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China large enough to lift both SGX and HKEx
GROWING demand for hedging solutions to help investors manage their exposure to China will benefit both Singapore Exchange (SGX) and Hong Kong Exchanges and Clearing (HKEx).
SGX's head of derivatives, Michael Syn, believes that both exchanges will be lifted by the larger liquidity in China's equity derivatives market even as HKEx looks to launch a rival product to its popular FTSE China A50 Index futures contract. The latter tracks the performance of 50 companies listed on Chinese exchanges. SGX is currently the only exchange that offers A-share futures offshore.
"Unlike HKEx which is more a gateway to China, SGX is an international port that connects institutional investors to multiple markets. Both serve different functions and needs," Mr Syn told The Business Times.
"SGX will continue to play to our core strengths as the pan Asia market infrastructure, providing liquidity for risk management with the longest trading hours in Asia as well as central clearing anchored in Singapore."
Concerns over HKEx's plans to introduce futures contracts on the MSCI China A-shares index, coupled with the limited number of new listings, have seen SGX share price falling 8 per cent since HKEx's announcement to hover around S$7.39 on Friday.
In its latest report, Citi Research said it preferred HKEx for its superior equity franchise and stronger growth. It said that by product, "HKEx is ahead of SGX in equities business by a big margin", regularly ranking first globally in terms of number of initial public offers (IPOs) and funds raised. This contrasts to SGX's limited number of new listings.
In terms of derivatives, the two exchanges are "neck to neck", excluding volume on London Metal Exchange (LME). But "with increased market volatility and demand for hedging products, HKEx's derivatives revenue (excluding LME) surpassed SGX again in 2018''.
Citi also highlighted that more than 80 per cent of SGX's derivatives volume growth came from five contracts, namely, China A50, Nikkei 225, India Nifty 50, MSCI Taiwan and MSCI Singapore, and warned that the potential launch of MSCI A-share futures contracts could be a game changer to cement HKEx's leading position on derivatives.
After comparing the two exchanges' profitability, product offerings and valuations, Citi concluded:
"HKEx looks better positioned than SGX, especially in products. We see HKEx as a long-term structural growth story, benefiting from the opening up of mainland China's capital markets.
"In contrast, SGX's equity business has been stagnant in recent years. Its leading position in derivatives and fixed income, currency and commodities (FICC) is also under threat as HKEx strengthens its non-equities businesses.''
Citi has buy call on HKEx and a target price of HK$315 and a sell on SGX, with a target price of S$7 as of end-March.
However, Tin Min Ying, an analyst at Phillip Securities Research feels that while HKEx's plans may present a threat to SGX in the longer-term, it is not expected to have a significant impact on SGX's derivatives revenue for the FY2019-2020.
"Firstly, if HKEx obtains relevant approvals, the launch should be in Nov 2019. Secondly, HKEx will take months to build up liquidity and onboarding of client's systems. Thirdly, SGX's derivatives platform provides high customer retention,'' said Ms Tin, who has a target price of S$8.17 for SGX.
Ms Tin believes SGX enjoys some "customer stickiness" due to its deep liquidity as a first mover. It also allows customers to carry out margin offsets across various derivatives assets and caters to customers' needs to hedge currency exposures with SGX's diverse FX exchange, especially the USD-CNH and IND-USD FX futures.
Moreover, HKEx's plans did not come as a surprise to SGX.
"HKEx's plans could create a larger ecosystem for China equity derivatives which should deepen liquidity and increase volumes with arbitrage between the exchanges,'' she said.
Jefferies analyst Krishna Guha believes the sell-off in SGX shares as overdone, noting the Singapore company has managed to grow revenues from derivatives in the past despite competition from other exchanges.
"We continue to believe SGX has multiple uncorrelated revenue streams with near monopoly position in clearing,'' said Mr Guha, who has a price target of S$8.20 for SGX.