How CPF Investment Scheme could boost SGX stock volume

Embrace an equity culture, says analyst.

According to CIMB, to be effective in driving up retail participation, a reduction of board lot sizes must also be accompanied with a liberalisation of the CPF Investment Scheme, also known as the CPFIS.

CIMB noted that one possible solution for low stock market volumes is getting retail investors to embrace an equity culture.

"We think a tweak in CPFIS’s allowable investment limits in equities can be a positive boost to retail trading volumes. We set out to explore the effects here."

Here's more:

The CPFIS was started as an asset enhancement programme for CPF members to boost their retirement savings through investments. CPFIS allows investments in a wide range of products, including shares and loan stocks, unit trusts, government bonds, statutory board bonds, bank deposits, fund management accounts, endowment insurance policies, investment-linked insurance policies, exchange traded funds and gold.

Members have the option of leaving funds in their CPF accounts to earn a guaranteed risk-free rate or to invest part of their pension monies.

There are two accounts under the CPFIS –the CPF Investment Scheme Ordinary Account (CPFIS-OA) and the CPF Investment Scheme Special Account (CPFIS-SA). Funds in the CPFIS-SA earn a higher interest rate of 4% compared to 2.5% for the CPFIS-OA. There are fewer investment products offered in the former.

For policy-making perspective, we think that Singapore policymakers could consider a hike in the maximum investment limits under CPFIS to divert some of the excess local liquidity away from property.

Plausible tweaks to the rules include: 1) allowing the more successful investors to commit a larger portion of their CPFIS to equity investments, or 2) to calculate ‘investible savings’ on a mark-to-market basis of prior investments are all feasible.

The US is talking about tapering, not a raising of short-term interest rates. If short-term rates stay low and a negative real rate environment in Asia prevails, releasing the valve of liquidity away from property (by opening it to equities) might be a useful way of curbing the instinct to buy property.

From SGX’s perspective, applying to policymakers to allow retail investors the ability to use a greater portion of their pension fund assets for equity investments also makes sense. It will complement recent initiatives to spur retail activity in the Singapore stock market.