Among the many investment opportunities, investors may want to consider Singapore Exchange (SGX). The bourse operator was a beneficiary of the volatility observed in financial markets last year. It recorded higher earnings and revenue as trading fees surged from the spike in trading volumes. Shares of SGX are up 13.7% in the last 12 months to close at $9.82 on Feb 5.
Indeed, there could be more upside to come. Covid-19 continues to wreck financial and economic havoc in many countries through subsequent waves of infection. Market participants, especially institutional ones, could take positions to manage risks again. Secondly, the low interest rate environment owing to central bank action could see more retail participation.
According to Phillip Securities, the preliminary securities daily average value (SDAV) stood at $1.47 billion in January, up 20% y-o-y. “We believe SDAV will normalise at the heightened levels observed since the beginning of FY2021,” Phillip Securities analyst Tay Wee Kuang writes in a note dated Feb 4.
SGX’s multi-asset strategy is also bearing fruit. The company’s acquisitions of Scientific Beta and BidFX have materially added to the company’s top and bottom lines.
Scientific Beta is an independent index provider specialising in smart beta strategies, with expertise in factor-based and risk-managed solutions. The company provides investable smart beta indices to its clients.
BidFX is a cloud-based FX trading platform for institutional investors. Since its establishment in January 2017, average daily volumes have grown at a compounded annual rate of 57% to US$31 billion ($41.4 billion) in May 2020. BidFX continues to acquire new clients, with over 100 of the world’s largest banks, hedge funds and asset managers currently connected to its platform.
For 1HFY2021 ended Dec 31, 2020, SGX’s revenue from its data, connectivity and indices segment was up 35% y-o-y to $70.7 million. If not for Scientific Beta, the increase would have just been 3% y-o-y. Similarly, BidFX helped lift revenue from its fixed income, currencies and commodities segment to $82 million, up 17% y-o-y. Excluding BidFX, it would have dropped 3% y-o-y.
SGX is also pursuing new growth opportunities. Last year, SGX announced that it is exploring a global dairy derivatives partnership with New Zealand Exchange to grow the dairy derivatives market. The company is also launching the ESG Focus futures contracts with FTSE Russell.
Furthermore, SGX has taken up a 10% stake in a digital exchange set up by DBS Group Holdings. The digital exchange, known as DBS Digital Exchange, will enable institutional investors and accredited investors to trade tokenised assets, such as cryptocurrencies.
SGX also signed a memorandum of understanding (MOU) with China Central Depository & Clearing Co (CCDC), a central securities depository for Chinese government bonds. Both parties will help promote the internationalisation of China’s bond market, and provide Chinese bond products and services internationally.
SGX will also work with CCDC researching bond products such as smart beta indices and developing ETFs linked to CCDC’s ChinaBond indices. Other initiatives include enhancing cross-border connectivity to facilitate mutual investor access in Singapore and China and jointly developing the bond market in the Shanghai Free Trade Zone (FTZ).
In addition, SGX announced that it signed an agreement with Nasdaq as the exclusive partner in Asia for its sustainable bond network initiative. The company plans to help enhance data access and transparency of sustainable bonds in Asia Pacific by bringing regional issuers onto the network. It hopes to further its position as the top five international green and sustainable bonds venue.
Although some analysts believe SGX is currently trading at a rich valuation, others reckon there is still more upside potential. Maybank Kim Eng has maintained its “buy” rating for the stock with a higher target price of $11.48 from $10.77. “A sooner-than-expected Covid-19 macro recovery may drive higher market volumes and liquidity,” says head of research Thilan Wickramasinghe in a Jan 24 note.
CGS-CIMB Research has also kept its “add” rating with a higher target price of $11.61 from $9.00 previously. “…we expect equity turnover to sustain over FY2021 given the low rate environment and macro uncertainty, supporting hedging demand,” analyst Andrea Choong writes in a Jan 23 report.
