EUR 850.00 For Business Accounts Only

Morningstar | Feedback from SGX Presentation at Morningstar Moat Conference

Narrow-moat Singapore Exchange attended our Management Behind the Moat Conference and outlined its growth strategy. Our long-term thesis on the exchange is unchanged along with our fair value of SGD 8.40. At close to 18% discount to our fair value, we continue to see the exchange as undervalued. While the exchange’s earnings are volatile and dependent on capital market conditions, we reiterate our view that the focus should be on the underlying fundamentals on the exchange. For Singapore Exchange, the focus remains on the development of derivatives products. While the presentation highlighted the majority of derivatives trading volume is linked to equity indexes, we note the risk management aspect of the derivatives contract is driven by volatility in the markets. The exchange has broadened its derivatives portfolio across currencies, commodities and energy and the acquisition of the Baltic Exchange and investment in Freightos, an online marketplace for sea freight rates, will see more extensive products around freight.

Derivatives contracts are traded close to 22 hours and the night session in Asia, or morning session in the U.S. and Europe, contributes close to 20% of derivatives trading volume. We note the extension of Japan Exchange Group’s night trading session has seen its contribution close to 40% of total volume. This suggests potential upside for Singapore Exchange’s derivatives volume as its products are progressively marketed post opening of offices in key financial centres in London, New York, Chicago and San Francisco. On the clearing side, the exchange also highlighted cross margining across its product portfolio, allowing clients to lower capital commitment on asset classes with negative correlation. While we do not assign switching cost as a moat source to financial exchanges, the above does increases the incentive for a client to trade and clear through a single integrated exchange, if the exchange offers a broad based of derivatives products.