“We believe the prior year, which included assassination attempts against a presidential candidate and dramatic shifts in trade policy, sets a high bar in terms of volatility. But we believe SGX's outsize exposure to derivatives, compared with other exchanges, positions it well as prior secular trends around stable geopolitics, globalisation, free trade and supportive central banks appear to weaken,” he writes in a Dec 15 note.
During November, turnover “strengthened meaningfully” in SGX’s cash equities segment, driven by investor interest in index stocks and REITs as rate expectations shifted lower. “While we view this as cyclical rather than structural, it supports near-term revenue,” says Van Keulen.
Van Keulen has raised his fair value estimate on “wide-moat” SGX, itself listed on the local bourse, by 3% to $15, “reflecting the time value of money”. That said, this is below the current trading price.
With a two-star rating against Morningstar’s five-tier scale, Van Keulen says SGX shares “screen as overvalued”, which he believes “reflects the market’s expectation that higher derivatives activity persists”.
See also: PhillipCapital cuts Sembcorp’s TP to $7.10, maintains ‘buy’
Derivatives are the core driver of SGX’s earnings, accounting for over half of the group’s revenue. “While foreign exchange derivatives benefit from trade-driven volatility, equity derivative volumes have stabilised at elevated levels, similar to those seen this time last year, which were boosted by the US election cycle.”
SGX continues to lean into its volatility-led strategy, adds Van Keulen, with Bitcoin and cryptocurrency derivatives launching on the exchange in November. “While immaterial, these products reinforce SGX's positioning as Asia's leading exchange for volatility-driven trading.”
As at 10.23am, SGX shares are trading 14 cents lower, or 0.82% down, at $16.86.
