Derivatives trading see boost in volume, value amid Covid-19
The Singapore stock market was not the only market to see a spike in trading volume and value as the Covid-19 pandemic took the world by storm. The local derivatives market, too, experienced a similar situation.
According to statistics from the Singapore Exchange (SGX), the number of its derivatives contracts traded grew from 19.5 million contracts in January to 23.9 million contracts in February. The figure jumped to 32.9 million contracts in March. Compared to the same periods a year ago, all three months recorded a higher number of contracts traded.
Besides SGX, there are a handful of smaller derivatives exchanges with operations here. The Asia Pacific Exchange, backed by Chinese investors, did not provide figures for the first three months of the year. However, it notes that new clients have come on board recently to hedge their risks against the market volatility. It points out that the volume of the APEX Crude Palm Oil Futures Contract (CPF) — its most actively traded product — grew to an average daily volume of 25,000 to 30,000 lots in May. This was up from 10,000 to 15,000 lots in April 2019 when it was launched.
Over-the-counter (OTC) derivatives, too, saw a surge. OCBC Securities says its OTC derivatives soared 168% in March compared to pre-Covid-19 volumes. The main underlying assets driving the increase in volume and value of OTC derivatives were gold, oil, foreign exchange (FX) and equity index, it notes. DBS Bank says the volumes of its corporate FX, regional OTC FX derivatives and regional OTC interest rate derivatives jumped 40%, 30% and 15%, respectively.
According to statistics from the Monetary Authority of Singapore (MAS), the total number and aggregate notional value of new OTC derivatives transactions leapt from 778,917 and US$18.01 trillion ($25.11 trillion) respectively in January, to 949,100 and US$18.43 trillion in March. This was despite a dip in both figures to 776,014 and US$17.78 trillion, respectively, in February. Compared to the same periods a year ago, all three months recorded higher total number and aggregate notional value of new OTC derivatives transactions.
Keeve Tan, head of futures and FX at OCBC Securities, says the industry-wide surge was due to a “sense of fear” in the markets. The CBOE Volatility Index (VIX), which is recognised as the “fear” index, hit 80 points on March 16 — a level not seen since the global financial crisis, he points out. Any value under 12 points denotes “little fear”, while those above 20 are “typical of a fearful market”, he says.
“Fear is certainly a major factor causing the increase in volume and value traded for the OTC and [ exchange traded derivative] markets, as investors and speculators either seek safe haven assets in a flight-to-safety play, or look to ride on the increased volatility in the markets,” Tan tells The Edge Singapore.
Andrew Ng, head of treasury and markets at DBS Bank, says the increase in demand was driven by market uncertainty as Singapore implemented the “circuit breaker” measures and the US Federal Reserve cut interest rates to zero. As a result, investors hedged their risks to fend against uncertainty. The increase in demand was also driven by significant portfolio shifts as the US dollar rose, credit spreads widened and funding cost increased, he adds.
The big question now is whether the surge in derivatives trading volume and value can be sustained. Both trading volume and value figures of exchange traded derivatives have declined in April and May, according to SGX. OCBC’s trading volume of OTC derivatives has fallen in both months, though it is still 30% to 40% higher than pre-Covid-19 levels. DBS did not provide data. The MAS has yet to publish April and May data on OTC derivatives.
DBS’ Ng reckons the uptick in volumes is unlikely to be sustained as the real impact of the pandemic will take some time to unravel. “Caution continues to run through Asian mar
kets and has been curtailing trading volumes as investors sit on the sidelines,” he tells The Edge Singapore.
While OCBC Securities’ Tan agrees, he notes that OCBC Securities has seen a 35% increase in the number of account openings by clients wanting to trade either exchange traded or OTC derivatives. With an impending recession, clients want to hedge their risks, he says. To that end, derivatives are increasingly becoming an important element of wealth management for many of his clients, he explains.
As such, new clients may eventually continue to be active post- Covid- 19 and thus contribute to a sustained increase in volume and value of exchange traded and OTC derivatives, Tan says. “With each crisis, we notice that the public is becoming more informed of the various instruments and options they have to manage and grow their wealth. The current group of investors or traders we interact with certainly is a lot more sophisticated compared to those we see 10 years ago,” he says.
Still, how will SGX’s non-renewal of its MSCI contracts impact the derivatives market? On May 27, SGX announced that all its non-Singapore MSCI products will expire from February 2021 onwards. Only its MSCI Singapore futures and options will remain listed on SGX. At the same time, the Hong Kong Exchange (HKEX) — which is widely seen as a major rival to SGX — announced that it will offer 37 new products after signing an agreement with MSCI.
OCBC Securities’ Tan says an adverse impact on the local derivatives market is unlikely to happen. This is because the brokerage’s clients will still be able to access the same MSCI contracts through its platform on HKEX.
DBS’ Ng agrees. “In today’s world of electronic trading, the geographical location of contracts has little impact on traders. As such, there should be minimal impact on the development of Singapore’s OTC derivatives market,” he says.
retail investors to take advantage of opportunities unlike before. After Covid-19 was declared a pandemic by the World Health Organization on March 11, financial markets plunged — including Singapore’s. The Straits Times Index plummeted by about 20% to a 11-year low of 2,233.48 points on March 23.
Given that valuations of many stocks had dipped to levels seen during the Global Financial Crisis (GFC) in 2008, some investors may have accumulated more shares, he says. Other investors may have exploited the wider trading range for speculation purposes, he adds.
Interestingly, retail investors were net buyers in 1Q. In contrast, institutional investors were net sellers. Statistics from SGX showed that retail investors collectively bought some $2.96 billion worth of shares net, while institutional investors collectively sold some $1.5 billion worth of shares.
Gary Dugan, CEO at The Global CIO Office, says institutional investors were fearful that the accommodative actions taken by central banks around the world were insufficient to prop up their respective economies. Notably, the US Federal Reserve had cut the Fed fund rates to near zero. However, institutional investors felt that stock markets could continue to slide and stay lower for longer, he says.
On the other hand, retail investors — being “less sophisticated” and perhaps having a one-dimensional view of things — believed that the easing of monetary policy is going to work, he says. “Therefore, they were much more trusting of the policymakers to improve things in the economy over the medium term and [so] they came in and bought,” he tells The
Edge Singapore.
Chew, however, begs to differ. He observes that this contrasting pattern between retail and institutional investors had occurred previously on several occasions. Whenever the STI was climbing to a peak, retail investors sold all the way to the top, while institutional investors were net buying. On the flipside, whenever the STI was declining, retail investors were net buying to the bottom, while institutional investors were net selling. So, the presumption that retail investors are not savvy, perhaps in aggregate, is not fair, he says. “In the Singapore context, they seem to be quite smart,” he quips.
Chew offers one possible reason for this. Unlike retail investors, institutional investors are constrained by their mandate. If the markets tank, fund managers may have to withdraw their holdings from the market in line with their mandate. Retail investors, on the other hand, are nimbler. They could also have more scrutiny and sensitivity to market cycles given that some of them have ploughed in their retirement money.
For now, the STI has rebounded to reclaim some lost territory, though it is still down 18.3% year to date. Interestingly, retail investors are still net buyers, while institutional investors continue to be net sellers, for much of 2Q. Market statistics from SGX reveal that retail investors collectively bought $4.01 billion worth of shares, while institutional investors sold $3.75 billion worth of shares.
However, the resurgence in market participation appears to be wearing off. Market statistics from SGX show that the securities market turnover volume and value in April have fallen to 31.6 billion shares and $29.63 billion, respectively. Both figures have declined further in May to 29.5 billion shares and $27.15 billion, respectively. The SDAV and turnover velocity have also fallen to $1.5 billion and 60%, respectively.
So, is the re-energised Singapore stock market — driven by retail investors — a short-lived phenomenon?
Chew says it is anybody’s guess whether the strong retail investor participation will pick up again and be sustained. “I don’t have a crystal ball,” he says. Volatility, which investors are taking advantage of and has led to the surge in trading, is not something SGX can control, he says. It is all up to the market.
Chew sees other positive aspects of the local stock market though. For one, local market makers and liquidity providers have continued to grow in proportion to the market. This has helped to provide liquidity to market participants when the CBOE Volatility Index (VIX) hit 90 points. There will be more “initiatives” in the coming months in that regard, he says. That could support the trading volume and value of the market and perhaps, sustain the trading interest.
Secondary fund-raising speeds up
Meanwhile, other challenges that have beset the Singapore stock market continue to be present. For one, the persistent dearth of major IPOs has continued to perpetuate the perception that the local stock market is still struggling to attract large companies to list here. This has been accentuated by an increasing number of companies delisting their shares from SGX. Worse still, the local stock market has been marred by a spate of corporate and accounting scandals.
In response, Chew touches on the role of the stock market, which primarily functions as a platform for companies to tap funding from investors. In return, investors can participate in the growth of these companies. The way he sees it, Chew says the local stock market has and is fulfilling its role — albeit via secondary fund-raisings.
According to SGX, the local stock market has so far this year raised US$7.2 billion ($10 billion). Of this, US$6.7 billion was raised through secondary fund raisings, comprising rights issues and share placements. This has already surpassed the total value of secondary funds raised last year of US$5.4 billion and equalled the total value of secondary funds raised in 2017.
Of course, a large part of this is attributed to the $8.8 billion raised from a rights issue undertaken by SIA earlier this year. Still, over the last five years, Singapore’s secondary fund-raising market has accelerated, though at the expense of the languishing primary fund-raising market. SGX-listed companies raised four times more funds through rights issues and share placements than at IPO. This compares with the Hong
Kong Exchanges and Clearing’s (HKEX) 1.9 times and London Stock Exchange’s 2.5 times.
For the rest of the year, more secondary funds could be raised if history is anything to go by. According to SGX statistics, secondary funds raised soared to US$15.2 billion in 2009 following the Global Financial Crisis (GFC). Already, Sembcorp Marine has planned to undertake a $2.1 billion renounceable rights issue to strengthen its cash position and balance sheet. “The need to raise funds continues to be there. This could be for recapitalisation and opportunities for growth for some of the successful companies here,” says Chew.
So, does this mean that SGX will focus more on secondary fund-raising compared to IPOs? Chew says the focus is about growing liquidity, regardless of whether it is primary or secondary fund-raising. An example of that is the REITs sector. He notes SGX has attracted REITs both locally and overseas from diverse geographies to raise primary and secondary funds here.
This has been so successful that the Singapore market has been labelled as “just a REIT market”, says Chew. “[But] what’s wrong with being [labelled] the REIT market globally, if we get that?” he says rhetorically.
Chew, nevertheless, agrees there is room to grow liquidity in other sectors too. This includes healthcare, consumer and technology. “The key for us is to work with the industry that includes the brokers and asset managers,” he says.
More REIT listings expected
Looking ahead, Chew is not worried about the IPO pipeline despite uncertainties and volatility brought by Covid-19. He points out that thus far this year, SGX has already welcomed the listing of six companies such as most recently South
ern Alliance Mining, as well as Hong Kongbased but New York-listed AMTD Internation
al, the first dual-class shares company that was secondary listed in April.
Other recently listed companies include Resources Global Development, Don Agro In
ternational and Memiontec Holdings. This is unlike the periods following previous crises like the SARS and the GFC which experienced a slow IPO market for 12 to 18 months, he says.
Market observers remain mixed though. Eng-Kwok Seat Moey, head of capital markets at DBS, says the stock market has reacted positively coming out from the doldrums in March on the back of the global economy reopening. Issuance activity is expected to ramp up in the coming months as issuers seek to tap liquidity as investor sentiment improves, she says.
“We continue to see healthy enquiries and pipeline activity remains intact. International issuers continue to see Singapore as a strategic and attractive location to access the broader Asian liquidity,” she tells The Edge Singapore.
Tay Hwee Ling, disruptive events assurance leader at Deloitte Southeast Asia and Singapore, thinks otherwise. “We do not foresee the IPO market to rebound quickly in 3Q or 4Q,” she tells The Edge Singapore. “There is still a lot of uncertainty in the capital markets and it is hard to predict when or how fast the market will recover post Covid-19.”
So far, Thai Beverage appears to have put its $10-billion brewery spin-off on the shelf. In a May 29 filing, the company said that “any potential listing will be reviewed and evaluated at an appropriate time when the global economic situation and outlook has improved”. On the contrary, another big multi-billion spin-off by Wilmar International of its China unit Yihai Kerry Arawana Holdings on the Shenzhen Stock Exchange, is going ahead.
Still, market observers agree that the Singapore stock market will continue to attract REITs to list here. Already, UK-focused Elite Com
mercial REIT and United Hampshire US REIT were listed earlier this year. Eng-Kwok says she continues to see interest from foreign issuers in Asia and the West looking to list their assets in Singapore because of its established reputation as a global REIT hub.
“We expect to see more activity in the REITs space in the coming months as it is generally favoured as an asset class especially amid volatile markets and a low interest rate environment. This is evidenced by the continued outperformance by REITs as markets remain flushed with liquidity looking for quality and defensive plays,” she says.
Tay says she observes a spike in the number of enquiries we received for potential REITs listing on SGX. These are mostly fund managers based in the Asia Pacific region, she notes.
That aside, AMTD’s listing could pave the way for more companies to list here — whether primary or secondary. This is because the company has an investment banking arm, says Chew. “We could see more of these secondary listings coming to Singapore,” he says.