With escalating tensions between the US and China over trade tariffs, stock markets around the world have swooned and fallen significantly over the last two months. The Straits Times Index (SGX: ^STI) is no exception, having fallen from a high of around 3,400 points at its peak this year to about 3,081 currently, for a year-to-date return of around 0.4%. If we factor in a dividend yield of some 4% for the index, this means that the total return for the index has only been around 4.4%.
Singapore Exchange Limited (SGX: S68), or SGX, however, has performed significantly better. At a share price of S$8.20, SGX has provided a year-to-date capital gain of around 14.7%. If we add in the dividend of S$0.15, the total return for SGX would be around 16.8%. This beats the return from the index by slightly more than 12%.
Investors, however, may be curious to know if this performance can be sustained. Is SGX’s valuation expensive? And can it continue to grow and prosper?
Strong derivatives growth
In its recent FY 2019 earnings (SGX has a 30 June fiscal year-end), the group set a record in derivatives volumes and open interest. This was driven by institutional demand for risk management tools and investment solutions. SGX’s suite of derivatives, spanning futures and options products for both indices and commodities, helps these investors to hedge their portfolios against volatility.
Derivatives revenue rose by 35% year-on-year to S$459.7 million, and for the first time, it has taken up the bulk of SGX’s revenue at 51% of total revenue. SGX continues to see growth in derivatives – in its July 2019 market statistics, total forex futures traded volume increased by 23% year-on-year, while USD/CNH futures traded volume surged 31% year-on-year.
SGX’s ultimate goal is to become a successful multi-asset exchange, rather than simply focusing on just one aspect of the securities industry. To this end, the management team has engaged in a series of bolt-on acquisitions to boost SGX’s various businesses. During FY 2019, investments in Trumid, BidFX and Freightos supported the growth of the Fixed Income, Currencies and Commodities segments, respectively.
A capital injection of S$5 million was also made into SGX Bond Trading Pte Ltd to boost SGX-BT’s OTC Trading Platform for Asian bonds, while a strategic investment was made into SmartKarma, a Singapore-based fintech firm with an investment research platform.
NSE IFSC-SGX Connect
In early August, SGX and the National Stock Exchange of India (NSE) announced the proposed NSE International Financial Service Centre (IFSC)-SGX Connect, which will allow both SGX and NSE ISFC members to access the Nifty products. This initiative is expected to be operational before the end of 2020 and is positive as it will increase the range of products available for market participants on both exchanges.
Numerous initiatives to drive continued growth
The above are only some of the many initiatives that the bourse operator is working with concurrently to grow the business to the next level. This multi-pronged approach sets the stage for SGX to expand its various businesses. Investors can look forward to better numbers ahead as the group integrates its acquisitions and powers on with its derivatives suite of products.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of Singapore Exchange Limited. Motley Fool Singapore contributor Royston Yang owns shares in Singapore Exchange Limited.