SGX Market Strategist, Equity & Fixed Income, Singapore Exchange Ltd (SGX)

Geoff Howie

SGX Market Strategist, Equity & Fixed Income

Asia’s leading multi-asset exchange

Singapore Exchange Ltd (SGX)

Singapore Exchange is Asia’s leading and trusted market infrastructure, facilitating the exchange of capital and ideas to create value for people, businesses and economies. As a multi-asset exchange operating equity, fixed income and derivatives markets to the highest regulatory standards, SGX is a vertically integrated business that provides listing, trading, clearing, settlement, depository and data services.

With about 40% of listed companies and over 80% of listed bonds originating outside of Singapore as well as established linkages across the region and in Europe, SGX is Asia’s most international and connected exchange. Offering a full suite of derivatives products across Asian equity indices, commodities and currencies, SGX is the world’s most liquid international market for the benchmark equity indices of China, India, Japan and ASEAN.

As Asia’s pioneering central counterparty, SGX is globally recognised for its risk management and clearing capabilities, and was one of the first globally to adopt the Principles for Financial Market Infrastructure.

Headquartered in AAA-rated Singapore, SGX has over 800 employees including offices in Beijing, Chicago, Hong Kong, London, New York, Mumbai, San Francisco, Shanghai and Tokyo.

Commodities

<ul>
<li>While broad 2Q20 market volatility saw the correlation of the FTSE China A50 Index and NSE Nifty 50 Index reach a 12 year high, the 120 day rolling correlation of the two Indices has returned to normalised &amp; minimal levels of 20% to 30%.&nbsp;&nbsp; &nbsp;</li>
<li>Less correlation of both Indices has seen price ratio of the SGX China A50 Futures (“CN”) to the SGX Nifty Futures (“IN”) fluctuate by as much as 9% within the past 3 months. Inter-Market spreads with a delta per spread ratio of 20 CN to 13 IN currently qualify for a 51% margin credit. &nbsp;</li>
<li>Between 25 Jan &amp; 2 Feb, the CN/IN price ratio declined from 1.32 to 1.26, from 2 standard deviations above the 3M average price mean to BELOW the 3M average price mean, with the mean reversion generating a 70% theoretical return on the Initial Margin requirement after applying margin credits. </li>
</ul>
&nbsp;
Among the world’s major economies, China and India are estimated to generate the strongest GDP growth rates in 2021. The stock markets of both countries have also outperformed global peers over the first five weeks of 2021, with 9% and 10% gains in USD terms. The China stock market maintains a total market capitalisation of US$11 trillion, compared to the India stock market with a total market capitalisation close to US$3 trillion. Both the FTSE China A50 Index and NSE Nifty 50 Index are comprised of 50 of the largest and most traded stocks of each country. While both indices have generated similar returns over the past five weeks, in January, the FTSE China A50 Index had outpaced the NSE Nifty 50 Index, with the latter Index declining by 2% for the month. After the 29 January India market closed, India’s Finance Minister Nirmala Sitharaman presented the national Budget, with significant spending and structural measures to stimulate growth (click <a href="https://www.indiabudget.gov.in/" target="_blank" rel="noopener">here</a> for more). This has seen the Financials mega-sector lead the NSE Nifty 50 Index in the February month-to-date, with the comparatively smaller sector of Industrials following suit. Financials maintain a 40% weight in the NSE Nifty 50 Index. Prior to the India’s national budget, the outperformance of the FTSE China A50 Index Futures (“CN”) to the NSE Nifty 50 Index (“IN”) had stretched to a 12-week high, with the price ratio of the Feb 2021 CN (“CNG1”) to the Feb 2021 IN (“ING1”) rising to 1.324 on 25 January, which was more than 2 standard deviations above the then moving 3-month price ratio mean at 1.260. The next four sessions that preceded the India budget saw the ING1 decline marginally less than CNG1, while the two sessions following the India budget saw ING1 outpace CNG1 by 5%.&nbsp; This saw the price ratio of CNG1 to ING1 revert back to the 3-month price ratio mean at 1.260.&nbsp;&nbsp;
<figure class="editor-figure mceNonEditable"><img src="https://api2.sgx.com/sites/default/files/2021-02/Capture_6.PNG" class="editor-image img-responsive"></figure>
<div class="content-caption">Price Ratio Spread of China A50 Futures/ India Nifty Futures</div>

The current delta per spread ratio to maximise margining credits on a CN/IN inter-market spread is 20 CN to 13 IN providing a 51% margin credit. Note these margin rates are updated regularly and Margin Schedules can be found <a href="https://www.sgx.com/derivatives/risk-management" target="_blank" rel="noopener">here</a>. Assuming the current 51% margin credit rate, the Initial Margin requirement to Sell 20 CNG1 and Buy 13 ING1 on 25 January was US$25,488. This is simply, US$1,210 x for 20 CNG1 + US$2,310 x for 13 ING1 = US$54,230 x 0.49 = US$26,573.&nbsp; Note the margin credit rate for the 20:13 delta per spread ratio was 53% at the time, however this is purely an educative example, applying the current rate. The market risk and potential return of the trade focused on the relative performance of the CN to IN inter-market. If the derivatives trader believed the CNG1 would outpace ING1, the derivatives trader would have conversely bought 20 CNG1 and sold 13 ING1.&nbsp; Between 25 January and 2 February, the CNG1 leg declined 252.0 points, equivalent to a US$5,040 return for the short position of 20 lots, while the ING1 leg gained 530.5 points, equivalent to a US$13,793 return on the long position of 13 lots. The theoretical return of the -CN/+IN inter-market spread excluding transaction costs was US$18,833, representing a 70% return on the initial margin requirement.
<table class="table table-striped">
<tbody>
<tr>
<td>
Trade Example
</td>
<td>
Lots
</td>
<td>
Contract
</td>
<td>
Price on 25 January
</td>
<td>
Price on 2 February
</td>
<td>
Points Return
</td>
<td>
Contract Multiplier
</td>
<td>
CCY
</td>
<td>
Return in $&nbsp; Value
</td>
<td>
Initial Margin
</td>
</tr>
<tr>
<td>
Short
</td>
<td>
20
</td>
<td>
CNG1
</td>
<td>
18,935.0
</td>
<td>
18,683.0
</td>
<td>
252.0
</td>
<td>
$1 
</td>
<td>
USD
</td>
<td>
$5,040
</td>
<td>
$24,200
</td>
</tr>
<tr>
<td>
Long
</td>
<td>
13
</td>
<td>
ING1
</td>
<td>
14,298.0
</td>
<td>
14,828.5
</td>
<td>
530.5
</td>
<td>
$2 
</td>
<td>
USD
</td>
<td>
$13,793
</td>
<td>
$30,030
</td>
</tr>
<tr>
<td>
Total
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
USD
</td>
<td>
$18,833
</td>
<td>
$54,230
</td>
</tr>
<tr>
<td colspan="4">
Initial Margin Requirement after Margin Credit
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
&nbsp;
</td>
<td>
$26,573
</td>
</tr>
</tbody>
</table>
&nbsp;Note Individual traders need to be Specified Investment Products (SIP) qualified to trade Futures Contracts - click&nbsp;<a href="http://edm.sgx.com/a/hBfPJ%24KB86%24MfB92l9XAAAAAANm/link11" target="_blank" rel="noopener">here</a>&nbsp;for course details. SIPs are financial products with structures and features that may be more complex than others and require more knowledge to understand. Futures markets are also are also leveraged products and are hence for investors who are willing to accept the risk of substantial losses exceeding the principal investment amount, possibly within a very short timeframe. &nbsp;


While broad 2Q20 market volatility saw the correlation of the FTSE China A50 Index and NSE Nifty 50 Index reach a 12 year high, the 120 day rolling correlation of the two Indices has returned to normalised &amp; minimal levels of 20% to 30%.&nbsp;&nbsp;  &nbsp;
Less correlation of both Indices has seen price ratio of the SGX China A50 Futures (“CN”) to the SGX Nifty Futures (“IN”) fluctuate by as much as 9% within the past 3 months. Inter-Market spreads with a delta per spread ratio of 20 CN to 13 IN currently qualify for a 51% margin credit. &nbsp;
Between 25 Jan &amp; 2 Feb, the CN/IN price ratio declined from 1.32 to 1.26, from 2 standard deviations above the 3M average price mean to BELOW the 3M average price mean, with the mean reversion generating a 70% theoretical return on the Initial Margin requirement after applying margin credits. 

&nbsp;
Among the world’s major economies, China and India are estimated to generate the strongest GDP growth rates in 2021. The stock markets of both countries have also outperformed global peers over the first five weeks of 2021, with 9% and 10% gains in USD terms. The China stock market maintains a total market capitalisation of US$11 trillion, compared to the India stock market with a total market capitalisation close to US$3 trillion. Both the FTSE China A50 Index and NSE Nifty 50 Index are comprised of 50 of the largest and most traded stocks of each country.  While both indices have generated similar returns over the past five weeks, in January, the FTSE China A50 Index had outpaced the NSE Nifty 50 Index, with the latter Index declining by 2% for the month. After the 29 January India market closed, India’s Finance Minister Nirmala Sitharaman presented the national Budget, with significant spending and structural measures to stimulate growth (click here for more). This has seen the Financials mega-sector lead the NSE Nifty 50 Index in the February month-to-date, with the comparatively smaller sector of Industrials following suit. Financials maintain a 40% weight in the NSE Nifty 50 Index.  Prior to the India’s national budget, the outperformance of the FTSE China A50 Index Futures (“CN”) to the NSE Nifty 50 Index (“IN”) had stretched to a 12-week high, with the price ratio of the Feb 2021 CN (“CNG1”) to the Feb 2021 IN (“ING1”) rising to 1.324 on 25 January, which was more than 2 standard deviations above the then moving 3-month price ratio mean at 1.260. The next four sessions that preceded the India budget saw the ING1 decline marginally less than CNG1, while the two sessions following the India budget saw ING1 outpace CNG1 by 5%.&nbsp; This saw the price ratio of CNG1 to ING1 revert back to the 3-month price ratio mean at 1.260.&nbsp;&nbsp;

Price Ratio Spread of China A50 Futures/ India Nifty Futures

The current delta per spread ratio to maximise margining credits on a CN/IN inter-market spread is 20 CN to 13 IN providing a 51% margin credit. Note these margin rates are updated regularly and Margin Schedules can be found here.  Assuming the current 51% margin credit rate, the Initial Margin requirement to Sell 20 CNG1 and Buy 13 ING1 on 25 January was US$25,488.  This is simply, US$1,210 x for 20 CNG1 + US$2,310 x for 13 ING1 = US$54,230 x 0.49 = US$26,573.&nbsp;  Note the margin credit rate for the 20:13 delta per spread ratio was 53% at the time, however this is purely an educative example, applying the current rate. The market risk and potential return of the trade focused on the relative performance of the CN to IN inter-market. If the derivatives trader believed the CNG1 would outpace ING1, the derivatives trader would have conversely bought 20 CNG1 and sold 13 ING1.&nbsp;  Between 25 January and 2 February, the CNG1 leg declined 252.0 points, equivalent to a US$5,040 return for the short position of 20 lots, while the ING1 leg gained 530.5 points, equivalent to a US$13,793 return on the long position of 13 lots. The theoretical return of the -CN/+IN inter-market spread excluding transaction costs was US$18,833, representing a 70% return on the initial margin requirement.




Trade Example


Lots


Contract


Price on 25 January


Price on 2 February


Points Return


Contract Multiplier


CCY


Return in $&nbsp; Value


Initial Margin




Short


20


CNG1


18,935.0


18,683.0


252.0


$1 


USD


$5,040


$24,200




Long


13


ING1


14,298.0


14,828.5


530.5


$2 


USD


$13,793


$30,030




Total


&nbsp;


&nbsp;


&nbsp;


&nbsp;


&nbsp;


&nbsp;


USD


$18,833


$54,230




Initial Margin Requirement after Margin Credit


&nbsp;


&nbsp;


&nbsp;


&nbsp;


&nbsp;


$26,573




&nbsp;Note Individual traders need to be Specified Investment Products (SIP) qualified to trade Futures Contracts - click&nbsp;here&nbsp;for course details. SIPs are financial products with structures and features that may be more complex than others and require more knowledge to understand. Futures markets are also are also leveraged products and are hence for investors who are willing to accept the risk of substantial losses exceeding the principal investment amount, possibly within a very short timeframe. &nbsp;

Recent Move in the China A50 & Nifty Inter-Market

Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Cross Asset Strategy

It is widely believed that a Biden win will be a boon for China, while a Trump victory will be negative for China – and consequently a boon for Taiwan. We believe this is too simplistic: while a Biden win will help China on the trade front (since Biden will likely focus less on bilateral pressure, and resume multilateral trade negotiations), China will soon face increased pressure on human rights (in Xinjiang, Tibet and Hong Kong). In the low-probability event of a clear win for Trump on 4th November (in Asia), Taiwan equities will receive a boost (and China equities will see a knee-jerk sell-off): a good way to position for this would be to go long SGX FTSE Taiwan Index Futures. A good way for investors to position themselves for a Biden win would be to be long the SGX FTSE China A50 Index Futures: we would recommend going long the latter now, in anticipation of the likely electoral outcome. However, once the dust settles, we would recommend switching to the SGX FTSE Taiwan Index Futures – as Taiwan’s underlying fundamentals are more robust than China’s. From a sectoral standpoint, a Biden win should also be more favourable to Asia’s technology sector (Alibaba, Baidu, Tencent, Samsung Electronics, TSMC) as antitrust action (already initiated against Google last week) likely spreads to Facebook and Amazon under a Biden administration.The key factor pointing to a Biden victory is the massive surge of early voting (in person and via mail-in ballots). Reuters reports that 80 million Americans (i.e., 58.5% of the total number of voters who cast their ballot in 2016) have already voted. Informal exit polling suggests that a large majority of these are Democrats or Democratic-leaning voters, while Trump voters are likelier to vote on 3rd November. This could sow chaos, as Trump may initially be reported as leading in key swing states like Pennsylvania and Michigan on Election Day, only to have this reversed after mail-in votes have been counted (something that Trump says he will challenge in the courts). Biden has led in the polls by 6-9 percentage points consistently since August; if more than half of all voters have already cast their ballot, this suggests that Biden already has a massive lead nationwide even before Election Day. Biden’s gaffe on fossil fuels in the final debate (which would normally cost him votes in Pennsylvania, Ohio and Texas) will be much less costly if half of the electorate had already cast their ballots by the time of that debate. Similarly, Trump is unlikely to be able to benefit from the 33.1% QoQ (saar) recovery announced for the US economy in 3Q 2020.The greatest danger to Taiwan in the immediate aftermath of a Biden victory lies in the possibility of China taking military action – i.e., going a step beyond the many provocative military actions China took in October 2020, to an actual attack on Taiwan. The time of confusion for the US between the defeat of an incumbent and the inauguration of the president 11 weeks later (with a possibly uncertain electoral outcome adding fuel to the fire in November) would be the ideal time for China to attack Taiwan. While that would have a disastrous immediate impact on Taiwan’s economy, in the long term it will destroy China’s relationship with the incoming Biden administration, and provoke Democrats in Congress to go even further in legislating against China’s human rights record. If there is no such military attack on Taiwan in November 2020, it will be time to switch to the SGX FTSE Taiwan Index Futures by the end of that month.

It is widely believed that a Biden win will be a boon for China, while a Trump victory will be negative for China – and consequently a boon for Taiwan. We believe this is too simplistic: while a Biden win will help China on the trade front (since Biden will likely focus less on bilateral pressure, and resume multilateral trade negotiations), China will soon face increased pressure on human rights (in Xinjiang, Tibet and Hong Kong). In the low-probability event of a clear win for Trump on 4th November (in Asia), Taiwan equities will receive a boost (and China equities will see a knee-jerk sell-off): a good way to position for this would be to go long SGX FTSE Taiwan Index Futures. A good way for investors to position themselves for a Biden win would be to be long the SGX FTSE China A50 Index Futures: we would recommend going long the latter now, in anticipation of the likely electoral outcome. However, once the dust settles, we would recommend switching to the SGX FTSE Taiwan Index Futures – as Taiwan’s underlying fundamentals are more robust than China’s. From a sectoral standpoint, a Biden win should also be more favourable to Asia’s technology sector (Alibaba, Baidu, Tencent, Samsung Electronics, TSMC) as antitrust action (already initiated against Google last week) likely spreads to Facebook and Amazon under a Biden administration.The key factor pointing to a Biden victory is the massive surge of early voting (in person and via mail-in ballots). Reuters reports that 80 million Americans (i.e., 58.5% of the total number of voters who cast their ballot in 2016) have already voted. Informal exit polling suggests that a large majority of these are Democrats or Democratic-leaning voters, while Trump voters are likelier to vote on 3rd November. This could sow chaos, as Trump may initially be reported as leading in key swing states like Pennsylvania and Michigan on Election Day, only to have this reversed after mail-in votes have been counted (something that Trump says he will challenge in the courts). Biden has led in the polls by 6-9 percentage points consistently since August; if more than half of all voters have already cast their ballot, this suggests that Biden already has a massive lead nationwide even before Election Day. Biden’s gaffe on fossil fuels in the final debate (which would normally cost him votes in Pennsylvania, Ohio and Texas) will be much less costly if half of the electorate had already cast their ballots by the time of that debate. Similarly, Trump is unlikely to be able to benefit from the 33.1% QoQ (saar) recovery announced for the US economy in 3Q 2020.The greatest danger to Taiwan in the immediate aftermath of a Biden victory lies in the possibility of China taking military action – i.e., going a step beyond the many provocative military actions China took in October 2020, to an actual attack on Taiwan. The time of confusion for the US between the defeat of an incumbent and the inauguration of the president 11 weeks later (with a possibly uncertain electoral outcome adding fuel to the fire in November) would be the ideal time for China to attack Taiwan. While that would have a disastrous immediate impact on Taiwan’s economy, in the long term it will destroy China’s relationship with the incoming Biden administration, and provoke Democrats in Congress to go even further in legislating against China’s human rights record. If there is no such military attack on Taiwan in November 2020, it will be time to switch to the SGX FTSE Taiwan Index Futures by the end of that month.  

Biden Vs Trump: How Best to Play the Impact on Taiwan and China

China

The FTSE China A50 Index includes the largest 50 A Share Chinese companies by total market cap. 

FTSE China A50 Index (XIN9I INDEX)

Recent Move in the China A50 & Nifty Inter-Market

While broad 2Q20 market volatility saw the correlation of the FTSE China A50 Index and NSE Nifty 50 Index reach a 12 year high, the 120 day...

Singapore Exchange Ltd (SGX)

Biden Vs Trump: How Best to Play the Impact on Taiwan and China

One way to look at Biden vs Trump is that a Trump win benefits Taiwan, a Biden win is better for China. We suggest ways of using low-cost SGX...

Prasenjit K. Basu