Asian markets buoyant SGX bid for ASX sparks activity in Australian market

The Hang Seng index jumped to 23,751 before the morning session close, up nearly 1%, along with other Asian markets. Market gains were broad based, with basic material and energy sectors making strong contributions. Chinese Coal producers, Yanzhou Coal and China Coal Energy, performed extremely well – up 7.1% and 4.3% respectively, boosted by the news that the Chinese government plans to consolidate the coal industry in the next five year.

The Strait Times gained 0.8% on the day despite heavy weight Singapore Exchange dropping more than 6% after making A$8.4 billion bid for Australian Securities Exchange. Genting Singapore, the most traded stock, continued its recent strength touching a year high of SGD $2.28 as markets anticipated an upbeat Q3 earnings report, due to be released on 12 November.

Corporate activity and the release of a higher than forecast reading of PPI spurred the Australian share market to significantly higher levels today (+1.3% to 4,710). Five year bond yields are up around 6 bps, and the Australian dollar has gained more than ½ % against the US and Singapore dollars, and is higher against other Asian currencies.

Banks shares have led the market ahead of this week’s full year numbers from NAB (+2.2% to $25.01) and half year results for ANZ (+2.1% to $23.90) and Macquarie Group (+4.1% to $34.97). Best performer in the sector is ASX (+19.4% to $41.75), bolstered by a merger deal with the SGX announced today. Most financial stocks have caught the updraft.

Industrial and transport majors are up, despite the increase in costs the PPI and a lift in oil prices on Friday night represent. Less surprisingly, energy stocks have also gained ground.

Resources generally are up, although some smaller companies have fallen as investors rotate back into global exposures. Telcos and consumer discretionary stocks are modestly higher, but defensive healthcare and consumer staples stocks are lagging the market rise.

Impending takeover of the ASX by the SGX
The Singapore Exchange Ltd (SGX) and the Australian Securities Exchange Ltd (ASX) today jointly announced a friendly takeover proposal. This represents the merger of the fifth and eighth largest exchanges in the Asia Pacific region, and combined will be second only to the Hong Kong Exchange in terms of assets listed. The plan involves listing on the SGX, with a secondary listing on the ASX. The combined operation, at pre-bid prices, will be capitalised at approximately SGD 20 billion or AUD 16 billion.

Analysts have largely praised the deal as a logical step in dealing with competition that each of the monopoly incumbents face in 2011. The Singapore Mercantile Exchange began operations in August, and Chi X (an impending rival to the ASX) has received preliminary approval to enter the Australian market next year. With limited opportunities for organic growth, the merger represents a chance to cut costs, increase product range and increase business scale. The deal assists Singapore in its plans to position itself as the regional financial centre, and delivers greater access and product range to Australian investors.

After seeking the necessary regulatory and share holder approvals during the first half of 2011, the deal will be to swap 3.473 SGX shares, plus A$22 cash, for each ASX share. At closing prices before the takeover deal was announced, this equated to a 37% premium for ASX share holders.

Arbitragers entered the markets immediately after the stocks resumed trading on their respective exchanges, pushing SGX shares down more than 5% and forcing ASX shares up more than 20%. This activity is likely to continue until prices reach an equilibrium at the proposed merger values, after carrying costs are taken into account.