Singapore's Mid-Cap Indices Launch

This initiative is a direct response to a growing demand for diversification and higher growth potential within the local market, especially as investors globally navigate volatile economic conditions. With Singapore’s GDP growth projected at 1.0% to 1.5% for 2023, according to the Monetary Authority of Singapore (MAS), and core inflation moderating to 3.2% in October from a peak of 5.5% in early 2023, investors are actively seeking resilient and high-growth assets. The new indices aim to capture companies demonstrating strong fundamentals and innovative business models, offering a compelling alternative to the more established, but often slower-growing, STI components.

By creating indices that specifically track the "next 50" largest and most liquid companies, the SGX is not just offering more choices; it is actively shaping a more vibrant and comprehensive market ecosystem. These mid-cap companies, often in sectors like consumer cyclicals, industrials, and technology-related services, typically exhibit higher growth rates and greater responsiveness to economic shifts than their larger counterparts. For instance, while the STI's price-to-earnings (P/E) ratio averaged around 11-12x in 2023, some mid-cap growth companies have commanded P/E ratios of 15-20x, reflecting investor confidence in their future earnings potential and a compounded annual growth rate (CAGR) that often surpasses large-caps by 2-3 percentage points over a five-year horizon.

The performance of these underlying mid-cap stocks has been notable, with theoretical index stretches showing a 20 to 23 percent increase from March to April of this year, significantly outpacing the 12 to 14 percent growth observed in STI components during the same period. This outperformance underscores the growth potential residing in Singapore's mid-cap space, suggesting that a shift in capital flow towards these emerging sectors could be on the horizon. The new indices provide a rules-based methodology, applying criteria such as a 15 percent minimum free float, SGD 100,000 minimum turnover, and SGD 100 million minimum market cap, ensuring that only sizable and actively traded companies are included, targeting a collective market capitalization of SGD 150-200 billion for the 'Next 50' segment.

However, a well-diversified portfolio often includes exposure to local markets to mitigate currency risks and leverage specific domestic growth narratives. Singapore's economy, while small, is stable and benefits from strong governance and a strategic position in Southeast Asia, attracting over SGD 12 billion in foreign direct investment in Q2 2023. The renewed focus on mid-caps, supported by government initiatives, could unlock new value for investors seeking growth within a familiar regulatory environment. The SGX's efforts to enhance liquidity and visibility for these companies could make them more appealing to both retail and institutional investors, with a goal to increase mid-cap contribution to overall market turnover by 5-10% within the next two years.

Many Singaporean investors traditionally look towards international markets for higher growth potential, particularly in the technology and innovation spheres. The allure of the NASDAQ, which has soared over 35% year-to-date in 2023, or specific emerging market opportunities often overshadows local equities. However, the unique advantage of the new iEdge Singapore Next 50 indices lies in their potential to capture growth companies within a stable, familiar, and economically sound domestic landscape, potentially reducing foreign exchange exposure and offering a clearer understanding of local economic drivers.

The government's commitment, evidenced by the MAS's EMDP, is a significant factor. The allocation of SGD 1 billion across three funds specifically tasked with invigorating mid-cap stocks signals a serious intent to breathe new life into the local market. These funds are likely to build portfolios based on the component stocks of the new indices, potentially even creating ETFs to track them, thereby increasing demand and liquidity. This institutional backing, projected to inject substantial capital over the next 3-5 years, could provide a strong foundation for sustained growth in the mid-cap segment.

Senior company officials need to make their business activities more visible to the market, fostering greater transparency and building investor confidence. Such proactive measures are essential to boost and retain investor interest, stimulate liquidity, and attract institutional investors who have historically focused primarily on the STI's "big boys," often due to perceived lack of information on smaller entities. Without this active participation, even the most well-intentioned index launches may struggle to achieve their full potential, potentially resulting in stagnant trading volumes for some newly indexed companies despite the added visibility.

The investment landscape on the SGX will be shaped by the interplay between optimism and caution in the coming months. Geopolitical, economic, and regulatory risks always abound, creating "known knowns," "known unknowns," and the inevitable "unknown unknowns" that can blindside even the most experienced investors. However, with the critical arrangements now in place to rebalance and revitalise the Singapore market, the stage is set for a potentially exciting period for mid-cap stocks, which are expected to contribute an increasing share to the SGX's overall market capitalization and trading activity.

Investors now have a new platform highlighting stocks that have demonstrated outperformance and possess solid fundamentals. The challenge and opportunity lie in identifying those companies within the iEdge Singapore Next 50 that are truly poised for sustained growth and are committed to robust investor relations. Diversification remains key, but a re-evaluation of Singapore's domestic opportunities, particularly within this dynamic mid-cap segment, is now warranted for a balanced and potentially rewarding investment strategy, aiming for a risk-adjusted return that leverages both local stability and growth potential.