Is It Always Safe To Invest In Blue-Chip Companies In Singapore?

Investing in blue-chip companies, especially those that are state-owned like Keppel Corporation and CapitaLand, or those controlled by billionaires like Mr Kwek Leng Beng (Hong Leong Group) and Robert Kuok (Wilmar, Shangri-La), is often perceived as a safe bet.  At least to me personally, I think that generally they provide a basic safety net, as the management of these companies are supposedly much more capable than myself in the operations and management of these companies, therefore it should be quite safe to invest my monies in them, and let them help me generate more returns from my capital invested, especially when many of these companies are typically well-established, financially sound, and possess strong market dominance.  However, history tells us that investing in such entities may not always equate to safe investments.  In Singapore, we have "once-upon-a-time" stated-owned listed companies like Noble and Singapore Press Holdings that ended up delisted, and more recently the City Development Limited controlled by the Kweks which had seen its share price plummeting by 60% over the past seven years.  As such, is it still true that blue-chip companies are always safer?  Let us explore the risks and realities involved.

Blue-Chip Companies Are Considered Safe Investments For The Following Reasons:

1)     Strong Financial Backing

State-linked corporations (SLCs) like Keppel Corporation and CapitaLand Group entities have the backing of government-linked entities such as Temasek Holdings.  With Temasek Holdings as the major shareholder, this grant us retail investors with confidence as it shows alignment in investors' interests.  In addition, this also translates to better credit ratings, easier access to capital, and resilience during economic downturns as we would expect government assistance in times of need (which was proven not to be the case all the time, as with Hyflux).  

Similarly, billionaire-controlled conglomerates, such as Hong Leong Group and Far East Organization, have vast financial resources and diversified businesses that help them weather market volatility.  These present the image of higher stability of these companies towards retail investors, especially during economic downturns. 

2)     Market Dominance & Competitive Edge

Companies like CapitaLand and Mapletree dominate the real estate market, holding prime assets across Singapore and globally.  Billionaire-led firms like Wilmar International benefit from established supply chains and economies of scale, giving them a strong competitive edge.

3)     Stable Dividends & Long-Term Growth

Investors are drawn to these companies for their stable dividend payouts.  The top bank in Singapore, Development Bank of Singapore (DBS) and defense company Singapore Technologies Engineering, for instance, offer regular and attractively growing income streams, making them irresistible for income-focused investors.  

Despite their strengths, these companies are not immune to risks.  Here are some factors investors should consider before assuming blue-chip investments are always safe.

The Risks Of Investing In Blue-Chip Companies Includes The Following:

1)     Cyclical & Sectoral Risks

This is the principle risk that even blue-chip companies cannot avoid.  While CapitaLand and Far East Organization dominate Singapore’s property market, the sector is cyclical.  Government cooling measures, rising interest rates, and economic downturns can affect property prices and rental yields, which in turn impacts investors' sentiments.  

Wilmar International and Keppel Corporation, on the other hand, are exposed to global commodity price fluctuations and trade policies, making them vulnerable to external economic shocks.  Long time investors would recall the crash in oil prices during the period 2014 to 2016, which caused tremendous operating difficulties to Keppel Corporation and then-Sembcorp Marine.  During the same period, share price of Keppel Corporation plunged by approximately 60% from SGD 11.00 to around SGD 4.50.  This drop is definitely distressing for investors.

The 3 Real Estate Investment Trusts (REITs) under Mapletree Investments are under immense price pressure these few years due to higher financing cost due to higher for longer interest rate environment, as well as the unfavorable performance of overseas properties within their portfolio.  I myself hold these three REITs in my portfolio, but the never-ending decline has eroded the confidence of investors, including mine, towards the capabilities of the REIT managers to steer the REIT through these trouble times.

2)     Corporate Governance & Scandals

While state-backed and billionaire-controlled firms generally have strong corporate governance, they are not immune to mismanagement or controversies.  Keppel Corporation’s involvement in a bribery scandal in Brazil highlights the potential reputational and financial risks.  

3)     Succession & Leadership Risks

Billionaire-controlled firms face key-man risk.  Leadership transitions, as seen in family-run conglomerates, may impact business strategies and long-term performance.  This is largely seen in the performance of City Development Limited, where the share price has fell by 60% since the son of Mr Kwek Leng Beng, Mr Sherman Kwek became the CEO of the company.  Through the years, some of the decisions made by Mr Sherman Kwek for the company had resulted in losses for the company, eroding confidence towards the property giant with time.

Blue-chip companies are generally more stable than smaller firms, but they are not risk-free.  In addition, there are many smaller firms that are very well run, like Centurion Corporation, Oiltek International Limited, Propnex and Aims Apac REIT just to name a few.  Personally, I believe that diversification is still the key in investing.  One should not only choose to invest in blue-chip companies and totally avoid the rest.  I believe that gems can be found anywhere, be it blue-chip or not.  Instead, it will be prudent for investors to constantly monitor the macroeconomic environment and market conditions, constantly review the financial reports of the companies owned to scrutinize any irregularities or red flags on top of diversification.  Investors should note that nothing is guaranteed, and with high rewards come higher risks.  Personally, I always believe that a well-diversified investment strategy remains key to managing risks.  Barista FIRE, here I come...!