BLACKROCK chairman Larry Fink’s letter to shareholders this year focused on the central role of capital markets in funding two big challenges – retirement and infrastructure.
With rising longevity, financing retirement is a daunting challenge globally. Ageing populations mean that more funds need to be set aside to earn higher rates of return.
Investing in capital markets, Fink argues, creates a virtuous economic cycle for companies and countries, and could generate wealth for millions of people. That has surely been so for many savers in the US who have managed to keep faith in that market, even though US workers face similar issues as Singapore’s. For instance, lower-income workers in the US face a far more substantial retirement income gap than higher earners, as a Vanguard study has found.
Still, more than a century of stable real returns of 6.5 per cent a year from the US stock market makes it possible to build a store of wealth for those who can save regularly and stomach the volatility. Surprisingly, the long-run real returns for the Singapore stock market since 1963 are not that far behind at 5.3 per cent after inflation, according to data compiled by academics Dimson, Marsh and Staunton.
More recent data, however, has been downright dismal. Based on 10-year returns from the iShares exchange-traded fund (ETF) tracking MSCI Singapore, the annual average price return was less than 1 per cent – no better than a savings account. In contrast, the iShares MSCI World ETF generated an annual average return of 9.55 per cent, and the core iShares S&P ETF, 12.91 per cent over 10 years.
Painful losses from investments are surely a reason that most Singaporeans are risk-averse and prefer instruments with a guarantee, even if such options are costly. In mature markets such as the US and Australia, retirement investing is a major underpinning for domestic stock market momentum, resilience and growth. Retirement monies tend to be stickier and help to dampen volatility.
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But this hasn’t happened in Singapore, where individuals, burnt by losses from stocks over the past two to three decades, have either retreated into cash or are forced to cast their nets wider. Even the few target-date retirement funds in the market now only have a modest allocation at best to Singapore stocks.
Retail investors’ reluctance to invest and the shrinkage of the Singapore stock market are a vicious cycle, manifest in lower valuations, an overall decline in market capitalisation, fewer initial public offerings and a rising trend of delistings. But individual savers must still take some risk. In this respect, the relative unattractiveness of Singapore stocks may well be a proverbial blessing in disguise.
This is because there is now far less of the home-country bias that investors are often cautioned against. And, there is surely heightened awareness of the richer pickings elsewhere. The US market, in particular, cannot be ignored and is a core holding in both active and passive globally diversified funds. All that remains now is for managers to roll out more low-cost lifecycle funds, where asset allocation decisions are automatically taken care of – all the way to the decumulation or income withdrawal stage in retirement. Such vehicles are key to getting Singaporeans to take measured risk, and will go a long way to securing their finances in retirement.
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