Published April 17, 2009

Is SGX price surge overdone?

By JAMIE LEE

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THE stock market, they say, is driven by hope, greed and fear.

In simple terms, greed led investors to push stock prices to dizzying heights some two years back, while fear drove investors out as the economy headed south.

And judging by the recent stock market rally, hope appears to be creeping back into the system.

Anecdotally, there is evidence that investors starved for some stock market action have been nibbling away.

This has benefited the stock of Singapore Exchange (SGX) as some investors went on a buying spree in the hope that the market could have bottomed.

Within a short span of three months, the stock has recovered some 25 per cent in price and has even outperformed the Straits Times Index.

But should investors be hopeful? Several analysts have noted in their comments on SGX's Q3 earnings that the speed of the stock's recovery was not justified.

The exchange reported a 45.5 per cent dive in quarterly net profit to $55.3 million from $101.5 million a year ago.

Though the earnings broadly met expectations, there were surprises in the derivatives trading segment, as net derivatives clearing revenue dropped 20 per cent to $31.2 million.

This suggests that SGX's derivatives trading - seen as the means to offset the slump in securities revenue - may not have been as strong as earlier touted.

'As the derivatives engine sputtered, SGX's earnings stream is not looking as robust anymore,' said CIMB-GK analyst Kenneth Ng, who downgraded the stock to 'underperform' from 'outperform'. 'Time to take money off the table,' he said in a client note.

'On a more structural note, we wonder if the blow-up over the S-chip asset class means that listing pipelines and turnover velocities for SGX will be hampered in the years ahead, making HKSE (Hong Kong stock exchange) the preferred exchange,' he added.

Many have also hesitated to call a bottom, despite the improved average daily trading value seen in April. It now hovers around $1 billion, as compared with $910 million in Q3.

OCBC analyst Carmen Lee noted yesterday that it was too early to call for a recovery. 'While some indicators have shown signs of bottoming-out, our view remains that a sustained economic recovery is necessary for confidence to return to the market.'

While some see the GDP figures of Q1 as indicating that the economy has hit the floor, analysts have cautioned that other factors such as consumer spending would determine a turnaround.

And as unemployment is set to rise, spending will be crimped, indicating a potential fall in investor interest over the next few quarters as pent-up demand pushing the markets up now fades away.

As Kim Eng analyst Pauline Lee puts it, there has been 'an overdose of optimism'. 'SGX's sharp price rally . . . and premium valuations to its peers look overdone,' she said in a report yesterday.

So take a swig from your cup and call it half-empty. This burst of hope that shares of SGX are riding on could pop soon.