Brokers' take: Singapore-Malaysia stock market link would likely benefit retail investors

WHILE it is too early to calculate any benefits from the proposed link between the Singapore and Malaysia stock markets, it would likely generate interest particularly among retail investors and potentially increase securities revenue for the Singapore Exchange (SGX), said DBS Group Research.

The SGX and Bursa Malaysia (BM) are set to be connected by a trading link by the end of this year which will allow investors to trade and settle shares in both markets in a more convenient and cost-efficient way, the authorities on both sides of the Causeway announced on Tuesday.

DBS Group Research noted that allowing investors to trade and settle shares in each other's markets will make the initiative different from the Central Order Limit Book (CLOB) set up in 1990.

CLOB closed less than a decade later after it was deemed to be an "illegal market" by the Malaysian government.

"The convenience of holding cross-border stocks arising from the Bursa Malaysia (BM)-Singapore Exchange (SGX) trading link is likely to generate interest particularly among retail investors, who unlike funds, may not already have their own access to multiple markets through existing channels," it said in a note on Wednesday.

About a fifth of average monthly turnover on the SGX between January-August 1998 was attributed to the trading of Malaysian shares, before the trading of Malaysian shares on CLOB ceased.

"We believe it is too early to impute any benefits from the BM-SGX Link, but purely based on sensitivity while holding everything else constant (eg clearing, trading and other related fee structures), every 1 per cent increase in securities daily average trading value would increase securities revenues by 0.9 per cent and net profit by 0.4 per cent," said DBS.

Similarly, CIMB Research said that the initiative would likely benefit retail participants more than institutional investors.

It could encourage more cross-border research reports, with similar sectors and companies listed on the SGX trading at lower valuations than their peers on the Bursa being potential beneficiaries.

"If successful, this BM-SGX trading link could replicate the success of the Hong Kong-China stock connect, in terms of higher cross-border trading and investment flows, possibly resulting in higher trading turnover for SGX," it said.

Both brokerages noted that the Asean Trading Link started in 2012 had not been successful.

But lessons drawn from the failed Asean Trade Link should propel better coordination between both governments going forward, and with the arrangement being a government-to-government effort, this implies a higher possibility of success, said DBS.

Both have a "buy" rating on the SGX. DBS has pinned a target price of S$8.90 on the stock, while CIMB carries a target price of S$8.50.

Shares in the SGX rose on Wednesday morning, and traded at S$8.05 as at 9.50am, up 2.2 per cent, or 17 cents, from the previous close.