment choices. One of the ways is to take advantage of an abnormality that occurs in the market CITATION DLe06 p 11 l 1033 (D. Leigh, 2006, p. 11). For example, if there are sudden shock and stock prices reduces one can either take the risk and buy more stock of the said firm or sell his/her current shares. If the company is a reputable one then one is guaranteed to make a good profit once the stock prices rise once more. If the stock prices do accurately reflect the company’s future performances then efficient investment and allocations of resources shall take place CITATION Bou16 l 1033 (Boundless, 2016).
As previously defined the Efficiency Market Hypothesis defines an efficient stock exchange market as one that rapidly reacts to information as it is received. In this concept, there are three aspects of efficiency CITATION Ken89 p 14 l 1033 m Ben13(Ewert, 1989, p. 14; Graham, 2013). These are:
Operational efficiency
This is where the participants (buyers and seller) transact at the cheapest cost within the market. It also deals with the speed at which transactions occur. This is because when transactions occur at a faster rate it means that information within the market is readily available thus saving on costs CITATION Wan06 p 54 l 1033 (Wang, 2006, p. 54). This is as opposed to when stock price changes take a long time to occur thus prolonging the transaction periods making the entire process not just time-consuming but also expensive.
It is argued that any action that reduces transaction costs enhances the allocative efficiency of the stock market. Participants are also able to receive information more effectively and thus the market operates in a better form. In addition in an operatively efficient market, there is high liquidity thus there; this is majorly due to the large number of transaction that occurs in the market. As a general rule such a market is also orderly CITATION Gla16 p 12 l 1033 (Yeo, 2016, p. 12). The regulators of the stock market also ensure that there is a competitive environment. Competition fosters productivity within the market.
Allocative efficiency
Whereas the operational efficient stock market is based on the speed of transaction the allocative efficient stock market is based on the disbursement of resources according to the risk of a particular investment CITATION Pia13 l 1033 (Pariyada & Sorasat, 2013). This is to say that vast amounts and sources of funds are directed to fast growing industry stocks while for the slow growth industries fewer funds are directed there. In many markets, the allocative efficiency determines the stock prices based on the rates adjusted for risk. This efficiency is based on the Iranian Stock Market thesis.
Pricing efficiency
This form of efficiency deals with how reactive to new information the stock prices are. In a market that is price efficient, then the stock prices reflect all the relevant information in the market as at that particular time CITATION Wal09 p 76 l 1033 (Walters & Authers, 2009, p. 76). For an illustration, if there are two stocks. The stock one has very dynamic prices and keeps changing while the other is stagnant and the prices change after a week. The second stock’s price is one week stale and thus not responsive to the information within the market.
This efficiency brings in the concept of news. Whereas information is what the participants already have, the news is random and unpredictable. It can be good or severely detrimental to the interests of the participants. When there is a reaction in a price efficient market due to any news received, it represents the rational expectations of the efficient market hypothesis. This is where based on judgment the participant act in the most logical way CITATION Dav09 p 56 l 1033 (Pogue, 2009, p. 56).
Implications of market efficiency
The Efficient Market Hypothesis propounds that abnormal profits are not probable based on the current information in the market and how efficient and responsive the information makes the market.
This assumption holds a lot of water for the market participants. For the market regulator, it provides the basis for making accurate policies and measures to govern the market. They need to ascertain how far off the market is from being perfectly efficient. If all prices are correct and reflect the information available in the market then the regulators can acquire enough correct data to steer the market into efficiency CITATION Ben06 p 12 l 1033 (Graham, 2006, p. 12).
On investors
For the investor, the Efficient Market Hypothesis gives a shelter against making above normal profits or losses on an investment or risk. This is because the market prices are considered to be accurate and correct and the expected returns from transactions involving any invested can have its expected return calculated.
Firms
In the case of firms then the hypothesis give the firm’s analyst the assurance that the stock market provides accurate information. This information includes the cost of equity. Such data allows forms to be able to effectively allocate resources and also to project the amount of additional capital that the firm can raise through the stock exchange marketCITATION Har13 p 21 l 1033 (Herring, 2013, p. 21). Due to proper planning and the ability to project the required capital to be sunk and it source then a firm’s projects does not delay.
Firms are also enabled to the merger and be acquired in a fair way. The efficient market also prevents firms from considering conglomerations as their only way to reduce shareholders’ risks. Conglomeration involves more costs and business risks than allowing for portfolio diversification of shareholders CITATION Dow79 p 12 l 1033 (Jones-Irrwin, 1979, p. 12).
5. Period comparison of SGX.
The Singapore Stock Exchange has been over the period described as the Asian gateway for the investors in and out of Asia. However, in the recent years, the SGX has seen a lot of declines. It is losing drastically to the upcoming exchanges such as the Hong Kong Exchange and the Japan next and Thailand’s exchanges which are relatively small as compared to it CITATION Sin09 l 1033 (Exchange, 2009).
The SGX has lost out to the Shanghai Stock exchange (SSE), Tokyo Stock Exchange (TSE) and more recently the Thailand Stock Exchange in terms of investor interest and number of listings. For an exchange to flourish and to progress in terms of growth it has to attract new Initial Public Offers (IPOs) as well as fan and attract investor interest in the exchange. This is exactly what the SGX has not been able to accomplish over the recent years CITATION Sin09 l 1033 (Exchange, 2009). The last major IPO was the MappleTree, a real estate concern unit of the investment company, listing of 2013. This is in contrast to the relatively smaller Hong Kong stock exchange which consistently lists as among the top five exchanges globally in terms of business and listings.
The reasons for the underperformance include a tarnished image and the loss of investor confidence in the exchange. In 2013 the exchange lost over 8 billion dollars in investment money. Investigations into this are still ongoing and no much progress has been made since there are no existing likely factors that might have contributed to the enormous losses that were experienced. The SGX currently has fewer than 776 listings and not much improvement has been made.
In terms of volumes of trade, the SGX seems to also be lagging behind. This can also be attributed to the number of listings it contains and the loss of investor confidence in the market. This loss of confidence has contributed largely to the exchange’s inability to attract new investors. By June of 2016, the volumes ranged at 996410 which was a 26% decline compared to the same years, totals CITATION Mar09 p 24 l 1033 (James, 2009, p. 24). Regardless of the decline, this was a 47% increase as compared to the 2015 reports of the SGX’s volumes of trade.
In total, the SGX has reported a securities market turnover of 22.5 Billion Singapore dollars. This is still low when compared to other exchanges within the same region.
As of past years, the SGX has seen two more IPO offering in the year 2016 than in the previous years. For instance, in 2015 it only had two Initial Public Offering Listings. As a result of the 47% increase in business, the exchange has been able to raise a whopping 1.6 billion in terms of funds. This is a relatively large increase in amounts raised by the SGX. It has gone through a lot of tribulation in the past but has been able to conquer each adversity and manage to run its operations as smoothly as it can CITATION Vir16 p 11 l 1033 (Vaghela, 2016, p. 11). Despite this tremendous increase, it is still lower than other exchanges in the region. The market still has a lot of potentials. All that has to be done is to ensure that the market is an s close to efficiency as is reasonably possible.
6. Conclusion:
The efficiency especially the allocative efficiency of the market has improved over the years. This increase in efficiency can be attributed to the measures the regulators of the market have taken to combat its flailing state. The Singapore Stock Exchange is seeking to profit by the introduction of stock that are of high demand in Asia as well as other parts of the world such as Europe. For example, in this year it aims at introducing new shares and futures. The increase in demand will improve the allocative efficiency of the exchange. In terms of funds to be raised the regulators are also looking at ways of making the market price efficient to ensure that fluctuations in stock prices do not make the market too risky to invest in.
References
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