Scrapping penny stocks not the solution

While equity markets around the world have been climbing steadily, led by Wall Street, amid signs of a recovery in economic conditions in key economies, the Singapore bourse has gone into something of a hibernation. Yes, the benchmark Straits Times Index has held steady but overall volumes have plunged, reflecting a major loss of trading interest over the past two months.

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Guanyu said…
Scrapping penny stocks not the solution

Business Times Editorial
10 December 2013

While equity markets around the world have been climbing steadily, led by Wall Street, amid signs of a recovery in economic conditions in key economies, the Singapore bourse has gone into something of a hibernation. Yes, the benchmark Straits Times Index has held steady but overall volumes have plunged, reflecting a major loss of trading interest over the past two months.

And this is largely due to the collapse in the erstwhile most vibrant segment of the market: sub-dollar counters. Much of this has had to do with the fortunes of several highly active stocks such as Blumont, Asiasons and LionGold, which had run up too high and too fast, and far ahead of their fundamental valuations.

A sudden selldown and subsequent sanctions imposed by the Singapore Exchange effectively spooked the market and sent players scurrying for cover, not just from these counters but most other actively traded penny stocks as well. The net effect has been to turn this segment of the market into a virtual ghost town.

There is some logic to the argument made by many market insiders that sentiment might have gradually recovered - perhaps not for the stocks which were at the epicentre of the collapse but for some subsequent statements regarding the penny stock market by key people within regulatory circles.

And the most impactful was probably that made by SGX chief executive Magnus Bocker, who asked whether the bourse should allow stocks that are traded at a few cents, and then answered in the negative. This has raised the spectre of enforced share consolidations or delistings. But really, when it comes to valuations and pricing, it is best to let the market decide.

While the cynicism over penny stocks after the recent events is understandable, just wiping them off the bourse may not be the solution for a market such as Singapore, where the appetite for these counters has traditionally been strong. A few rotten apples should not be allowed to spoil the whole bunch.

But there is another factor that needs to be borne in mind. And it is that the penny stock market is often the “incubator” market for young companies - local and regional - trying to raise funds and grow. Many come with promising businesses and ambitious plans. By taking away this market - be it main board or Catalyst - one is effectively slamming the door on a critical avenue for their fund raising.

Singapore, with its abundant liquidity, strong regulatory regime and standing as a financial centre, has attracted many of these companies. They should be encouraged to flourish, albeit under appropriate regulation. An important first step after the recent fiasco would be to announce the outcome of the month-long Monetary Authority of Singapore investigation. Uncertainty and opaqueness is the market’s worst enemy.

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