SGX is clearly more than just a securities market

WHEN the Stock Exchange of Singapore was incorporated in May 1973 and officially opened in June that year, Hon Sui Sen, Singapore's then finance minister, envisioned that it would become one of the leading stock exchanges in the world.

Mr Hon's vision was for the stock exchange to serve not just the capital needs of Singapore, or Southeast Asia, but also the whole of Asia-Pacific and perhaps, the world.

Decades have passed and the local bourse today is clearly more than just a stock market operator. It is an integral part of Singapore's global business and financial hub. SES merged with the Singapore International Monetary Exchange and the Securities Clearing and Computer Services to create the Singapore Exchange (SGX) in December 1999.

Today, SGX - led by chief executive officer Loh Boon Chye - is busy growing its overseas footprint, setting up new offices in major cities and inking numerous Memorandum of Understanding (MOUs).

Analysts have previously criticised SGX for the lack of fruition despite its many initiatives. Now they are beginning to appreciate SGX's multi-year strategy of planting seeds patiently to ensure it stays on top as Asia's most international, multi-asset exchange.

JP Morgan has lauded SGX's co-operative model which involves competing with various exchanges on certain products, while collaborating on others.

"This has allowed SGX to build solid network effects (cross-margining and large market share)," said the US research house, which has an "overweight" call on SGX and a target price of S$7.70.

Looking at its latest results, that strategy is showing signs of progress. Its pact with Tel Aviv Stock Exchange (TASE) is expected to result in some dual listings from next year. TASE's CEO, Ittai Ben-Zeev, told The Business Times that he expected 30 to 50 Israeli firms to leverage this collaboration over the next three years. One can't wait to see what its MOUs with the likes of Nasdaq and New Zealand Stock Exchange will yield.

SGX has morphed to become more than just an equity or an initial public offer (IPO) market.

Investors who are too focused on its securities business may have failed to recognise the strength of SGX's multi-asset product suite, near-monopoly positioning and ability to underwrite steady dividends generated from operating cash flows with no gearing, noted Jefferies Singapore analyst Krishna Guha, who has a "buy" call on SGX, with a target price of S$8.60.

What stood out in SGX's fiscal first quarter results ended Sept 30 was its derivatives business, which continued on a strong growth trajectory. Derivatives revenue rose 21 per cent to S$97.7 million, contributing to 47 per cent of total revenue, up from 39 per cent a year ago. China A50 Index Futures was the star performer.

Traditional revenue generators, equities and fixed income, declined 13 per cent to S$86.4 million from S$99.7 million a year ago. They accounted for 41 per cent of total revenue, down from 49 per cent a year ago.

Market volatility

Market volatility, fuelled by the ongoing trade war, interest rate hikes, uncertain economic growth, will continue to drive demand for SGX's risk management and investment solutions. Mr Loh expects the derivatives business to "increase by at least double digits" going forward.

Since the launch of its high-performance derivatives trading platform, SGX Titan, in November 2016, SGX has seen increasing market participation in the T+1 session - SGX's second trading session for its derivatives market, which operates through the Asian night and European and US day.

Its expanded MSCI Net Total Return index futures suite is also gaining traction, with SGX boasting more than 20 per cent market share.

Where there was no active FX futures market on the exchange three years ago, SGX today has a leading share in Asian FX futures. It is also the preeminent exchange on FX futures for Asian currencies and the leading debt listing and trading platform for Asian G3 currencies. The latter refers to Asian issuers that issue in US dollar, euro and yen - the three big currencies in this part of the world for debt raising.

SGX shares on Tuesday closed at S$7.05, down three Singapore cents. The stock's current trading range has discounted the loss of India's derivatives revenues, analysts said. SGX was trading around S$7.89 a share on Feb 9 when India exchanges decided to bar overseas bourses from trading in Nifty derivatives.

Any alternative arrangement to minimise the disruption to India's Nifty contracts, or a resumption in talks with Bursa Malaysia on trading links will be an upside catalyst to SGX's share price.