The counter could potentially give up much of its gains since unveiling its first-half results

 

SHARES of Singapore Exchange (SGX) fell as much as 6.3 per cent or S$0.85 to S$12.62 on Friday (Feb 14) as investors were less than impressed with the initial proposals to revive the equities market.

 

The counter closed at S$12.69, down S$0.78, or 5.8 per cent, on turnover of 7.2 million shares.

 

Citi Research downgraded its call on the SGX to a &ldquo sell&rdquo on Friday, as it expects the recent optimism priced into the counter&rsquo s valuation to unwind. It also lowered the price target of the stock to S$11.90.

 

The bank&rsquo s downgrade come a day after the equities market review group of the Monetary Authority of Singapore (MAS) announced its first set of measures.

 

The review group had proposed introducing tax incentives to attract enterprises and fund managers to list in Singapore. It also aims to encourage the launch and growth of funds with substantial investment in local equities.

 

The first set of measures has already been submitted to Prime Minister and Minister for Finance Lawrence Wong. A fuller update on these measures will come on Feb 21.

 

The group will continue to work on its next set of measures to foster the longer-term development and sustainable growth of Singapore&rsquo s equities market, and provide more details in the second half of this year.

 

Citi analyst Tan Yong Hong said that although the research house said previously that SGX&rsquo s 12-month forward price-to-earnings multiple of 23.4 times reflected optimism over the recommendations of the review group, commentaries that advised against investments by GIC and the Central Provident Fund in domestic equities &ldquo likely disappointed markets&rdquo .

 

Second Minister for Finance Chee Hong Tat, who chairs the review group, said that &ldquo GIC&rsquo s mission is to preserve and enhance the international purchasing power of Singapore&rsquo s reserves&rdquo .

 

He said the sovereign wealth fund should thus not be required to have a specific allocation to local equities if such investments could result in lower overall returns, as doing so would not be in the best interests of Singapore and Singaporeans.

 

Analysts yesterday after the review group&rsquo s proposal also said that tax incentives likely won&rsquo t address fundamental issues facing the Singapore market, as decisions behind where a company chooses to list will include trading liquidity, valuations.

 

Citi&rsquo s Tan said in his research note that assuming SGX could de-rate to an average price-to-earnings multiple of 21 times, that implies a potential 8 per cent downside risk to its current share price.

 

This would entail the counter giving up &ldquo much of (its) gains&rdquo since announcing its results for the first half.

 

Citi&rsquo s revised target price implies a 21 times 12-month forward price-to-earnings multiple &ndash roughly at the mean level &ndash but this is ahead of the 19 times trough in May last year, when the research house upgraded the counter, it said.

 

The bourse operator posted a net profit of S$340 million for the first half ended December, up 20.7 per cent from S$281.6 million in the previous corresponding period.

 

Earnings per share (EPS) stood at S$0.318, up from S$0.263 in the year-ago period.

IN HIS commentary &ldquo Referee kayu? Like in football, focus in the market should be on the &lsquo play&rsquo , not the refereeing&rdquo (BT, Jan 27), Tan Boon Gin, CEO of Singapore Exchange Regulation (SGX RegCo), said that not only has the frontline market regulator fine-tuned its trading queries &ndash which has helped reduce the number issued &ndash it is also conducting a review of the entire trading query regime this year because of public feedback that trading and SGX intervention can have &ldquo a chilling effect&rsquo &rsquo on the market.

 

This would surely be music to the ears of the many brokers who have long complained of over-regulation, which some claim to be one of the major factors behind the local market&rsquo s underperformance in recent years.

 

&ldquo Let animal spirits run unfettered.&rdquo Or: &ldquo Other markets don&rsquo t over-regulate. If we do, then people will simply take their business elsewhere.&rdquo These are some of the comments from observers clamouring for a loosening of the regulatory reins as a first step towards improving conditions in the Singapore market.

 

By the same token, though, there may be some who see Tan&rsquo s declaration as a retrograde step as far as ensuring proper market discipline is concerned.

 

After all, if a stock were to suddenly move by a large percentage in either direction for no apparent reason, then surely a query is warranted to at least try to shed light on why?

 

When I was a market reporter at The Business Times, I used to receive calls asking why SGX RegCo had not queried some unusual price movements while querying others of a similar nature.

 

In other words, my experience has been that not all market participants would welcome fewer trading queries.

 

Supporters of less regulation might assert that in almost every trading query case in the past, the replies have invariably been that the company concerned knew of no reasons why its shares were in play. If so, why bother querying in the first place?

 

The reason is that even if a query results in no new information being shared, the very act of asking is actually designed to signal to the market that regulators are either watching developments surrounding the stock, or already aware that something not quite kosher could be going on.

 

A routine trading query could then be escalated to a &ldquo Trade with Caution&rdquo alert, which is an even stronger signal that regulators are not wholly comfortable with developments surrounding that stock or the parties behind the trading.

 

It could also mean that the matter has been passed up the regulatory chain for closer investigation. Quite reasonably, SGX RegCo issues its &ldquo Trade with Caution&rdquo notices sparingly, given the seriousness of the intended signal.

 

There is therefore a fine balance to be struck between allowing &ldquo animal spirits to run unfettered&rdquo and ensuring a fair and orderly market where everyone operates on a level playing field.

 

While much would depend on the judgment of regulatory staff, issuing fewer trading queries for unusual price movements is a step in the right direction, especially considering the high level of sophistication in current tracking and surveillance systems.

 

Similarly, a public that has been calling for a lighter regulatory touch should also understand that when a trading warning is actually issued, it means that something significant is afoot and that sterner regulatory action could be forthcoming.