SINGAPORE (Oct 18): Credit Suisse is initiating coverage of the Singapore Exchange (SGX) with a “neutral” call and a target price of $7.60, citing lack of near-term catalysts.

Analyst Rikin Shah believes that SGX’s investment case lies in its long-term growth through equities and its Asian gateway strategy.

“Nearer term, its fortunes are more linked to the current level of market activity, which remains uninspiring, with a risk of further seasonal slowdown in 4Q,” says Rikin.

The securities business has been muted, with turnover and revenue hitting a decade low in FY16 ($205 million), notes Rikin.  Declining velocity has been the main cause of the plunge, with a dearth of IPOs and privatisation deals exacerbating the situation.

However, derivatives growth has been a stabilising force, with revenue growth at 18% compounded annual growth rate in the past five years, notes Rikin, mitigating the 7% fall in securities revenue.

The FTSE CHINA A50 stands to be an indirect beneficiary of the Hong Kong-Shenzhen Stock Connect in the near-term, highlights Rikin, as SGX is the only offshore market that trades in China A50 Futures.

The newly launched MSCI China Futures, as well as currency futures and new commodity products such as LNG derivatives and Forward Freight Agreements should help to drive incremental growth in the long run, says Rikin.

Key upside risk is higher than expected average daily trading volume, and launches of China derivatives by competitors and muted turnovers remain key downside risks.

“We could turn more constructive on the stock if the cash turnover improves and capital market activity picks up meaningfully from the current levels,” says Rikin.

Shares of SGX are trading 4 cents higher at $7.26 as of 11.45am.