SGX just gets posh London address with Baltic Exchange

The SGX Centre located at 4 Shenton Way.
The SGX Centre located at 4 Shenton Way. ST PHOTO: DESMOND WEE

SINGAPORE (BLOOMBERG) - What does Singapore's bourse hope to get out of its takeover of the Baltic Exchange?

On the face of it, a lot.

Faced with stagnating revenues from its securities business, Singapore Exchange has been looking to diversify its revenue base. But since its attempt to purchase Australia's ASX was blocked by that country's Treasurer in 2011, its only completed takeover has been its locally based energy-trading platform from the government in 2014.

There's also a geographic logic. Singapore is the world's busiest container port after Shanghai and a major hub for trading many of the commodities that fill the holds of the globe's shipping fleet. One-third of the world's traded goods pass through the Straits of Malacca and Singapore. Could there be any better place to situate the global shipbroking industry's central clearing house?

Sadly, that ship has sailed. Founded in a Threadneedle Street coffee house in 1744, the Baltic has long ceased to be a central trading node. Despite the "Exchange" in its name, these days it's more of a market-information service, generating an array of indexes such as the Baltic Dry to help members work out a fair price for transporting cargo. Most of the actual exchange takes place over-the-counter, between shipowners, charterers and brokers. Revenue last year was a mere 6 million pounds (S$12.1 million), with net income of 1.3 million pounds for the shipping industry players who make up the Baltic's shareholder base.

Singapore Exchange's own net income last year was S$349 million. The Baltic Exchange's paltry profits will barely move that needle. The real question then is, why is SGX allowing itself to get distracted by what's at best a trophy purchase?

What Singapore really needs is an honest-to-goodness market for equities that can once again excite both its aging population and global companies looking for informed price discovery and superior value addition.

Both are daunting challenges. Singapore's IPO market last year was the quietest since 2001. Meanwhile, the city's investing public has been bruised once too often. Mainland Chinese shares have shed more than half their value on the SGX over the past decade, even as the Hong Kong stock exchange's Hang Seng China Enterprises Index has risen 31 per cent in US dollar terms.

Whatever confidence remained went out the window following a penny-stock scandal in 2013. Incidents of market abuse continue to dog SGX, as do worrying lapses in governance at some of the city-state's companies. The exchange's daily turnover has averaged just S$1 billion so far this year, down 25 per cent from 2011. SGX's operating income last quarter was basically flat from a year earlier at S$102.6 million, with derivatives accounting for about two-fifths of it.

Baltic is better seen as a financial-information provider - the sort of business against which Bloomberg LP, publisher of Gadfly, competes. The prospective deal more closely resembles General Atlantic's purchase of a majority stake in commodity- price news service Argus Media, a transaction that valued the target at almost 1 billion pounds. 

Chasing an information service might suggest SGX is getting disillusioned with those old-fashioned things called stocks and bonds. In the past four quarters, only about S$29 million of the exchange's capital expenditure has gone into the securities market, according to data compiled by Bloomberg, compared with more than S$50 million spent on derivatives.

The argument that the island-state's maritime heritage makes it a natural home for things like the Baltic Dry Index is also spotty. Even within Singapore's currently comatose securities market, mariners aren't getting a second look. Fewer than 12 million shares and trusts linked to the shipping industry have changed hands on average this year, down 41 per cent from 2011.

On closer inspection, SGX may just be buying a flashy London address. Shareholders who have got very little from the stock over the past five years except a juicy dividend yield would have preferred something more substantial.     

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.