While the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has gained a healthy 10% so far in calendar year 2012, it hasn't been such an impressive performance for stock exchange owner and operator ASX Ltd (ASX: ASX) which by comparison has fallen around 3.5%. Returns are even bleaker if you extend the time period out to 5 years, with the ASX Ltd down nearly 50% compared with the index's 33% fall.
Market sentiment is an important factor in ASX Limited's outlook. While markets have rallied since the depths of the GFC, poor sentiment has made the going tough for the company and other market-linked businesses. When investors sit on the sideline, trading volumes for equities and derivatives decline, in turn this discourages companies from raising capital which also affects revenue for ASX Ltd.
With trading volumes currently at a similar level to 2006 and capital raisings also at multi-year lows, underlying earnings per share (EPS) have been in a downward trend since 2008.
So with EPS declining, concern over the Eurozone and a slowing Chinese economy, combined with increased competitive pressures, the market appears to have a lacklustre view of ASX Ltd.
These competitive pressures are building on two fronts.
Firstly, the entrance of Chi-X Australia into the trade execution market has led to a loss of market share and the potential for more entrants to follow.
Secondly, London-based LCH Clearnet, one of the world's biggest clearing houses, has applied for a license to conduct clearing services in Australia.
With the market up double digits for 2012 it could be reasonable to presume similar positive momentum in the share price and earnings at ASX Ltd. This hasn't been the case for the reasons outlined above.
For further evidence that investors aren't expecting a turnaround for market-linked earnings, take a look at the predicament of the listed stock brokers. Wilson HTM (ASX: WIG) and Bell Financial Group (ASX: BFG) have both been struggling now for a number of years now and provide a good proxy and insight into how both retail and institutional trading volumes and corporate activity are tracking.
Foolish takeaway
It's near monopoly status and high margins have meant the ASX Ltd has always been regarded as a very good business. While it does face competitive threats and structural challenges, it is also near a cyclical low. If an investor takes a long term perspective, it could be the right time to purchase the stock.
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Motley Fool contributor Tim McArthur owns shares in Bell Financial Group and Wilson HTM. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
