What’s up? SGX stock has gone up 30% since the announcement of MAS review.
MAS has ruled out the participation of sovereign wealth fund and reforms will focus on the harder but more sustainable route of bringing quality companies onboard.
Why I am not buying now: Current valuation is fair given management’s goal of mid-single-digit CAGR dividend growth over the medium term. But current stock price risk significant downside if MAS review disappoints.
Background
SGX has actually done a great job building up its platform for commodities trading and foreign exchange (FX). It
- has nearly a 100% share of the international iron ore derivatives market
- is the largest clearing venue for Dry FFA, with market share doubling from 35% in 2017 to 70% in 2022
- owns The Baltic Exchange, which publishes the Baltic Exchange Dry Index, the global benchmark for freight
- SGX Commodities’ SICOM rubber futures is the global reference market for the agricultural product and volume market share has risen from 40% to 75% over the last five years
As Asia continues to industrialize and grow, there is still room to grow further.
On FX, SGX is the largest Asian FX Futures exchange, with FX futures aggregate notional volume reaching $3.805 trillion, a 43% year-on-year increase. And SGX is not resting on its laurels, having recently hired Hugh Whelan who come from CME to continue to grow SGX’s FX platform.
But Singapore remains disadvantaged when it comes to equities listing.
Our limited domestic market means there is a lack of promising companies that could pursue a public listing.
And amidst the growth of private equity and venture capital, more companies are choosing to remain private or stay private for longer.
Making things worse, the network properties of stock exchanges tend to concentrate order flow and liquidity. As a result, even those that go public tend to gravitate to the United States for its deep and liquid capital market and investor base.
Local investors also tend to distrust foreign companies that do a primary listing in Singapore.
As noted before, foreign companies incorporated overseas are subject to the Securities and Futures Act and Regulations, but not to the Singapore Companies Act. Even when foreign companies are both incorporated and listed in Singapore,
“it is often only an investment “shell” company which is incorporated here, and most of the operations of these foreign listings are conducted through foreign subsidiaries. As these foreign subsidiaries are not subject to the Singapore Companies Act, there is arguably a certain degree of regulatory “leakage”.
Increasingly too, countries are also competing for stock listings. For instance, Dubai requires all locally domiciled public joint stock companies and even others operating in the UAE that meet specific revenue conditions to list their shares locally. This may make it harder for foreign companies to list in Singapore as countries seek to boost their own domestic bourse.
Despite the challenges, SGX has been pursuing secondary listings and Singapore Depository Receipts(SDRs) to boost liquidity with other stock exchanges.
Unfortunately, these efforts also suffer from liquidity issues.
By virtue of their deeper markets, stocks on the US/home stock exchanges have tighter bid-ask spreads. This means buyer and seller can get their orders processed at a better price. Singapore investors also do not have an incentive to transact on the local secondary as they could easily access the US/foreign market on their own too.
While the market is optimistic that the MAS review will be the thing to revive the equity market on SGX, it would be an extremely challenging task.
MAS has made it clear that GIC and Temasek funds would not be mandated to take part in Singapore’s equity market. And I agree. While it might seem like a good thing, after all, countries around the world are doing it, it is not sustainable.
Southeast Asian companies on Nasdaq have recorded a median price decline of 80% since listing. This means that liquidity is only a part of the equation to a sustained vibrant equity market. SGX needs growing companies that give a good return to investors.
And perhaps more critically, give companies with potential the ‘why’ for listing in Singapore rather than other stock exchanges.
Finding New Areas of Growth
In its early days, Nasdaq was able to compete with the juggernaut New York Stock Exchange by carving out a niche in technology companies listing. Given the popularity of REITs on SGX, this is a niche that SGX can double down on. This could be particularly attractive with assets in countries where foreigners have been unable to invest in such as those of India and Indonesia. If SGX could bring more REITs that offer investors a chance to bet on the assets of these growing economies, it would certainly garner the attraction of investors. This could help build up the image of SGX as the go-to-exchange for REITs similar to CME as the exchange for commodities.
Other potential areas to explore could be private credit exchange traded funds or even new investment vehicles such as the ELTIF (European Long-term Investment Fund) and for UK investors the LTAF (Long-term Asset Fund) that invest in longer term projects. This is a unique opportunity particularly for Southeast Asia as countries look for funds to further develop their infrastructure, and pursue green transition.
The foray into digital ledger technology via the investment on MarketNode could also become a promising catalyst.
SGX is fairly priced at current valuation.
That said, these are areas that will take time to develop. Despite the uphill task, the market has responded positively and SGX has gained 30% since news of MAS review. This suggests significant downside if MAS review disappoints and perhaps unsuitable for the more conservative investor.
