Strong Monthly Performance As Trading Volatility Remains Elevated
In Apr 22, SGX saw sustained growth in DDAV as trading volumes for both equity-linked
and forex derivatives rose, driven by uncertainty caused by the Ukraine-Russia conflict.
SDAV continued its downtrend while commodity volumes normalised from recent
monthly highs. Upcoming interest rate hikes are expected to suppress SDAV while
boosting interest income. In our view, SGX remains fairly valued at current price levels,
with limited upside. Maintain HOLD with an unchanged target price of S$9.33.
WHAT’S NEW
• Decline in securities volume. Despite the benchmark STI Index being the strongest
performing developed-market benchmark globally for 4M22, securities daily average volume
(SDAV) continued its decline in Apr 22 to S$1.3b (-1.1% yoy, -18.2% mom). The lower mom
performance could be attributed to three fewer trading days in Apr 22 and coming off
monthly highs in Mar 22.
• Derivatives outperform. Derivatives daily average volume (DDAV) surged to 1.1m
contracts in Apr 22 (+25.1% yoy, -6.5% mom), driven by uncertainty from the ongoing
Ukraine-Russia conflict. On 26 April, DDAV rose to an all-time high of almost 3m contracts.
Total equity index futures surged (+23.3% yoy, -17.8% mom) while FTSE China A50 Index
volumes skyrocketed (+37.3% yoy, -17.9% mom) as SGX’s commanding market share
continued to hold up well against HKEX’s MSCI China A50 Index futures. Other equity index
futures such as FTSE Taiwan Index (+7.4% yoy, -11.5% mom) and FTSE Nifty 50 Index
(+14.5% yoy, -9.3% mom) also outperformed.
• Commodities stable while forex outperforms. Total forex futures volumes grew 27.0%
yoy, the highest since Mar 21 as both INR/USD futures (+8.6% yoy, +2.3% mom) and
USD/CNH futures (+58.0% yoy, -0.8% mom) surged with the latter increase being
attributable to the increasing adoption of CNH as a safe haven currency. Total commodity
derivatives volumes softened mom as market volatility normalised from recent monthly highs
but was largely stable yoy. Iron ore futures (+3.4% yoy, -49.0% mom) climbed while forward
freight agreement softened (-16.9% yoy, -41.6% mom) amid macro uncertainties.
STOCK IMPACT
• Impact of high inflation and interest rate hikes. Facing record-high inflation, the Fed has
indicated multiple upcoming interest rate hikes for the upcoming Jun/Jul 22 Fed meetings.
Looking back, periods of high inflation and corresponding interest rate hikes have historically
supressed SDAV levels as investors anticipated lower corporate earnings, forming a SDAV
floor at around S$1b post-hikes. As of end-Apr 22, SDAV is currently at S$1.25b, implying
that we expect a 15-20% drop in SDAV levels before seeing any potential rebound in trading
activity. This is in line with our expectations as we had already expected SDAV to soften from
elevated levels in Feb 22 and Mar 22 (1Q22), driven by the Ukraine-Russia conflict. Thus, as
the cash equities segment historically accounts for 35-40% of SGX’s annual revenue, we
expect revenue from this segment to moderate going forward, and drag down SGX’s overall
revenue and earnings.
• Boost in treasury income. In May 22, the Fed raised the benchmark interest rate by 50bp to
curb record-high inflation. As rates increase, we expect higher treasury income to follow suit
and there should be a significant boost some time in 2HFY23/1HFY24, given that there is
usually a lag of 6-9 months.
EARNINGS REVISION/RISK
• No changes to earnings estimates.
VALUATION/RECOMMENDATION
• Maintain HOLD with the same target price of S$9.33, pegged to the same PE of 23.7x
FY22F earnings, +1SD of SGX’s historical forward PE. Currently trading (25.1x FY22F PE) at
+2SD of its historical mean, we reckon that SGX is fully valued at current price levels and do
not see major potential upside. We think significant revenue from new initiatives such as
SGX’s Forex Electronic Communication Network and Special Purpose Acquisition Company
(SPACS) would take time to gestate, and major success from these initiatives could re-rate
SGX to trade at levels similar to peers’ average (28.6x).
KEY CATALYST
• Secondary listings of foreign listed entities.
• Longer-than-expected period of trading volatility.