Singapore: Singapore Exchange

 

Just a few short hours after my midnight arrival in Singapore, I had the pleasure of meeting with Darrell Lim at the Singapore Exchange (SGX).  It looked like I was in for a treat upon arriving at the exchange which is a very impressive building on Shenton Way, right in the heart of the financial district.  Even the elevator ride up to the exchange lobby was impressive.  A massive data board and ticker, placed at the same angle of the elevator, follows you up the entire length of travel, displaying the history and major events of the exchange.  I shot a little video on the way down the escalator that’s probably a little tough to watch (shaky video, narrow angle of view, etc.), but you’ll have to take my word that it’s impressive first hand.

Darrell was gracious with his time, especially considering SGX had just released its earnings that very morning.  To read the summary, click here.

We jumped right in to a great discussion, starting with a few points on how Asian exchanges are different from their U.S. and European cousins.  Asian exchanges own their own clearing houses and tend to provide services across the entire gamut of issues related to public securities (listing, trading, clearing, etc.).  I heard a similar explanation in Sydney when talking with representatives from ASX.  Interestingly, SGX and ASX announced plans to merge in 2010, but a variety of issues prevented the deal from ever becoming a reality.  I’ll expand more on that later…

With the ink still wet on their annual earnings report, Darrell highlighted the importance of commodity trading at SGX.  Specifically, SGX is the global exchange leader for iron ore and rubber, currently facilitating ~95% of all trading.  Iron ore is the second most heavily traded commodity on the planet (after oil), and 95% of those trades are moving through SGX.

Ryan Hessenthaler with Darrell Lim, Vice President, Head of Investor Relations

Darrell explained that being small, mercantilist, and innovative is part of the DNA of Singapore, and the exchange reflects that mindset.  They have to be outward looking to attract and retain capital.  They have certainly been successful in doing just that.  Darrell noted that Singapore is somewhat like the “Switzerland of Asia.”   Singapore is a global financial center and it has strong governments, mature markets, and effective regulations in place to safeguard investments and capital.  While I haven’t confirmed the statement, Darrell reported that only New York City domiciles more capital than Singapore through banks, brokerages, etc.

The location of Singapore was also a discussion topic.  Geographically, Singapore is positioned in a sweet spot between China, India, and Australia.  This location has proved to be very advantageous.  As Darrell commented, “The Chinese are never going to go to Sydney to trade, and the Aussies won’t go to Shanghai either… but they’ll both come to Singapore to get the transactions done.”

I asked how Hong Kong factors in to the equation – a Singapore vs. Hong Kong type of battle.  I’ve visited Hong Kong a few times in the past decade and have been impressed with the many things going on there.  As I might have expected when asking such a question in Singapore, Darrell was quick to say the distinction between Singapore and Hong Kong was more subtle a number of years ago… but that Singapore has emerged as a global financial center.

He argued that Hong Kong is truly a China play; it is the conduit to get in and out of China.  He conceded that given China’s size, that access is incredibly valuable, but suggested that Hong Kong is in a tough position when it comes to acting as a global financial center.  As long as China’s markets remains difficult to access directly, Hong Kong will remain the portal through which investors can get access to the broader Chinese market.  If China becomes more open and demonstrates a willingness to play nice with the global investment community, the focus will shift from Hong Kong to Shanghai as the direct route to China.

That conversation continued with questions about Tokyo, Sydney, and Mumbai.  Darrell said the Japanese are primarily concerned with Japan, the Australians are focused on Australia, and India is still fractured… which all points to Singapore as the global financial center in Asia.  From my short visit to Singapore, I can’t point to anything that would fundamentally refute Darrell’s position about Singapore’s position in the financial world.

Earlier in the blog, I mentioned an attempted merger between SGX and ASX in 2010.  The combination of the two groups looked good on paper from a business perspective.  Each group had specialties the other lacked and a merger appeared to be complimentary and mutually beneficial.  Darrell worked closely on that deal and said that ultimately politics got in the way.  He noted there was a great deal of nationalistic sentiment in both Singapore and Australia that prevented the deal from closing.

I asked about potential deals with other exchanges in the region.  Darrell explained SGX has grown significantly and has built in-house much of what they would have targeted in the past, so a merger is less likely these days.  Nationalistic sentiment still runs deep, so potential mergers would stir-up the same issues SGX encountered with ASX.  Darrell said, “If we tried to merge with Malaysia or Indonesia, we would likely start a war.”  I smiled at his comment (thinking he was being a little sarcastic in his description)… but he quickly said, “No, I’m serious.  That sort of deal could actually start a war.  It would be like Texas and Mexico merging… just isn’t going to happen.”

SGX isn’t interested in Singapore starting a war with a neighboring country… but SGX certainly has their sites on continuing to take market share wherever they can.  Given their drive, focus, and discipline, I have little doubt they’ll be successful in their efforts.

 

Special thanks to Brennan Staheli, Joshua Cooper, and the Lunt Capital team for their contributions to this report.