Over the past decade, the Singapore Exchange (SGX) has evolved from being just an exchange where investors can buy and sell Singapore-listed equities, to offering a wide range of asset classes that includes fixed income, indices, currencies and commodities and derivatives. One such product that launched on SGX in 2017 was Daily Leverage Certificates (DLC). Offered by Societe Generale, SGX currently has 76 DLCs on Singapore and Hong Kong stocks.
DLCs allow investors to achieve higher short-term results as it utilises leverage to increase the exposure that investors take on for any stocks or index that they invest in. For example, if we think that DBS share prices will go up, we can buy a DLC SG5xLong DBS that provides us with 5 times the exposure on any daily changes for DBS share price. If DBS share prices go up by 5% on a particular day, our return will be 25%. Losses are likewise magnified.
With DLCs, we can take a view on either direction of the market. If we think SIA share prices will decline over the next week, we can buy the DLC SG5xShort SIA that provides us with 5 times exposure on any changes for SIA. Since it’s a short position, we will generate profits if prices decline, and make losses if prices increase.
In general, DLCs perform better when the market is trending in one direction and you choose the right position for the market, as opposed to a volatile market that is trending sideways. You can read our example here to find out more about why this is so. More on this at the end of this article.
One interesting point to note is that there are many Daily Leverage Certificates (DLCs) that are listed on the SGX that provide us with exposure to China/Hong Kong companies. In this week’s edition of 4 Stocks This Week, we take a closer look at some SGX-listed DLCs that can provide us with short-term, leveraged exposure to some Hong Kong-listed companies.
It’s worth noting that for each counter, there could be multiple DLCs that are offered on the SGX. As explained by our friends over at Investing Note, the reason to issue more than one product on the same underlying asset, direction and leverage are because the price sensitivity of existing products is getting lower due to their low unit price. The new products will provide investors with higher-sensitivity options, which is more favorable for short-term trading.
For this article, we strive to use the more sensitive DLC for the counter whenever possible. All DLC-related information in this article is taken from the issuer – Societe Generale.
Alibaba is a Chinese e-commerce company founded by Jack Ma and is seen by many as the Amazon of China. On the SGX, investors can gain access to the daily changes in Alibaba share prices by buying either the Alibaba 5xLong or the Alibaba 5xShort.
Since the start of the year, Alibaba is down by about 26%. Over the past month, losses are at about 11%.
There are a few Alibaba DLCs that are currently trading on the SGX. When we look at the Alibaba 5xLongSG220608 (the most sensitive Long DLC for Alibaba), we can see that the past 1 month has seen a decline of about 59% as Alibaba shares have been impacted by Chinese government policies. For those who took a short position in Alibaba, the Alibaba 5xShortSG230202 saw a return of about 4% over the past month.
Currently China’s biggest company by market capitalisation, Tencent share prices have been on a similarly volatile ride over the past 2 months because of China’s regulatory clampdown. Though the company share price has not moved much over the past month (up 1.66%), prices have been trending sidewards in a volatile manner.
When we look at the Tencent 5xLongSG220808, the DLC is down about 18% over the past month. Interestingly, the Tencent 5xShortSG230202 is down by about 40%, as the volatile market means that losses on both the long and the short positions.
JD.Com is a Chinese e-commerce company and one of the largest retailers in China. Its share prices over the past month are up by about 13.5%, though it’s down about 6% since the start of the year.
For its DLC, the JD 5xLongSG230615 is up by about 48% over the past month. In contrast, its JD 5xShortSG230907 is down by about 87% over the past month.
Hang Seng Tech Index
The Hang Seng Tech Index comprises the 30 largest technology-related companies listed on the Stock Exchange of Hong Kong. These include tech-related companies like Alibaba, Tencent, Meituan, Xiaomi and JD.com.
Over the past month, the index has been up about 0.4%, though loss extends to about 20% over the past 6 months.
When it comes to the DLCs, the HSTECH 5xLongSG220602 has shown a loss of 13% over the past month. Unfortunately, due to the volatile nature of price movement, the HSTECH 5xShortSG220602 also fared poorly, with a loss of 25%. This is a good reminder that holding a DLC for an extended period of time isn’t ideal during a volatile market.
As a leveraged product, DLCs are not easy to understand and trading them comes with an increased level of risk. Also, we should bear in mind that returns offered by the DLCs are designed to track the daily performance of an asset. What this means is that if we buy and hold a DLC beyond one day, our returns may deviate away from the 3x or 5x that the DLC is supposed to generate. Holding a DLC beyond one day means that we may see a compounding effect coming into play.
For example, as seen above in many of the counters, when prices are volatile but trading sidewards, both the long and short positions may see losses if you were to hold the DLCs for a period of one month. To sum it up, DLCs are not suitable products to hold for a long period or in volatile markets. However, traders can also use it to enjoy short-term gains when the market is trending.
Join The Investing Note SG Active Trader Tournament 2021 To Practise Trading With Daily Leverage Certificates (DLC)
If you are keen to trade DLCs, we strongly suggest that you understand it well first, and practise trading with it using virtual funds.
One such competition that you can consider signing up for is the Investing Note SG Active Trader Tournament 2021. Co-organised along with Societe Generale and supported by SGX, the DLC-focused trading competition will have its elimination round of the tournament starting from 13 September to 1 October, with the final round running from 11 October to 22 October. The competition is open for free for all to join.
While you will be trading with virtual capital, the prizes for winning are real cash – $4,000 for the winner, $2,000 for second place and $1,000 for third place. The most profitable trades of each trading day during the elimination round will also win $60 in Capitaland Vouchers daily.
That’s not all – registered participants who made at least 3 trades during the elimination round will stand a chance to win an Apple Watch Series 5! To make it even better, 2 lucky winners will walk away with an Airpods Pro, just by registering for the challenge. There is also a 2D1N Staycation that you can win just by registering for the challenge.
You can register for the event here. https://dollarsandsense.link/trading-tournament-2021
Don’t Take A 50-50 Chance With A So-So Trading Experience
As a Gold/Diamond client with FSMOne.com, you can let your investments soar higher with flat HK$50 processing fees* for HKEX trades.
This means that whether you make a HK$10,000 or HK$100,000trade, you will only be paying HK$50 in processing fees*. So, the higher your investment amount, the higher your cost savings!
Click here to find out more.
*Excludes exchange-related fees.
4 Stocks This Week is not a recommendation from us to buy or sell any of these stocks. For investors who are keen to find out more, you should continue researching about them before making your investment decisions.