Macro microscope | Episode 5

Unusual market trends: signs of regime change?

Indrani De, CFA, PRM

Head of Global Investment Research, FTSE Russell, LSEG

John Dioufas

Director, Datastream and Macroeconomics, Data & Analytics, LSEG

In this episode of Macro Microscope, Indrani De focuses on a key theme of 2024: hidden under a broad market rally are some unusual trends. Indrani identifies some surprising market shifts: "risk-off" gold outperforming U.S. equities, many non-U.S. equity markets closing the performance gap with U.S. equities, unusual performance of ‘defensive’ Utilities relative to AI-driven Technology and the different reaction of the U.S. long yields to rate cuts. Indrani also identifies some major changes in global trade and emerging markets that underpin these unusual market moves. John Dioufas takes the stage to continue the discussion on economic fragmentation. He provides insights into six extraordinary economic surprises in the last 12 months of U.S. Labor Market data releases and illustrates how economic fragmentation is beginning to show through employment data in the U.S. and what this means for global markets.

(upbeat music)- Janice, it's so great to meet you.Thanks so much for stopping by.- Thank you Jamie. Pleasure to be here.- Janice, we're gonna talk a little bitabout Singapore Exchange, the product offerings,product innovation.What I'd love to do is get a little bitmore background about yourself.So what's your role thereand maybe get a history of the Singapore Exchange itself.- So I'm head of markets at SGX groupand that's the equity shelf, which includes the cash marketas well as the equity derivatives contracts.Actually, the exchange is like my second home.I've been there for three decades now.But I started quite humbly from the Cimex entity,which was the company that merged togetherwith stock exchange of Singaporeto form the Singapore Exchange.It was really a momentous milestonefor Singapore when Cimex was formed.So this is actually the entity that was there,this franchise of SGX group 40 years ago.- Okay.- Yeah, so at that time it wasthe first financial futures exchange in Asiaand lots of hype around it, like what you can doand how we can be on the global map.- But not including Japan? Or including Japan?- No, not including Japan. - Okay. Right.- So Japan is started with a commodities exchange.So when it comes to financial futures exchange,Singapore was actually the first.So the beauty of that, is that we managedto successfully grow the Euro dollar futures contractin the Asia time zone.And that's a big deal at that timebecause, I dunno whether you remember,there is only physical floor tradingfor futures contract that time.Yeah. So no electronic trading was available.- Wow. - Yeah.So there is no such thingas like you can trade like 24 hours a day.So you're actually constrained by the real estate.- These are physical people in a pit tradingwith hand bills.- That's right, yes.Yeah, so those were the daysand for a contract like Euro dollar,so Euro dollar is a interest rate contractthat is based off the three months dollar (indistinct).So it was, you'll be great to get like 24-hourliquidity throughout the all the time zones sothat traders can risk manage their positionswith interest rate movements.So with constraint like a physical flaw,it's not possible.So in order to do that,actually then we must have two partnershipseach covering 12 hours of time zone.And that's the magic of the mutual offset systemthat was innovated by Cimex at that timeand also CME Exchange in Chicago.So for 12 hours, Euro dollar traded on the fiscal tradingfloor of Cimex and the other 12 hourswas covered in Chicago.So that allows really a 24 hour risk management time zonefor all participants.I think that really put- - Singapore on the map.- Singapore on that global map.- How much of a impetus is there from the Singaporegovernment to really make Singapore itself a sortof financial center within Asia?- I would say that the motivationand ambition is set very high.Singapore is a very small nation.We don't really have natural resources.So in a way the odds are quite stacked against us.So the only valuable resources we have is actually humans,people, and that's where servicesbecome much more important.And financial services at this moment,I would say is top priority for the government.And Singapore is one of the key financial markets in Asia.So by FX trading we are third largest in the world.So- - Really?- Yes. - Wow.- (laughs) Yeah, so there's a lot of small detailsabout Singapore that is still quite unknownto a lot of people.- So on the Singapore Stock Exchange,obviously you have equities trading, you have options,derivatives, commodities, interest rates with Euro dollar.Who decides, and perhaps this is you, who decideswhat products you're gonna startto trade on the Singapore exchangeand how do you know when the products are gonna work?What determines like what are the best productsto have on the Exchange?- That is actually a very big question.Well, in the exchange world,launching new products is probably quite a daunting task.For every product success that I've seen,there are many more that has failed to gain market traction.So what we normally looked at is try and identifywhat's the gap in the marketplace.Yeah, as a start, to able to fill a shelf for our clients.So our clients are global institutions,so they are not just Singaporean institutions,European institutions as wellas our US institutions are actually a big partof our clientele.So for us to be able to attract them to cometo this marketplace for all their Asian trading,requires some thinking.- So when it comes to Chinese and Hong Kong investors,they typically use Hong Kong Exchange,Shanghai Stock Exchange is that right?- You can't exactly say thatbecause in the early days for financial futures,Ho Chi Hong Kong is not very strong.Even to today, most of the products that they are successfulfor them is really Hong Kong based products.Whereas for Singapore,our value proposition is actually Pan-Asia.So our shelf covers like almost 100%of the key Asian markets.That will include like Japan, India, China, Taiwan,Singapore, and we are multi-asset class.So aside from equity index futures, the other two largederivatives products will be commodities futures,and also currency futures.So in total this shelf serves our global institutionsfor their risk management needs,looking at Asian underlyings.- And just going back to product innovation,how can you tell if you think a product will succeed or not?- There are two measurements. Okay?One is look at the volumes.The other one is looking at the open interest,but these are very hard, I would say very superficial kindof statistics that's offered by a lot of magazinesand actually also newspaper reportingto determine the success of the product.But if you take a step back, what is the real economic valueof a futures contract?It is actually the utility of risk management.Participants can use those productsto risk manage their portfolios.So that means that as an exchange,fundamentally you are not really a product house,you're actually providing a risk management service.So like any marketplace, exchanges,as a financial infrastructure, drives actuallyon two parameters only.Number one is the network effects,and two is portfolio effects.So network effects is just a function of like numberof users and the diversity of distinct user groupsthat are using your products or service.This is important because we need to match bias with sellersto form a trade and we can't have everyoneon one side of the market.So, that network effects is important.So when you look at portfolio effectsit's slightly different.Portfolio effects looks at the range of productsthat is relevant and available for the usersand what is the efficiency that you can offer them sothat they will treat everythingwith you on the same single platform.So it actually measures the stickinessof the users to your platform.And in combination, I would say these are,these two probably will determinewhether a product will succeed or failwhen it comes to attracting early adoptersto form this network effectand inform this portfolio effect.- Over the last five, 10 years,in the US one theme we've seen is the riseof the retail investor, not just in stocks and shares,but in ETFs and options too.What's the kind of state of play in Singaporeand Southeast Asia?- For Singapore, it's a very unique situationbecause majority of our clients, both stock market as wellas futures markets are actually institutions.Retails are present in our market,but they actually pay a small share in terms ofvolume or activities.Mainly because first our population is not high, (chuckles)there's just so many people.So if you minus people who that are too oldor too young to trade,the actual trading population in retailis not going to be much.However, because our clients are global, when it comesto stock and futures market, that's where you seethat Singapore features when it comes tolike top five markets in Asia.So Asia is very fragmented.We have maybe close to 40, 50 markets,futures and options exchanges combined,cash and futures markets combined.We have about 50 venues, the top five like China,India, Japan, Taiwan, and Singapore.The rest actually it just tails. Right?So for those, they are looking for the abilityto enter these markets in a very easy manner.So imagine if you're global institutionsand you need to access like five, six markets in Asia.It's quite difficult.And most of these markets they are close marketsor semi-closed markets whereby they either have capitalcurrency controls or you need some kindof foreign limits in order to enter the market.That means that they put, many people actuallynot look at Asia as one of the investing venueand it's quite costly to Asia in that sensebecause there's so many capital flowsand if you can't attract those capital flows,you can't actually grow the market.So one of the value propositionof SGX is we provide the risk management shelffor clients to use our products as access products.Like in partnership with (indistinct) Russell,we had the China A50 index futuresand the Taiwan index futures, which meansthat you can use those futures contract as an excess productor as a futures over as an overlay to your investmentand portfolio strategies.So those have been very popular when it comes tohow do you get exposure without getting your feet wet,by going to the countries trading on the venues itself.So it has been quite helpful.And the platform efficiency that SGX offers also meansthat it's actually very cost efficient for them to cometo SGX to trade a variety of contractsbecause we offer margin offsetsbetween the various asset class.And so within the asset classes, increasingly I seethat margin offsets is critically important with the risinginterest rate environment or the higher interest rateenvironment, even if there's no more increasein interest rate for a while.The watermark has been set, so the costof trading is getting higher.So every dollar of margins thatan institution plays on exchange, they want to maximizethat value and that requires a portfolio effectto happen whereby they can comeand trade a multiple variety of productsand being able to use that same dollar marginsto fund those positions.- Do you see the regulationin the financial services industry in Singapore as friendly?- I think Singapore is probably oneof the friendliest environmentwhen it comes to doing business.But I wouldn't say that this is the main thingthat people come to Singapore for.I would say that people actually value Singaporefor our legal, regulatory and (indistinct) frameworksbecause we are one of the few exchangesthat meet international standards.When I say that, I really mean itbecause for SGX, we are a certified FBOT,a foreign board of trade by the US, US CFTC,we are also a recognized third country, CCPby the European regulator, ESMA.So that really, you know,puts us in a high watermark when it comesto the risk management and regulatory frameworkthat our clients can expect from us, when they trade.'Cause at the end of the day, what matters to clients isthat they are assessing an institutional grade marketthat is situated in a triple areaof the country in Singapore.That's a real compelling proposition.- So who do you see as your competition?- Actually, competition is everywhere.I've often asked like which exchanges are in competitionwith Singapore?And I don't really see it that way.I see it as like, who is competing for the wallet? Yeah.So, and that's really a lot of things.It's like, it can be a banking product, it can bedeposits with the banks.It can be mutual funds, obvious, it can also be cashand also future positions.So there are a variety of instruments that as a retailor a global institutions can actually accessto put their money.So I see that competition isa very narrow way of defining like, where you should look.So if you are able to see beyond that, thenactually there's a lot more collaboration than competitionthat we can experience in the futuresand options world especially.So the earlier example I gave you why we are successfulin the Euro dollar is because of a collaborationwith Chicago Mercantile Exchange.- Right. Okay.- And that mutual offset system, it still exists today.We don't use it for Euro dollar anymore.We use it for Nikkei, the Japan Nikkei futures.And that is like the, I would say the most innovativeclearing link globally right now when it comes tohow you can help clients, risk manage their portfoliosof risk positions.- Do you have ETFs trade on SGX as well?- Yes.Yeah. So ETF is actually growing very significantlyfor us in the last three to four years.It could be Covid because peoplehave more free time to look at, "Okay,how to rebalance your own portfolio."And it's also difficultto have new product innovation at that time.So ETFs becomes a very easy way for passive investment.In Singapore, what we have seen isthat the last two years, our assets under managementof the ETFs has grown like twice, almost doubled.And the number of ETF launches,I think is at record high as well.So we have not done so many ETFs in the last two,three years compared to five years ago.- Yeah.Janice, this has been so great.Thank you so much for spending the time with us.- Oh, thank you. Glad to be here.(upbeat music)

Video published on November 8, 2024

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