SINGAPORE (Feb 7): Analysts say the proposed creation of a stock market trading link between Bursa Malaysia (BM) and Singapore Exchange (SGX) is a positive move which could improve efficiency, reduce costs, and drive liquidity on both stock markets.

The Monetary Authority of Singapore (MAS) and the Securities Commission Malaysia (SC) on Tuesday announced plans for the network, which will allow cross-border clearing and settlement of traded stocks.

MAS and SC will set up cross-border supervisory and enforcement arrangements, and work with SGX and BM to get the trading link off the ground by the end of 2018.

See: Malaysia and Singapore to set up stock market trading link

“The convenience of holding cross-border stocks arising from the BM-SGX trading link is likely to generate interest particularly among retail investors, who unlike funds, may not already have their own access to multiple markets through existing channels,” says DBS Group Research lead analyst Lim Sue Lin in a flash note on Wednesday.

Lim describes the proposed trading link as a “positive move towards improving liquidity”.

“We reiterate our positive view on SGX and believe that SGX’s continued efforts to drive market liquidity and new product initiatives should bear fruit in the coming years,” she adds.

On the ground, however, some investors are wary about the proposed BM-SGX trading link.

In 1990, the Stock Exchange of Singapore had set up CLOB International, an over-the-counter market for Malaysian and foreign shares. The Central Order Limit Book (CLOB) served as a secondary market in Singapore that traded mainly Malaysian stocks.

Then, at the height of the Asian Financial Crisis in 1998, Malaysia’s then-Prime Minister Mahathir Mohamad pulled the rug on CLOB as part of a slew of measures to tackle the crisis.

“Recall also that the older Central Limit Order Book back in 1990s led to much investment losses and unhappiness among Singapore investors, after it was deemed to be an ‘illegal market’ by the Malaysian government,” says CIMB Research analyst Ngoh Yi Sin in a flash note on Tuesday.

The suspension of CLOB left some 180,000 Singapore-based investors holding US$4.3 billion worth of Malaysian shares stranded.

DBS’ Lim, however, allays fears that the new BM-SGX trading link is reminiscent of CLOB.

“We note that the stock market trading link, in contrast to CLOB, allows investors to trade and settle shares listed on each other’s stock market,” she says.

CLOB aside, CIMB’s Ngoh opines that the BM-SGX trading link could potentially boost interest and vibrancy in both capital markets, allowing seamless access to a combined market cap of over US$1.2 trillion and 1,600 listed companies.

“If successful, this BM-SGX trading link could replicate the success of the Hong Kong-China stock connect, in terms of higher cross-border trading and investment flows, possibly resulting in higher trading turnover for SGX,” Ngoh says.

According to Maybank Kim Eng Research analyst Ng Li Hiang, this could mean further upside for SGX’s securities daily average value (SDAV) forecasts.

“With higher traded value from more liquidity, turnover velocity could improve,” Ng says in a Wednesday report. “Our sensitivity analysis shows that for every 10% increase in SDAV, securities clearing revenue will rise by 8-10%.”

However, Ng cautions that the trading link could also lead to higher staff and technology costs to support new systems and platforms.

Maybank estimates SGX’s costs to increase at a compound annual growth rate (CAGR) of approximately 5%.

Pending further details and updates on the trading link, all three research houses are maintaining their forecasts on SGX.

DBS is keeping its “buy” call on SGX with an unchanged target price of $8.90; CIMB is keeping its “add” call on SGX with an unchanged target price of $8.50; and Maybank is keeping its “buy” call on SGX with an unchanged target price of $8.82.

As at 1.19pm, shares of SGX are trading 11 cents higher at $7.99. According to DBS forecasts and valuations, this implies an estimated price-to-earnings ratio of 22.4 times and a dividend yield of 4.2% for FY18.