LAST week, the Singapore Exchange (SGX) announced that it would partner the Securities Investors Association (Singapore) or SIAS in a drive to educate the public on the benefits of equity investing as part of retirement planning. The move is not without its critics. Some have argued that the exchange should not be encouraging the masses - especially low-income groups - to dabble in the stock market. All the more so given the increase in risk in financial markets because of the uncertainty shrouding the eurozone, as well as the US and Chinese economies.
This argument has some merit. But on balance, given the poor level of retail participation in stocks (and possibly an over-investment in real estate by individuals) and the superior returns that equities offer over the long term, SGX's initiative also has merit. Considering that it is the job of the exchange to develop the local capital market by encouraging greater investor participation, it is difficult to see what other choice SGX has. The issue is not whether it should educate people on stockmarket investing, but how.
In particular, when conducting educational programmes, it is important that SGX and SIAS focus not just on potential returns, but also on risk. Too often, investment products are advertised and sold on the basis of eye-catching profits made in the past together with ambitious projected returns. In almost all cases, there is no disclosure of the risks that were taken. In a properly functioning disclosure-based, caveat emptor regime, risk must receive equal coverage.
Second, since the ultimate goal is for retail investors to incorporate equities into their retirement plans, SGX must ensure that new offerings are of high quality. Throughout the years 1998-2007, retail investors suffered when Malaysian shares that used to trade on Clob International were replaced by a flood of China stocks. Although some of these did thrive for a few years after listing, most eventually collapsed under the weight of a host of governance-related scandals. This has contributed to retail disillusionment with the stock market and is probably a significant factor behind the conspicuous absence of retail investors these days.
In this connection, it is good to note that SGX last month revamped its mainboard listing requirements, drastically raising the profit and size hurdles that companies have to achieve in order to gain membership on the exchange.
Although size does not necessarily guarantee quality, larger companies are more likely to be tracked by institutions which should help enhance governance. Also, big companies tend to have more diversified revenue sources and, therefore, lower earnings volatility - features which should also help reduce risk. Properly handled, the SGX-SIAS drive to educate potential investors is a worthwhile initiative that deserves to succeed.