Stock market needs shot in the arm, but not via CPF investments

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ROUGHLY 10 years ago, when my mother-in-law was in her mid-80s, I was asked to take a look at her investment portfolio.

I was taken aback that her portfolio was more than 50 per cent invested in equities, an asset allocation which defied traditional risk limits linked to age.

There’s a common rule of thumb that the proportion that can be invested in higher-risk assets such as equities is 100 minus your age. This is because risk tolerance generally declines with age and in one’s senior years, there is less time to recover from market downturns.

In my mother-in-law’s case – she passed away in 2022 at age 93 – there was a silver lining. She was a long-time resident of Australia, dubbed the “golden” country for good reason. Thanks to sizeable and growing investments by Australia’s superannuation or retirement-savings sector, the stock market was stable and generated steady returns.

Between 2010 and 2023, the market capitalisation of the Australian stock exchange rose from A$1.32 trillion (S$1.18 trillion) to around A$2.4 trillion. According to Vanguard, Australian stocks generated annualised total returns of 9.2 per cent over 30 years up to June 2023, just slightly less than US stocks’ 10 per cent.

My mother-in-law’s financial planner was remiss in not rebalancing her portfolio. Yet, inertia also worked in mum’s favour. The equities portion of her two investment accounts reaped an annualised return of between 7 and 9 per cent after fees over the long term, an enviable and fortunate outcome.

Retirement monies are famously sticky. Such funds help to anchor a stock market, which results in lower volatility and a steady return through time, even with the occasional down drafts.

Given the potentially huge role of pension savings, it is therefore unsurprising that an association representing the venture and private capital sector has reportedly proposed steps to inject life into the Singapore stock exchange. Financial Times reported that the proposals included “mechanisms” to allow pensions and sovereign monies to be invested in the stock market.

In the CPF context, however, allowing more stock investments would do a disservice to CPF members. The CPF Investment Scheme (CPFIS) imposes a cap of 35 per cent for direct investments in stocks, property funds and corporate bonds. The SGX website has a list of CPF-included stocks. The list is not an indication of quality; it is just that the stocks must not be on the SGX watch list.

In my view, the 35 per cent cap on stocks is generous enough. Members are behaving rationally to invest mostly in professionally managed funds, and to be conservative. This is because the CPF is also used to fund property purchases; older members are also required to set aside an amount in their retirement account.

Even in the cash market, many Singaporeans invest in US-listed exchange traded funds (ETFs), even though the same ETFs may be listed on the SGX. These ETFs’ thin trading volumes on the SGX cause bid-ask spreads to balloon, raising costs.

The stock exchange has been afflicted for years by a hollowing out of capital, resulting in a vicious cycle in disincentivising listings and investment. Market capitalisation has steadily declined from more than S$1 trillion in 2017 to around S$777 billion in April. The SGX surely needs a shot in the arm – just not via the CPFIS.