Poised for next spurt of growth

THE financial landscape has undoubtedly been very tough since the global financial crisis (GFC) of 2008.

Since then, financial sector regulation has tightened, giving firms less leeway to hunt for profits. The sector has lost more than its former glory; it has been cast as a global villain and villified for its greed in bringing the world economy to the brink.

Meanwhile, Main Street investors, shell-shocked by the meltdown in financial asset prices in 2008 and early 2009, have yet to recover their verve to venture back into the market.

Anaemic growth in the US economy and the threat of it falling over the fiscal cliff; the eurozone debt crisis; and slowing growth in China - individually, each is enough to make investors edgy; when combined, they cause paralysis.

Against this backdrop, the Singapore Exchange (SGX) has done a creditable job of continuing to keep its cash register ringing. In the financial year ended June 30, 2012, it raked in $292 million in net earnings. That's a decline of 39 per cent from the record earnings of $477 million recorded in 2008. Still, this is a more than 160 per cent jump - or a compounded annual growth of 15 per cent - from its earnings in 2005. Today, it is the sixth most valuable exchange in the world.

Meeting needs

SGX has managed to stay afloat by making use of its efficient infrastructure to serve up the products most needed by the market. When interest in equities waned, it stepped up its offering of bonds and derivatives. It also launched various new contracts to cater to the need for stability and predictability amid the market volatility.

In its favour, SGX is not only defending its turf well in the current difficult environment, but also positioning itself for its next spurt of growth.

"The key for us - once growth starts in the US or in Europe - is how we remain in the flow of finances between Asia and the West," says SGX president Muthukrishnan Ramaswami.

"For us, it's all about financial intermediation. How do our contracts remain relevant? How do our stocks remain relevant?"

Mr Ramaswami is sanguine about Asia's prospects and by extension, the future of SGX. If Europe grows at 3 per cent, Asia has to grow at 10, he reasons.

"If you look at the demographics, the percentage of the world that live in Asia, which is still relatively poor compared to the developed world, is very, very high. If we take the infrastructure needs in Asia in the next 10 years, it's as much as having to reconstruct Europe after the Second World War. It's a huge amount of infrastructure that needs to be built."

A market to raise funds for all that development has to be established - whether it be securitisation, government bond markets, or a pan-Asian bond market.

"If you take the Eurobond markets and look at the size of it and what it did for funding for Europe, we will need a similar Asian bond market. Developing all these will be kind of where we spend our time," he says.

SGX is the biggest offshore bond listing facility in Asia. "Ninety-nine per cent of the corporate bonds issued outside of their home countries are listed in Singapore," says Mr Ramaswami.

Mr Ramaswami, who joined SGX in 2007 to manage the group's operations and technology functions, says SGX is trying to entrench itself as the gateway to Asia.

"Gateway means two things. One, the ability to service people who want to come and invest across Asia; and second, service companies in Asia who want to go out to the world and raise money."

Anyone who comes to SGX can deal in a variety of equity index futures, he explains. SGX now has Indian Nifty futures, Chinese A50 futures, Nikkei options and the latest addition, MSCI Indonesian futures contracts.

"That's part of our being a gateway - how do you service people coming in, looking to do things across Asia."

The recently launched Asean Trading Link, in which SGX is a participant, may also eventually make this tiny red dot the access point to the bourses in the region.

Under this initiative, regional stock exchanges in Kuala Lumpur, Bangkok, Jakarta, Manila and Singapore will be hooked up to a common platform so that brokers in any of these markets can execute trades in the securities in any of the exchanges.

As a grouping, Asean accounts for 5 or 6 per cent of the world's capital markets. Says Mr Ramaswami: "Anyone in the world who has a basket of money to invest and who uses an asset-allocation model cannot ignore us. We are in a growing part of the world, so there will be attractiveness to invest."

The other function of the gateway, says Mr Ramaswami, is to help companies across Asia raise capital. Bond listing is one example. Equity listing is another, though SGX seems to be moving away from a more general approach of attracting foreign listing to targeting those in specific sectors.

Yield market

"Slowly, Singapore is being seen as a yield market more than a growth market," notes Mr Ramaswami.

Many of the business and real estate trusts listed on SGX have done well on a currency-adjusted basis. "In today's environment where everyone is risk-averse and searching for yields, we are seeing more interest in these securities," he adds.

SGX has also carved out a niche in the listing of marine-related stocks. There are a fair number of analysts who understand the industry in its global context and who are able to value these companies appropriately.

While it has been pretty quiet on the initial public offering front so far this year, Mr Ramaswami sees IPO activity picking up next year after the US elections.

Being neither a major natural resource producer nor a big consumer makes Singapore an ideal middleman in facilitating the trading of such products, says Mr Ramaswami. SGX now clears a significant portion of the world's quantity of iron ore swaps, most of which are traded between Australia and China.

"We are neither producer or consumer-biased. And we are geographically well placed to service the flow of these kinds of business," he says.

SGX envisages the energy sector as the next growth area. Though energy consumption is rising in Asia, most of the trading of energy products still takes place in the West and there are few price points which are based in Asia, notes Mr Ramaswami. "We think we will soon have something which is Asian based, and we will be part of that."

SGX expects derivatives trading to be the fastest-growing segment of its business in the next three years. As these products help manage risk and "with risk being quite high now, we are seeing activities in the derivatives side more than anything else", he says.

Equities trading, however, is far from dead, since all the new liquidity that is being flushed out of the US will need to find a home. "That's when we think the equity market will pick up. In the long term, the only inflation-protected asset that can grow is equities," Mr Ramaswami says.

It's about location

The secret of successful property investment is location, location, location. The same applies for an exchange, especially one that does not have a huge domestic market. It's about which part of the world one is located.

All of Singapore's neighbours - Indonesia, Thailand, Malaysia and the Philippines - are physically bigger than it is. It's a matter of time before these larger markets experience development that makes their stock-market valuations higher than Singapore's. The key question is how Singapore will participate in that growth. "How do we become a gateway to that, or a facilitator for that, or a help in that?"

SGX's initiatives, such as the listing of Indonesian futures contracts and the linking up with Malaysia on the Asean Trading Link, help ensure that it is either a part of that growth or a facilitator of that growth.

"Indonesia growing or Malaysia growing is not a bad thing for us. It's a good thing," says Mr Ramaswami.

Already, SGX is reaping dividends of its Asian gateway strategy. In the last financial year, international revenue made up 56 per cent of the group revenue.

Giving an assessment of where SGX is today and where it is headed, Mr Ramaswami says: "We have an extremely strong balance sheet. We are one of the best capitalised clearing houses in the world. We are conservatively run. We look at it as we only have upside ahead. We are reasonably happy where we are."