Derivatives up, securities down: analysts divided on SGX outlook

Jovi Ho
3-min read

Analysts are split on whether higher volume in derivatives trading can offset softer trading activity for securities on SGX.

Analysts are split on whether higher volume in derivatives trading can offset softer trading activity for securities on the Singapore Exchange (SGX), along with what this spells for the bourse, itself also a listed company.

SGX’s securities volume is trending downwards, with the 5MFY2023 ended November securities daily average volume (SDAV) down 10.5% y-o-y at 1,095 million contracts as the market sentiment remained subdued due to macroeconomic factors, and the volumes moderated from a record year in FY2022, writes PhillipCapital Research analyst Glenn Thum.

However, SGX’s derivatives volume is trending upwards, with the 5MFY2023 derivatives daily average volume (DDAV) up 9.4% y-o-y. As market volatility continues to rise, derivatives volume can climb for the rest of FY2023, he adds.

Thum remains bullish on the bourse, maintaining his “buy” call in a Dec 8 note with an unchanged target price of $11.71.

SGX’s equity, currency and commodities derivatives average clearing fee per contract reached new highs, at $1.62 in 1QFY2023 ended September. This is 12% higher y-o-y and 7% higher than FY2022’s average clearing fee of $1.51.

The uptick in derivatives pricing is mainly due to the product mix of the derivatives being traded. This is encouraging, writes Thum, and the derivatives fee should continue to trend upward.

However, SGX’s securities average clearing fee per contract of 2.58 basis points (bps) in 1QFY2023 was marginally higher than FY2022’s average clearing fee of 2.56 bps. “We should expect this to maintain at these levels going into FY2023,” he adds.

Treasury income to tick up in FY2023 

On the other hand, in FY2021 and FY2022, SGX’s treasury income dipped due to the low interest rate environment.

However, Thum expects a rebound in FY2023 by 8%. “SGX’s treasury income is lagging behind the Fed Fund Rates. As a majority of SGX’s collateral balances are placed in fixed deposits (FDs) with the tenure spread out, certain deposits have not matured yet and the interest rates have not been refreshed. Nonetheless, moving into FY2023 we should expect the treasury income to recover to pre-pandemic levels as they get placed into higher interest FDs.”

SDAV to dip

Meanwhile, RHB Group Research analyst Shekhar Jaiswal holds a more muted outlook on SGX. He believes SDAV could surprise on the downside despite mild upward earnings adjustments.

In a Dec 8 note, Jaiswal maintained his “neutral” rating with a higher target price of $9.30 from $9.00 previously. “We assess to be fairly priced, amid expected earnings declines for FY2023 and an underwhelming yield.”

Similar to PhillipCapital’s Thum, Jaiswal expects a rise in treasury income. He believes this will commence in 2HFY2023 and move higher at a gradual pace during the forecast period.

“SGX’s forward P/E of 22x is in line with its historical 1-year forward P/E, which we believe is a fair valuation,” writes Jaiswal. “We suggest investors to wait for a better entry point as the expectation of a muted SDAV outlook going forward could pose a downside risk to our and the consensus estimates. In addition, the stock offers a below-market dividend yield of 3.5%. Our target price is based on a target P/E of 21x on 12 months’ forward earnings per share (EPS) [and] includes an ESG premium of 8% over its fair value of $8.60.”

As at 9.54am, shares in SGX are trading 4 cents higher, or 0.44% up, at $9.12.

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