SGX Group sees diversification as key driver of resilience

DESPITE volatile market conditions for equities and a slowdown in capital raising globally, the Singapore Exchange (SGX Group) delivered a robust performance in its fiscal first half.

At the heart of this resilience is a well-diversified business model, said the bourse’s chief executive Loh Boon Chye.

While SGX Group’s cash equities segment saw weaker revenue as higher interest rates impacted trading volumes, its derivatives business was an outperformer.

Revenue from the derivatives segment grew 28 per cent on year, as uncertainty across global markets raised demand for risk-management solutions.

The way Loh sees it, the group can capitalise on its diversification to deliver even stronger business performance as market conditions improve.

“Imagine, in the environment that we are in today: if we didn’t have a solid, robust growing derivatives business, that wouldn’t have been too well. But, clearly, that (diversification) has put us in a good space,” he said in an interview with The Business Times.

“Markets are cyclical. The broader cash business – including fixed income and equity – globally will come back. That will set us up for, I hope, much stronger business overall.”

Driving growth in derivatives

For its fiscal first half ended December 2022, SGX Group’s revenue rose 10 per cent on year to S$571.4 million, with derivatives making up 44 per cent of this figure.

Revenue from equity derivatives climbed 21 per cent to S$173.5 million, surpassing the S$171.2 million revenue generated by the group’s cash equities segment.

Loh noted that the equities business has served as an international platform, providing access for market players into Asia.

“Asia is growing rapidly – faster than the rest of the world – notwithstanding all the volatility and uncertainty. So in that regard, it’s clearly an international global business for us,” he said.

While overall derivatives volume has been growing, Loh added that it has been “more pleasing” for the group to see strong growth in commodities.

During the fiscal first half, commodities derivatives volume grew by nearly 40 per cent to 19.4 million contracts. The bourse’s flagship iron-ore contract also recorded its highest six-month volume ever.

There are also more financial participants in the market, and a growing proportion of trades are taking place on screen instead of over the counter.

Loh noted that screen trading now accounts for over 40 per cent of volumes. “I expect that to grow to 50 per cent. And frankly, at some stage, screen may really dominate,” he said.

Indeed, the move towards financialisation of iron ore could provide investors with a proxy to macroeconomic trends for the global economy.

At the same time, SGX Group is also eyeing opportunities in other commodities.

“Cobalt and lithium, part of the (electric vehicle) value chain, (are among) those that we think will grow over time. It will take some time, but the main thing is building from a position of strength,” Loh said.

Adapting to market changes

While the broader financial sector ecosystem is “clearly stronger” than what it was 14 years ago during the global financial crisis, Loh noted that market conditions are changing.

“We’re obviously faced with a change in the market regime, from a zero-interest-rate environment to higher interest rates (that will) possibly continue to rise,” he said.

The changing conditions have led to a slowdown in activity in global capital markets, as market participants adjust.

SGX Group’s cash equities business delivered a more muted performance in the fiscal first half, with revenue slipping 10 per cent year on year to S$171.2 million.

Daily average traded value slipped to S$1.1 billion from S$1.2 billion in the year-ago period, while the number of initial public offerings (IPOs) fell from six to four.

“The overall capital markets environment isn’t as conducive globally, for a start,” Loh said. “I think what is important is to see a peak in rates.”

A pause in interest-rate hikes may provide greater certainty for companies that are looking to tap capital markets.

Meanwhile, Loh added that the group has been working on boosting demand and supply.

To drive demand, SGX Group has been working with brokers and has broadened its outreach to investors – both retail and institutional. On the supply front, the bourse has been focusing on its products.

Loh said the exchange will be launching listed certificates, and has also been doing more work relating to exchange-traded funds (ETF).

In 2021, SGX Group also announced a partnership with the Stock Exchange of Thailand for a depository receipt (DR) linkage.

“We hope to launch, with some of the stocks being listed in June,” Loh said. He declined to name the companies that would be first to use the DR linkage, but said that there may be between three and five such stocks for a start.

Creating a win-win with collaboration

With the growth in regional exchanges, SGX Group could see greater competition as companies may prefer to stay in their home markets. Loh, however, is positive on the prospects of the Singapore bourse, as the group has a “collaborative mindset”.

“There will be ways where two exchanges can find ways to collaborate, and I think it could be a win-win for the broader ecosystem,” he said.

Apart from working with Asean exchanges, SGX Group has also signed agreements with the New York Stock Exchange and Nasdaq to collaborate on dual listings. This may become increasingly relevant for companies.

Loh said: “Given the less globalised world (with) more complexity, companies also hedge themselves… and I think companies will begin to think about more than one listing venue (where) they could tap into different pools of liquidity.”

SGX Group is working with both primary and secondary listings prospects in the pipeline. “All in all, I would say we are having very good conversations with companies,” Loh said.

“The building blocks are there, in terms of what we have done on demand and potentially supply side. As and when the environment is a lot more conducive, I think we’ll be in a position to grow.”

Analysts are mixed on SGX Group. According to Bloomberg data, there are four “buy”, five “hold” and three “sell” calls on the stock, with target prices ranging from S$8 to S$11.71.

At its closing price of S$9.66 on Friday (Apr 21), the company was trading at a trailing 12-month dividend yield of 3.3 per cent.

When asked if SGX Group would consider raising its dividend, Loh noted that it has always paid a growing absolute dividend.

While yield is important, he added that equally important to management is the total shareholder return.

“We want to make sure that we deliver growth in the company and with that also a growing absolute dividend,” he said. “We did have very good first-half results, and as our business grows, we would like to pay a growing sustainable dividend.”