Arbitrage opportunities in Singapore stocks

Stock trading is a popular investment option globally, and Singapore is no exception. With its robust economy, stable government policies, and diverse business landscape, Singapore has become an attractive destination for investors looking to capitalise on potential arbitrage opportunities in the stock market.

Arbitrage refers to buying and selling assets simultaneously in different markets to take advantage of price discrepancies and earn a profit. This article will discuss potential arbitrage opportunities in stocks in Singapore that investors can explore to maximise their returns.

Merger arbitrage

Merger arbitrage, or risk arbitrage, is a common strategy investors use in the stock market. It involves purchasing stocks of companies involved in mergers or acquisitions and selling them after the deal is completed.

Several merger and acquisition activities have occurred in Singapore over the years, creating potential opportunities for investors to employ this strategy. One recent example is the merger between CapitaLand Mall Trust (CMT) and CapitaLand Commercial Trust (CCT). Under this deal, shareholders of CMT will receive 0.72 units in the merged entity for every share they hold in CMT. As a result, investors can buy shares of CMT at a lower price and sell them at a higher price once the merger is complete, earning a profit.

Another potential merger arbitrage opportunity in Singapore is the proposed acquisition of United Engineers Limited (UEL) by Perennial Real Estate Holdings. Under this deal, UEL shareholders will receive SGD0.55 cash for every share they hold, allowing investors to buy UEL shares at a lower price and sell them at a higher price once the acquisition is completed.

Dividend arbitrage

Dividend arbitrage involves buying and selling shares of companies to exploit differences in dividend payments. In Singapore, many companies pay dividends twice a year, allowing investors to employ this strategy.

One example of dividend arbitrage in Singapore is the difference in dividend payments between companies listed on the Straits Times Index (STI). For instance, in 2020, STI component company Singtel paid a dividend of SGD0.053 per share, while DBS Group Holdings paid a dividend of SGD1.33 per share. By buying and holding shares of both companies, investors can earn a higher overall dividend yield.

Another potential dividend arbitrage opportunity in Singapore is the difference in dividend payments between ordinary and preference shares of the same company. Preference shares usually pay out a fixed rate of dividends, while common shares’ dividends may vary. This difference allows investors to buy preference shares at a lower price and earn a guaranteed return on their investment compared to ordinary shares. However, preference shares may have inferior liquidity and price volatility, making it essential for investors to consider these factors carefully.

Dual-listed companies arbitrage

Dual-listed companies are those that are listed on multiple stock exchanges. There are several dual-listed companies in Singapore, with their primary listing on the Singapore Exchange (SGX) and a secondary listing on another stock exchange, such as the Hong Kong Stock Exchange.

Investors can take advantage of potential price discrepancies between the two listings by buying shares in one market and selling them in the other. One example is Sheng Siong Group, a Singapore-based supermarket chain with a secondary listing on the Hong Kong Stock Exchange. In 2020, there was a significant price difference between Sheng Siong’s shares on the SGX and its Hong Kong listing, allowing investors to profit by buying and selling shares in both markets.

Stock buyback arbitrage

Stock buybacks occur when a company repurchases its shares from the market. This activity typically increases a company’s stock price, creating potential arbitrage opportunities for investors.

One recent example in Singapore is City Developments Limited’s (CDL) share buyback program. Under this program, CDL repurchased 21 million shares, or approximately 1.5% of its outstanding shares, at an average SGD8.40 per share. This activity increased CDL’s stock price, allowing investors to profit by buying shares before the buyback announcement and selling them at a higher price afterwards.

It is essential to note that stock buyback arbitrage can be risky, as companies may only sometimes follow through with their buyback plans. Therefore, investors must carefully research and evaluate a company’s financial health and intentions before employing this strategy.

Sector arbitrage

Sector arbitrage involves taking advantage of price discrepancies between companies within the same industry. Given the country’s diverse business landscape, Singapore has many opportunities for sector arbitrage.

One example is the price difference between companies in the banking sector. In 2020, DBS Group Holdings’ stock price was significantly higher than that of United Overseas Bank (UOB) and Oversea-Chinese Banking Corporation (OCBC). Investors can profit by buying shares of UOB and OCBC at a lower price and selling them at a higher price.

Remember that sector arbitrage requires thorough research and analysis, as price discrepancies may stem from fundamental differences between companies. Investors must consider financial performance, management, and growth potential before making investment decisions.