Will SGX’s lucrative A50 volumes crash along with the Chinese market?

It’s not as straightforward as investors think.

One of the reasons behind the SGX’s recent share price weakness is investors’ concerns that its lucrative A50 futures volume will suffer along with the crash in Chinese markets.

Jefferies Singapore analyst Krishna Guha noted that the China A50 futures makes up 10% of SGX’s operating revenue and 12% of its earnings per share (EPS), and fear over its prospects may be the culprit behind the SGX’s recent share price weakness.

Guha stated that there is indeed a risk that A50 futures volume may slip along with the mainland markets. However, it is unlikely that the local bourse will lose its entire A50 futures volumes in the event of a market crash.

“While we are cognizant of such a risk, we will like to point out that historically, the relationship has not been that straightforward. Between Jan-Mar 2015, while the index (CSI300) was broadly flat, A50 futures daily volume declined 40% In recent times, since 25th May, the index has fallen 20% while A50 futures daily volume has more than doubled from 330K contracts to about 750K contracts. Thus, we will like to think that various activities - hedging, arbitrage and leverage exposure – are at play and a simple correlation between price and volume may be bit too simplistic to assume,” he said.