Bear roams global stock exchanges

Singapore’s SGX, London’s LSE, Chicago’s CME and Frankfurt’s Deutsche Borse have lost more than 50 per cent of their value in the past eight months. Bear markets may be the kiss of death for global exchanges, but they also create opportunities

The last decade saw a frenzy of new issue listings, mergers and consolidations among the world’s stock exchanges. The NYSE, Euronext, Chicago Merc, NYMEX, NASDAQ, OMX, Dubai Financial Markets, Deutsche Borse, Singapore Exchange (SGX) and the Hong Kong Exchanges and Clearing proved spectacularly profitable investments in their own right. The FTSE Exchange Index rose a spectacular ten times between 2001 and 2007, with an annual return of an incredible 35 per cent, far more than even the world’s best performing stock indices. The past eight months, has seen the valuations, daily turnover and share prices of global exchanges evaporating. Exchanges such as Singapore’s SGX, London’s LSE, Chicago’s CME and Frankfurt’s Deutsche Borse have now lost more than 50 per cent of their value. Bear markets may be the kiss of death for global exchanges, but bear markets also create opportunities in this exciting sector.

Singapore sling
The Singapore Stock Exchange (SGX) is the leading cash and derivatives exchange in Southeast Asia. The SGX was a fairy tale investment from 2004 to October 2007, soaring from Sing $2 to $17 on the exponential rise in trading volumes and stock market indices. From the creation of SIMEX as a futures exchange to trade the Japanese Nikkei’s stock index and the Merc’s Eurodollar futures contract in 1984, Singapore Inc was determined to position its exchanges as the hub for pan Asian, not just, local financial markets products.

 So Singapore’s SGX grabbed one fourth of the global market share on the Nikkei 225 contract (more than Osaka) and began to trade futures contracts on the stock indices of Taiwan, India and Malaysia, easily outpacing its competitor exchanges in Hong Kong and Tokyo. Global financial futures, options, swap and warrants trading grew at 25 per cent a year in the Pacific Basin as regional banking systems, insurers and fund managers increasingly embraced risk management and risk insurance products. Singapore also has a stellar record in product innovation, introducing recently the world’s first Sharia compliant Japanese large cap fund in collaboration with Daiwa Asset Management to attract Middle East investors. The SGX also attracted global investors with its Chinese and Indian IPOs, its shipping trusts, its REITS and its structured warrant products, that grew at an annual rate of 50 per cent as the Asian bull market attracted retail speculators.

However, the SGX share price has fallen by more than 50 per cent to 7.4 Singapore dollars from its high of 17 last autumn. As Chinese, Indian and Southeast Asian stock market indices plunged after the Wall Street credit meltdown, the exodus of hedge funds from emerging markets and monetary tightening of Asian central banks, daily trading volumes on the SGX have plummeted from 3 billion last summer to less than 2 billion Singapore dollars now. As the SGX shares are almost totally correlated to exchange turnover, I cannot get positive on its shares until daily turnover volumes and the stock indices stabilise. I believe that the SGX bottom will coincide with a 2600-2800 on the Straits Times index and 1.5 billion Sing dollar daily trading volume. This means the EPS of SGX can easily fall to 25- 26 cents. Valuations will continue to compress as US Treasury bond yields rise and can well fall to 15X next years earnings.

So it is not all unreasonable to expect a Sing $4-4.5 “bottom” price on the SGX if the bear market in Singapore continues. Bottom fishing is extremely dangerous in the shares of a stock exchange trapped in a vicious bear market. However, amidst all the gloom and doom, it is critical not to lose perspective that SGX is the gateway to the world’s most dynamic growth engine. While algorithmic trading will not boost market turnover and Asian nationalism do not merit a takeover premium on the SGX, I am convinced that it is entirely possible to double one’s money on the SGX as long as the buy level is at or near a market bottom of SGD4-4.5. After all, SGX owns 5 per cent of the Bombay Stock Exchange and will take a strategic stake in the Taiwan stock exchange IPO in 2009.

The Tokyo Stock Exchange also owns 4.9 per cent of SGX, meaning that Singapore will increasingly attract Japanese exchange funds and derivatives contracts targeted at international investors. As the spectacular success of the Aussie dollar and Kiwi dollar, Uradishi bonds and Samurai (offshore) Euromarkets prove, Japan’s retail, bank and institutional investors can create highly profitable riches in the international financial markets constellation for nimble intermediaries like the SGX.

LSE too succumbs
Few strategic investments by Gulf sovereign wealth funds were as ill fated as the London Stock Exchange (LSE), one of the true iconic brands in international finance, in existence since three centuries. The LSE rejected takeover bids from NASDAQ, Deutsche Borse and Euronext, instead selling strategic stakes of 20.4 per cent to Borse Dubai and 15 per cent to the Qatar Investment Authority (QIA). Yet 2008 was a disaster for Britain’s leading cash equities, debt and derivatives exchange. Borse Dubai and QIA have taken huge losses as the LSE share price plunged from 20 pound sterling last January to July to only 9 pounds now. The CEO of the LSE has even travelled to Doha to reassure the Qataris about management strategy. LSE fell victim to the global credit crisis, increase in competitive risk, the fall in international IPO issuance and sluggish daily volumes in London STEPS and its Borsa Italiana subsidiary.

Market share in UK cash equities is increasingly shifting from primary markets to alternative exchanges, the liquidity venues of the current decade. LSE rejected NASDAQ’s 12.40 offer two years ago and NASDAQ then bought the Swedish operator of Nordic/Baltic stock exchange OMX. A bad move for the LSE, Borse Dubai and Qatar.

Chi- X, a unit of Instinet Europe, the electronic stock exchange trading system, directly targets LSE’s listed equities. Chi- X will broker 25 percent of trading in Footsie 100 shares by next year. The success of Chi- X is due to the EU’s new Market in the Financial Instruments Directive, which encourages alternative electronic trading platforms such as Chi- X, Turquoise and Plus Market Group PLC to compete with incumbent, traditional stock exchanges. The LSE is extremely dependent on cash equities and the UK markets, not as exposed to high growth derivatives markets as the NYSE Euronext or the Deutsche Borse. New issuer service revenues are correlated to the size and success of international IPOs, but the credit crisis has killed international new issues. This suggests revenues will not rise by 30 percent, unlike 2008.

The LSE has lost more than half its market cap as well as its credibility with the global financial markets. The LSE trades at 13 times forward earnings, among the cheapest exchanges in the world. It is now takeover bait for the Deutsche Borse, possibly the only way Borse Dubai and Qatar Investment Authority can recoup their losses. The LSE is a buy at 8 pounds for an 11 target.