Singapore Exchange - UOB Kay Hian 2022-03-30: Strong Monthly Performance As Volatility Peaks


Singapore Exchange - Strong Monthly Performance As Volatility Peaks

  • For Feb 22, Singapore Exchange (SGX, SGX:S68) saw improved SDAV and DDAV as trading volatility peaked, mainly driven by the Ukraine-Russia war. Commodities and forex derivatives volumes rose as demand for risk management surged. Additional interest rate hikes are expected to boost profit further.
  • In our view, SGX remains fairly valued at current price levels with limited upside.

Reversal in securities volume.

  • Despite three fewer trading days in Feb 22, SGX's securities daily turnover value (SDAV) increased (+21.1% y-o-y, +35.9% m-o-m), on the back of increased volatility caused by the upcoming interest rate hikes, elevated inflation risks and Ukraine-Russia geopolitical tensions.
  • Heavily traded in-favour stocks such as Rex International (SGX:5WH) and Samudera Shipping Line (SGX:S56) also contributed to the outperformance.

Derivatives outperform.

  • SGX's derivatives daily average volume (DDAV) surged to highs not seen since Mar 20 (+5.2% y-o-y, +3.9% m-o-m), driven by an increased demand for risk-management tools amid heightened volatility.
  • Equity index futures increased (+4.9% y-o-y, - 11.6% m-o-m) as Nifty 50, Nikkei 225 and MSCI STI index futures posted strong gains y-o-y. The m-o-m decline was due to softer FTSE China A50 Index (-2.2% y-o-y, -17.0% m-o-m) and Taiwan Index futures (-3.6% y-o-y, -16.8% m-o-m), given that Feb 22 had fewer trading days.

Outperformance from revenue growth drivers.

  • Both forex and commodity derivatives outperformed amid raised global volatility caused by the UK-Russian conflict and SGX’s commanding market share in key product markets.
  • Forex derivatives, SGX’s earmarked revenue growth driver, saw robust volume growth for its US$/CNH futures (+15.0% y-o-y, +8.4% m-o-m), due to increasing adoption of CNH as a safe haven currency.
  • Total commodity derivatives volume surged 36.0% y-o-y as iron ore contracts (+40.5% y-o-y, +10.9% m-o-m) and forward freight agreements (+30.6% y-o-y, +42.2% m-o-m) volumes skyrocketed, caused by difficulties and uncertainties in global supply chains.

Assessing the impact of geopolitical events.

  • Geopolitical events/crises historically favour SGX as SDAV and DDAV volumes opine SDAV would soften in the coming months while DDAV continues its uptrend, unchanged from our previous expectations.

Additional boosts to treasury income.

  • As expected, the Fed raised the benchmark interest rate by 25bp in Mar 22 to combat record-high inflation. Also, the Fed committee reiterated their hawkish position and plans to increase rates at each of the six remaining meetings in 2022, nearly a full percentage higher than previously indicated in Dec 21.
  • As rates rise, we expect higher treasury income to follow suit and see a significant boost some time in 2HFY23/1HFY24, given that there is usually a 6-9-month lag.

SGX - Earnings forecast revision & recommendation

Llelleythan Tan UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-03-30
SGX Stock Analyst Report HOLD MAINTAIN HOLD 9.33 UP 9.090