People pass a logo of the SGX in Singapore's financial district © Reuters
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The decision by Singapore Exchange (SGX) to bid for London’s Baltic Exchange seems natural given Singapore’s historic roots as a trade and shipping hub. But it also highlights the pressure SGX’s new chief executive, Loh Boon Chye, is under to diversify, following a woeful year for new equities listings on the bourse and competition from regional centres.

Singapore is the world’s second busiest container port and the largest oil trading hub in Asia. With long-term demand for commodities expected to grow across Asia, the city-state would appear an ideal location for the trading and settlement of shipping contracts in which the Baltic Exchange specialises.

Yet SGX attracted just one initial public offering over S$150m ($111m) last year, along with 12 smaller ones. Meanwhile Hong Kong has edged out New York to become the world’s biggest IPO market by funds raised — a coup driven chiefly by listings of mainland Chinese groups.

SGX’s year in the doldrums was a stark contrast with 2012, when Formula One was poised to list on the city-state’s exchange, though the IPO never happened. There were 22 equity listings in Singapore that year, raising S$4.5bn.

The differing fortunes of SGX and Hong Kong underline the challenge facing Mr Loh, analysts say. SGX is left looking for a role to play as businesses in neighbouring Southeast Asian states have turned to their own national exchanges for big IPOs in recent years. Meanwhile, Deutsche Börse is planning to combine with the London Stock Exchange Group to create a new European giant, though Britain’s EU referendum result threatens the deal.

Peter Lenardos, managing director at RBC Capital Markets, says: “[SGX management] need to determine what they want to be; if they want to be a nationalistic, regional exchange — which they are now — or if they have larger ambitions, which I do not think they can do organically. That’s the key question for SGX.”

Five years ago, SGX’s planned A$8.4bn ($6.2bn) takeover of its Australian counterpart was blocked by the Australian government, which decided the deal would not be in the national interest.

$50bn

Market value of SGX-listed Reits (real estate investment trusts)

For SGX, the Baltic bid fits its strategy of developing Asian benchmarks for pricing commodities. The Baltic is best known for compiling the Baltic Dry Index, the global measure of the cost of transporting non-oil commodities such as iron ore and grain in bulk.

At a time when China, the world’s biggest consumer of raw materials, is trying to establish itself as a global price-setting centre, Singapore’s exchange is determined to maintain its entrepot role.

SGX executives say the deal would allow Singapore to master the freight price-setting that underpins the cost of all seaborne commodities. As traders and shipowners based in Asia play an increasingly decisive role in maritime trade, the deal would give the Baltic a stronger presence east of Suez, with SGX promoting its adoption by creating futures based on Baltic indices.

SGX managers say both exchanges would benefit from growth opportunities, including potential new shipping benchmarks and clearing tools.

Derivatives accounted for 38 per cent of SGX revenues for its 2015 financial year, compared with 27 per cent for securities. Those figures compare with 30 per cent and 33 per cent, respectively, in 2014.

© Reuters

With Baltic’s presence in the City of London and its connections, SGX would gain a bridgehead to build contacts in Europe. This may not be so beneficial should Britain leave the EU.

Carmen Lee, head of OCBC Investment Research, says the Baltic tie-up “may offer some complementary fit as Singapore is also a key centre for shipping and also for future shipping-related derivatives products or indices”. But she adds that as the global trade business becomes less profitable this may be less of a consideration.

Under Mr Loh, Singapore has expanded its derivative offerings, a process that began under his predecessor, Magnus Böcker. SGX is offering investors exposure to Chinese companies through derivatives based on MSCI indices, tracking Chinese companies such as Alibaba and Baidu that are listed overseas.

The new chief executive has also launched the first over-the-counter trading venue for Asian corporate bonds, SGX Bond Pro.

Meanwhile, SGX’s flow of IPOs has revived this year, with two real estate investment trusts (Reits) listing. Frasers Logistics and Industrial Trust raised $672m with a trust backed by Australian properties, the biggest new listing in Singapore since 2013, while Canadian insurer Manulife raised $519m by listing US properties last month.

The two listings underlined Singapore’s strength as the biggest hub for Reits in Asia outside Japan. Issuers have been drawn to Singapore’s deep and geographically diverse Reits market. The market value of SGX-listed Reits is about S$68bn ($50bn).

“SGX has done well in terms of the derivatives business and it is also growing its bond segment,” says Ms Lee of OCBC. “We see the next phase being more index-linked products and leveraging its strength in key sectors such as Reits.”

But while Reits are a strength for the bourse, the recent spate of Reit listings underlines the scarcity of other big IPOs. Analysts warn that, ultimately, any exchange that relies on offering exposure to China risks being eclipsed by China itself.

Mr Lenardos says: “SGX isn’t alone in saying [it wants] to provide access to China. Hong Kong gives you access to China and a whole list of Western exchanges are targeting China. And when China opens up — China will give you access to China.”

Copyright The Financial Times Limited 2017. All rights reserved.
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