In the past year, Singapore's stock market, particularly among SGX-listed companies, has seen a growing trend of share buybacks. From financial institutions to manufacturing firms, share repurchase programs have become a key strategy, especially as companies seek to manage market volatility and improve earnings per share (EPS). However, while buybacks may offer short-term benefits, they pose significant long-term risks to liquidity trading in Singapore’s secondary market.

Why Singapore Stocks Are Increasingly Using Share Buybacks

Across the Singapore market, companies are using share buybacks to manage short-term volatility. In uncertain global markets, share repurchases help stabilize stock prices, reducing the fluctuations that often unsettle investors. By reducing the number of outstanding shares, companies can artificially inflate stock prices, which often benefits executives tied to stock-based compensation plans.

Additionally, share buybacks provide a flexible way to return excess cash to shareholders without committing to regular dividend payments. This flexibility makes buybacks particularly attractive when the trading market is uncertain, as companies strive to keep stock prices stable.

The Risks of Shrinking Float in Stock Trading

While share buybacks may offer short-term gains, they lead to a reduction in liquidity over time. As companies repurchase shares, the available float in the secondary market decreases. This shrinking float makes it harder for investors to trade stocks without impacting prices, especially in a smaller financial market like Singapore.

Consider Company S, which launched an aggressive share repurchase program in 2021. During certain periods, its buybacks accounted for up to 83% of the daily trading volume on the SGX. On multiple occasions, Company S’s purchases made up 100% of the volume on the exchange, raising serious concerns about low liquidity in the market. This dominance in trading activity distorts the stock market, making it difficult for outside investors to buy or sell shares without causing significant price shifts. Essentially, the company became its own market maker, artificially inflating its share price.

In the long run, this reduction in liquidity can make Singapore stocks less attractive to institutional investors who require larger volumes of shares for their trading strategies. Reduced liquidity limits a stock’s ability to attract long-term investors and may ultimately impact its valuation.

Comparing the Singapore Stock Market with Regional Players

Compared to other regional markets, such as the Hong Kong Stock Exchange and Malaysia, Singapore's stock market shows a higher dependence on share buybacks. For instance, companies listed on the Hong Kong Stock Exchange maintain a larger float, ensuring sufficient liquidity for both institutional and retail investors. This liquidity makes the Hong Kong market more attractive for long-term investors who seek predictability and ease of trading.

Although Hong Kong and Malaysia have similar rules regarding share repurchases, companies in those markets tend to stay within their volume limits. In contrast, many SGX-listed companies often exceed the 30% daily volume limit imposed by the Singapore Exchange, raising concerns about market manipulation and potential distortions in the trading market.

Long-Term Impacts on Liquidity in the Singapore Stock Market

If the trend of excessive share buybacks continues, the long-term consequences could be damaging for Singapore's financial market. Reduced liquidity in the stock market makes it difficult for new investors to enter, and for existing shareholders to exit, without causing drastic price fluctuations. Moreover, companies risk alienating institutional investors, who prioritize liquidity when deciding where to invest their capital.

The shrinking liquidity in Singapore's stock market could also put SGX-listed companies at a competitive disadvantage compared to firms listed on the Hong Kong Stock Exchange, where higher liquidity trading makes stocks more appealing. Hong Kong companies are less likely to manipulate trading volumes through buybacks, offering a more stable and predictable environment for investors.

Conclusion: Can the SGX Sustain Long-Term Liquidity?

While share buybacks have provided short-term relief for many SGX-listed companies, the long-term risks are becoming increasingly apparent. Shrinking liquidity in the Singapore stock market could harm investor confidence and market stability. Without regulatory adjustments or alternative liquidity strategies, SGX-listed companies may struggle to compete with their regional counterparts on the Hong Kong Stock Exchange and Malaysia, where larger floats and more liquid markets offer greater investor confidence.

The key question remains: Can Singapore’s buyback-heavy market sustain itself in the long term, or will the over-reliance on share repurchases lead to a liquidity crisis that hampers the growth of Singapore stocks and the overall financial market?