Capital Markets and Stock Exchanges Sector Benchmark

18 stocks evaluated through my rating system

The Capital Markets and Stock Exchanges sector is particularly compelling due to its unique characteristics. While overall growth tends to be moderate, most of the companies in this sector benefit from local monopolies or, at the very least, possess strong competitive moats. These barriers to entry are typically fortified by regulatory requirements, technological infrastructure, and established market trust, making it difficult for new entrants to disrupt their operations.

The 18 stocks we will compare in this sector are:

• B3 S.A. (Brazil)

• Marketaxess (USA)

• Euronext (France)

• Multi Commodity Exchange of India (India)

• BSE (India)

• Tradeweb Markets (USA)

• Deutsche Boerse (Germany)

• OTC Markets (USA)

• CME (USA)

• Intercontinental Exchange (USA)

• TMX Group (Canada)

• Nasdaq (USA)

• London Exchange (UK)

• Japan Exchange (Japan)

• Singapore Exchange (Singapore)

• Hong Kong Exchanges and Clearing (China)

• NZX (New-Zealand)

• ASX (Australia)

Key characteristics of the industry

The key characteristics of this industry are:

• Local monopolies and strong moats. Most stock exchanges operate in regulatory environments that grant them dominant, if not monopolistic, positions in their respective markets. Strong competitive moats arise from high regulatory barriers, market infrastructure, and the trust of market participants.

• Regulation and compliance. Stock exchanges are heavily regulated. Each exchange must comply with rigorous local and international regulations concerning market fairness, transparency, and anti-money laundering. Regulatory oversight makes it challenging for new players to emerge but also provides established exchanges with a degree of stability.

• Technology. Exchanges have increasingly become technology-driven businesses. Investments in trading platforms, high-frequency trading capabilities, and cybersecurity are essential for competitiveness.

• High profit margin. The capital market infrastructure is characterized by high profit margins due to the scalable nature of their businesses. Once the trading infrastructure is set up, the marginal cost of executing additional trades is minimal.

• Defensive profile. Stock exchanges typically exhibit a defensive business profile, as they remain operational even during economic downturns. Trading volumes may increase during periods of market volatility, providing a countercyclical benefit.

• High valuation. Due to their profitability and defensiveness, companies in the stock exchange sector often trade at high valuations.

Outlooks

The industry has undergone significant M&A activity in recent years, with many exchanges leveraging acquisitions to either expand within their core business or diversify into adjacent markets. For example, Euronext's acquisition of Borsa Italiana strengthened its position in the European exchange landscape, while the London Stock Exchange's acquisition of Refinitiv marked a strategic move into the growing financial data and analytics market, diversifying its revenue streams beyond traditional exchange services.

Exchanges are also increasingly embracing ESG (Environmental, Social, and Governance) initiatives, offering ESG-focused investment products and enhancing their sustainability reporting standards. This area is becoming a key growth driver as institutional and retail investors alike prioritize sustainable assets.

As discussed, technology remains a pivotal element of this industry, and its importance will only grow in the coming years. Innovations such as the adoption of AI for predictive analytics, blockchain for improving settlement efficiency, and cloud computing to scale operations are examples of how exchanges are evolving to meet the demands of modern capital markets.

However, the rise of alternative platforms poses a potential risk. Decentralized finance (DeFi) platforms, fintech innovations, and digital asset marketplaces could disrupt traditional exchanges, especially as these alternatives offer lower costs and more accessible trading solutions. While established exchanges have a significant advantage in terms of trust, regulation, and infrastructure, keeping an eye on emerging competition will be critical to their future success.

The benchmark

For the benchmark I use my scoring system. It relies on 5 different categories. Each category has different metrics, mainly quantitative. Each metric gives a score depending on thresholds I defined, once again to fit my investment style.

Growth. The growth category uses 4 metrics:

• Past and future revenue growth

• Past and future EPS growth

Quality. The quality category uses 3 metrics: net profit margin, ROE and cash/debt ratio vs the EBITDA.

Valuation. For valuation, I use 3 metrics: PE, FCF yield and PEG.

Shareholder return. This category shows if the company is shareholder oriented. I look at 3 metrics: dividend yield, dividend growth and buybacks/dilution in outstanding shares.

Market. This is the only qualitative metrics. It represents the value of being present in the market and the company’s strength in it. It is a personal appreciation.

An extract of the benchmark for free subscribers

And the full benchmark for paid subscribers