There are many public-listed companies with major shareholders that are related to a country’s government. In Singapore’s stock market, there are many companies with links to the government of Singapore. When investing in them, there are three key things to be aware of.
1. Unpredictable behaviour
Government agencies are generally run differently compared to companies, and this may also extend to their investment mandates. Government-linked entities may also have their own agendas when it comes to the running of majority-owned companies, and they may exercise undue influence on management to fulfill government-related objectives. These objectives may be detrimental to the interests of the company’s other shareholders.
2. They are perceived as being “safe”
The strange thing about companies backed by government entities is that they are perceived as being “safe” investments, immune from usual business and competitive influences.
As investors, we need to remember that such companies are still subject to business forces, and they may also fail and do poorly despite having a strong shareholder. Although the presence of a government may indeed provide capital to support a company’s business, this may not be a long-term solution if the company itself is losing market share, experiencing deteriorating margins, or losing control of its expenses.
We should be critically assessing government-linked companies as we do any other company that does not have a strong shareholder for backing. This ensures that we do not get caught up with the idea of a company having such a strong backing that we throw all caution to the wind.
3. They may have high valuations
Going along with the illusion that government-linked companies are safer, such companies may also therefore be trading at high valuations. Retirees and older people who seek safety and security tend to gravitate towards such companies, and there is a tendency for the valuations of such companies to be elevated, as a lot of retirement money are flowing into their shares.
We need to be aware that undue optimism may be priced into government-linked companies. If too much optimism is baked into the share price of a government-linked company, we may not be able to attain an adequate margin of safety when buying its shares.
There are 28 surprising and important things we think every Singaporean investor should know—and we’ve laid them all out in The Motley Fool Singapore’s new e-book. Packed with information and insights, we believe this book will help you be a better, smarter investor. You can download the full e-book FREE of charge—simply click here now to claim your copy.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.