SINGAPORE (May 29): Singapore Exchange will not renew the bulk of its MSCI contracts next year onwards. With trading of these index contracts coming to an end, SGX expects to suffer a 10–15% drop in earnings. What hurts too is that these MSCI contracts will now go to Hong Kong Exchanges and Clearing, pitting the two rival bourses yet again.
Analysts reacted to the news with a barrage of downgrades and cuts to their target price for SGX. “Beyond the immediate earnings impact, we believe SGX will see more competition from HKEX going forward in the derivatives space,” says DBS analyst Lim Rui Wen, who downgraded her call from “hold” to “fully valued”, with a new price target of $7.40, down from $10.
From Wednesday morning when the news was announced to the market close on Thursday, SGX’s share price has dropped by nearly a fifth to close at $8.15.
Two of the relatively popular MSCI contracts, MSCI Taiwan and MSCI Net Total Returns contributed about 11.3% and 2.3% of the total volume for SGX’s 3QFY2020 ended March 31. The only MSCI contract that will remain after February next year is MSCI Singapore, which accounted for around 6% of the volume. The MSCI Taiwan contract, in particular, was enjoying strong growth, up some 44% y-o-y in the quarter, although MSCI Singapore grew slightly faster at 51% y-o-y.
The most popular contract, by far, is the SGX FTSE China A50 Index Futures, which accounted for 46.8% of total volume during the same quarter, albeit with a slower growth rate of 5% y-o-y.
By any measure, the trading of derivatives is a big business for SGX. In 3QFY2020, derivatives revenue increased by 24% y-o-y to $106 million, accounting for 36% SGX’s of total revenue. SGX CEO Loh Boon Chye maintains that the exchange has in place a well-diversified, well-positioned portfolio of products plus a pipeline of new ones that will keep both market participants and investors interested.
“We will be launching more products around the Singapore market; we are broadening the suite of the cash equities markets and that will dovetail very well into the MSCI Singapore products suite,” Loh tells The Edge Singapore.
Equities is the most familiar asset class for many investors, but as an exchange, SGX can offer many more products, according to Loh. This trend is especially pronounced after the Global Financial Crisis. “Some have gone into data, technology. We’ve gone bigger into multi-assets. Some of the thematic and operating environment that we saw in the last five years, and will continue to see in the next five, ten years, support our strategy,” he adds.
In recent years, SGX has made a series of acquisitions to broaden its offerings. The most notable one was in January when it paid EUR 192.8 million ($301.3 million) for a 93% stake in Scientific Beta, a specialised index provider that can offer customisable solutions for large asset owners who want exposure to certain market factors such as value and momentum. “In addition, SGX has the capability to launch thematic indices that ETFs can be based on and which can then be listed and traded on our exchange,” says Loh.
Loh argues that his multi-asset push is necessary and that SGX is well positioned for this. He says, “We think the operating environment will be one of very low interest rates, for a very long time, and that calls for investment asset class choices that can generate more returns.”
“The investments over the years to build a multi-asset product suite should help the exchange to mitigate the impact over time,” says Jeffries analyst Krishna Guha, who is keeping his “hold” call but lowering his price target to $8.50 from $9.10.
Loh also reiterates that SGX will keep its 7.5 cents quarterly dividend payout. In fact, he wants to increase this payout as SGX’s business remains strong, has multiple strong cash-generative business lines, and a solid balance sheet. “We are committed to sustaining the dividend, and not only sustaining it, as I said before, we want to pay a sustainable, and growing dividend, and let our shareholders grow with us,” he says.
News of MSCI going with HKEx came after an eventful week for Hong Kong. On May 28, Beijing lawmakers passed a new sweeping set of security laws. The previous evening, the United States said it can no longer deem Hong Kong as autonomous, amid wider trade and geopolitical tensions with China. MSCI had said its move to go with Hong Kong came after years of discussions.
Loh, without making reference to the latest news about Hong Kong, notes that Singapore, as a financial centre, has always been very consistent and very transparent. “Singapore will always have that as a financial centre. You can always trust Singapore,” he says.