Liquidity Uncovered: Navigating Market Dynamics in 2024

Explore the vital role of liquidity in shaping today’s financial markets with insights from SGX and Deltablock experts. From global events to investor behavior, this episode uncovers key trends and strategies to navigate market volatility.

Summary – IBKR Podcasts Ep. 201

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Guillaume Roux-Chabert 

Welcome to today’s podcast. My name is Guillaume Roux-Chabert from Interactive Brokers Singapore, and I’m joined by two guest speakers today. We have Hamza El Khalloufi, founder of Deltablock in Paris, and we have Bliss Chang from the Singapore Exchange. Thank you both for joining us today. In today’s episode, we’ll be talking all about liquidity in the market which is a key component for all well-informed investors. 

So let me start with you, actually, Hamza, and maybe let me ask you, what are the significant local and global events since 2020 that shaped Singapore’s market performance? In particular, which events have had the most profound impact? 

Hamza El Khalloufi 

Yeah, thank you and hello, everyone. Typically the SGX market performance has been influenced by several major events since 2020. Basically, there is five main events. The first one was the COVID-19 pandemic in 2020. So this pandemic has caused a market selloff in early 2020, but SGX rebound due to the strong sectors like healthcare and tech. 

Also, the low interest rates and the government stimulus, they further supported the recovery.  

The second event, and what’s more of a macro event, which is linked to the global monetary policies from 2021 to 2023. So basically the interest rate hikes and also the inflation concerns has led to corrections, both in growth stocks, but also for small and mid caps being the more affected.  

Then we have the third macro event, which is the China’s economic slowdown between 2021 and 2023. So basically, the regulatory crackdowns and also the economic challenges in China negatively impacted SGX as many companies on the exchange are exposed to China’s market. Then we have the big geopolitical event, which is the Russia-Ukraine conflict in 2022. 

So basically the conflict caused energy and also commodity price surge, which drives inflation and also affected the market sentiment. But at the same time, AGEX has benefited from commodity price increase. However overall, it was still affected negatively. And maybe just to end on a good note from 2022 to 2024, Singapore has seen a strong economic recovery that was driven by mostly by the strategic government policies robust global demand, and also resilient domestic market. 

So basically, sectors such as finance, technology, but also manufacturing, they have led to the rebound, which has contributed significantly to the GDP growth. 

Guillaume Roux-Chabert 

Understood. Thank you very much. So Bliss from the SGX, maybe we could have a closer look on how have Singapore equities perform in in the third quarter in particular? 

Bliss Chang

Thank you very much, Guillaume and Hamza. So looking at the third quarter of this year, the benchmark Straits Times Index, so that’s what we use in Singapore, the STI, it advanced 8% in the quarter, outperforming most of our Southeast Asian peers, as well as many of the North Asian markets, such as Japan, Australia, Taiwan, Korea, as well as India. 

And it brought year to date gains to more than 10%. And in September I’m glad to also note that the STI index recorded a 17-year peak last seen only in 2007, and the total returns version of the index achieved an all-time high. And that means that when you reinvest dividends into the index, there’s a little bit more outperformance. 

So actually, STI is well-known as quite a dividend play kind of index. It has the highest dividend yield in Asia Pacific, recently surpassing Australia due to steady dividend payouts. And in September, I think what we’ve also noticed is that the REITs, which are the Real Estate Investment Trusts, of which Singapore is the largest REIT market in Asia-Pacific. So the REITs, as well as the mid cap have actually outperformed large caps. And that’s been bolstered by the rate cut realisation, which has really supported the valuations of REITs and improved the overall, risk-on sentiment. 

Finally, I think a lot of you are not Singapore-dollar earning investors but because of the historically strong Singapore Dollar, you might actually have increased returns. The Singapore dollar appreciated 4% against the USD just in the last one year to date. 

Guillaume Roux-Chabert 

Just to come back on the point that you mentioned regarding the mid cap, maybe Hamza, can you define a bit more how the small and the mid-caps companies are performing in comparison to the large cap counterparts since 2020? 

Hamza El Khalloufi 

When we take a look to the performance of small and mid-cap companies since 2020, what we can see is that they have underperformed large caps, particularly during periods of uncertainty, like the pandemic, and also subsequent to the anti-strike hikes.  

Also the limited access to capital and the higher volatility, they have wasted a lot on their performance. And if we zoom a little bit more on the sectors, what we see is that typically, tech sector was the one that has been hit harder within the small and mid caps due to rising in borrowing costs, but also to the investor risk aversion.  

With regards to large cap companies, they have generally far better, they have stronger balance sheets, access to capital, and also a larger global presence that have allowed them to weather those economic shocks that we talked about in the beginning. 

So typically sectors like finance, real estate, and commodities, they have performed better because they benefited from the broader macro environment, but also the safe have an inflows. 

Guillaume Roux-Chabert 

Understood. And let’s stay a little bit more on this sectorial approach, right? So what is the current state of market activity in Singapore and how the various sectors that you mentioned a bit on the market cap sizes contribute to the overall turning volume? 

Hamza El Khalloufi 

That’s a very good question. So the current state of the global market activity in Singapore shows a small decline in trade volume from 2020 to 2023. But now in 2024, we see that there is a slight uptick. If we take a look a little bit closer to see this liquidity and its sector contribution, what we can see is that the financial sector consistently dominates the trading activity. So generally it accounts from 50% to 58% of the total volume across the years. Then we have the industrial and the consumer cyclical sectors, so that are the next larger contributors. 

Typically, they count between 13 and 16% and from 7 to 11% of the volume, respectively. Then we have some sectors that show significant year to year variations, such as communications since they dropped a lot in 2023, but they rebounded strongly in 2024.  

Also, if we take a look to the market cap contribution, what we can see is that the large cap stocks, they are just dominating the other market cap category since they account for between 66% and 79% of the total volumes across the years. And the share is growing over time.  

Then, if we take a look to the mid cap stock, we can see that their share, as the opposite to the large cap, their share their market share is just declining. 

So it went from 20-22% in 2020 to 15.5% in 2024. And last but not least, we have the small and micro caps. So they have experienced also a significant decline in their share of trade volume. So typically, for example, for the micro-cap, we can see a drop went from 5% 2020 to 0.7% in 2024. 

Guillaume Roux-Chabert 

I see. And that would be interesting to have also your point of view please, because we see an uptick recently, so maybe there are like some other parameters that are kicking in the market and especially can I ask you to more like, what’s the institutional investor focus? Has it changed post rate cuts, especially? 

Bliss Chang 

For institutions, what we saw in the last month during the first U.S. rate cut was a significant buying of more than S$900 million, almost one billion Singapore Dollars, and this was the highest single month institutional inflow since November of 2020. So since the first year of the pandemic.  

I think what’s interesting is that the institutions are buying quite significantly into the Real Estate Investment Trust, which are a significant proportion of our trading turnover. About 20% of our trading turnover goes into REITs.  

And the institutional buying of REITs in September of this year was actually the highest in more than two and a half years. So I think what we see is there’s potentially more room for the REITs to continue to improve their business fundamentals and therefore win that increase in valuation. 

What we noticed is that Singapore REITs are still somewhat lagging in the recovery compared to US REITs. And then shifting gears a little, since the Chinese stimulus measures came out in near the end of September, what we’ve seen is significant institutional inflow into China-related stocks. And there’s quite a number of them. About 100 Chinese- related stocks listed on SGX have around 50% or more of revenue exposure to China.  

So these include some of the REITs like MapleTree PanAsia Commercial Trust, as well as Yangzijiang, which is a shipbuilding company.  

I think there’s really great interest for price discovery and for greater utilization of some of these instruments. 

Guillaume Roux-Chabert 

Indeed we see a kind of a rally from China, right? But let’s go to the core of this topic today and Hamza, speaking of investor behavior, how does liquidity influence price volatility and execution costs for the investors? 

Hamza El Khalloufi 

The liquidity shows a clear influence of both on both price volatility, but also on the execution costs of investors. As for the volatility, there is an inverse relationship between the market cap size, which correlates with liquidity and volatility. So basically large cap stocks consistently show a lower volatility compared to small cap sizes. 

Then for the execution costs, where generally we measure it and we take as a proxy the spread. So the spread is constantly lower for large cap, which indicates lower execution costs for more liquid stocks. And the spread for large caps basically remains relatively stable since 2020. 

While for small caps and micro caps, we’ve seen more variability and also generally a higher spread, meaning a higher execution cost.  

Then, finally, for the second part of your question, which is more linked to, let’s say, the velocity of the shares, which means typically the traded volume divided by the volume of outstanding shares, what we can see is that large cap stocks show a higher and more stable velocity, which indicates better liquidity. Same thing for small caps, same thing as the execution cost. We can see that for a small cap it shows a more variability in the in the velocity, which suggests a less consistent liquidity during this last five years. 

Guillaume Roux-Chabert 

Understood. So can we go a little bit more into details here? Because is there any evidence of a fly-to-liquidity trend in recent market behavior and particularly with the certain sectors or market cap sizes? 

Hamza El Khalloufi 

Yeah definitely. The short answer is yes, there is clear evidence of a flight-to-liquidity trend, as we call it. So basically, we have an increasing dominance of large caps, as we mentioned before, since the share of the traded volume for this kind of this type of market caps increased from 66 in 2020 to 79 in 2024, which suggests that investors are favoring more liquid and larger companies. 

Also, the decline in the activity in smaller caps and micro caps that dropped from 5 to 0. 7% in the last five year period. This the same flight-to-liquidity effect or trend is happening also in different types of sectors. So we can see a sector shift.  

Some more traditionally liquid sectors like financials, they have maintained or even increased their share of trading volume, while some less liquid sectors have been have seen decline.  

And what is also important to mention here is that while smaller cap stocks have seen more variability in volatility and spreads during these last five years, we can see that for large caps, they have maintained relatively s table metrics, which could be attracting some risk adverse investors. 

So to sum up, we can say here that this flight-to-liquidity trend is particularly pronounced in market cap sizes with a clear shift toward larger, more liquid stocks. It’s also visible to some extent in some sector preferences, with more liquid sectors like we mentioned before, like the financials that are maintaining their dominance in the traded volume. 

Guillaume Roux-Chabert 

Thank you. And Bliss, could you add a little bit more on your views on liquidity and a recent theme on this topic? 

Bliss Chang 

What we see in the more recent quarter, in the recent couple of months, is a broadening and an uplift in the minimum liquidity. We see about 10% more stocks year on year in the third quarter, having achieved minimum liquidity of S$1 million, which is a marker that is commonly referred to by many institutions.  

And this is a good trend, definitely a positive development. Furthermore we’ve also noticed an uptick in retail trading activity in terms of  number of retail trading accounts on a daily basis, and that’s up nearly 20% quarter on quarter. 

Looking at liquidity from a thematic lens, we’ve seen rise in greater volatility and also increasing oil prices from some of the Middle East tensions. And what we noticed is that there might potentially be a knock-on impact on liquidity, as well as valuations of a specific sector in SGX, which is offshore and marine services. 

There are analysts that believe the offshore and marines may be beneficiaries when oil prices are elevated and stay higher-for-longer. One of the stocks, actually a large cap in the offshore and marine sector, is Seatrium. Previously, it was Sembcorp Marine and Keppel O&G. Seatrium has actually rallied 18% in the first five days of October and its average daily liquidity is up by almost three times from the previous month to more than S$100 million and today again it traded I guess more than S$100 million. 

What I’m alluding to is that the return of risk-on sentiment is really benefiting the wider market, and this is showing in the increased liquidity across, not just your index names, but also the small-caps and the mid-caps as well. 

Guillaume Roux-Chabert 

That’s great. And Hamza, maybe like to consolidate and sustain this trend that we see, which might be a bit like on the short term. What kind of like conclusion and what steps should companies that want to take the journey of navigating any low liquidity environment? 

Hamza El Khalloufi 

To navigate a low liquidity environment, typically the one under which we are currently, companies can implement some strategic measures to improve investor confidence. and also broaden their capital resources.  

So one of the things that can be implemented basically can be enhancing the shareholder communication and transparency in order to build some trust.  

Also to keep investors engaged and reduce this insensitivity that is mainly due to the current environment.  

Second thing they can focus on is the diversification of funding and also the typology of investors. As Bliss said, currently we can see that there is an urge in retained investors that are also the ones responsible of the daily liquidity, but companies can also widen the typology of investors with institutional, retails, and also more of, I would say, speculators, because typically these are the ones really provoking the daily liquidity. 

The third point could be considering the shares buyback because basically first it’s a signal of confidence to the markets, and also, it helps to reduce the share supply, but also supports the share price.  

And finally one of the solutions in the current liquidity environment is mainly the use of market liquidity services since it’s a way to improve the market quality of the company’s share and also helps to improve the trading ease. But also the price stability, which means that it’s pushed to attract more investors while stabilizing the stock market 

Guillaume Roux-Chabert 

Understood. Yeah. Thanks for sharing your golden rules about liquidity and how to improve it long term. Bliss, I’d like to also your few final words on this specific topic on your side. It would be great, please. 

Bliss Chang 

Thank you. I wanted to just finally add that one of the appeals of Singapore equities is that we’re often considered a safe haven destination. This is given our relatively well-capitalized large caps and also supported by the strength of the Singapore Dollar and our regulatory framework. So let’s take today as an example. 

Today, the 8^th of October, China-related securities fell by 10%. And it was a quite a bloodbath. The STI (Straits Times Index) in comparison, was down only, less than 1%. So this resilience is really a vote of confidence from our investors. 

Today, we’ve noticed that institutions were net purchasing into large-caps, continuing to add allocations after they started doing that for the last four sessions. And individual investors were also reentering into large caps, as well as our REITs, which already have seen valuations improve.  

Just wanted to really, finally, highlight that there’s a bit of a flight-to-quality phenomenon into the Singapore market and in comparison, we’ve actually seen outflows from foreign institutions from Southeast Asian markets in the October period. So Thailand, Malaysia, Indonesia, they’re all having outflows from foreign institutions, while actually we’ve noticed an opposite trend.  

It’s definitely an interesting period, as we head into relatively uncertain territory ahead of the elections, as well as considering geopolitics. 

Guillaume Roux-Chabert 

Indeed. Absolutely. All right. Thank you very much. I’m going to wrap up this podcast. Bliss, Hamza, thank you very much for sharing your very complimentary insights on liquidity today. You brought up some great points on this key component, which is liquidity on the market. 

Thanks for the listeners who can learn more about any of financial topics free of charge on Interactive Brokers and www.interactivebrokers.com. Feel free to leave us a rating or review and follow us on our favorite podcast network. Thank you for listening and happy trading ahead. 

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