The financial sector in Singapore will see the biggest impact as Sea Limited’s weighting within the MSCI Singapore index increases from 2.5% to 11.0% on Sept 1, says UOB Kay Hian analyst Adrian Loh and the Singapore research team.
See: What does it mean for Singapore when foreign-listed shares are included in the MSCI index?
This is due to the three Singapore banks having the largest weighting within the index at 51.1% currently.
At its current prices, DBS will be hit the hardest with its weight expected to fall around 7.1 basis points (bp) between the current weighting to the next review in February 2022.
Oversea-Chinese Banking Corporation (OCBC) and UOB Limited will see declines of 5.0 bp and 3.9 bp respectively.
Sea’s weight increase in the index is due to its inclusion factor increasing from 5% of its free-float adjusted market capitalisation to 25%.
“We believe [the increased weighting] will see more ETF-related buying of the stock,” writes Loh and the team in an Aug 30 report.
On the flip side, Yangzijiang (YZJ) may be a potential inclusion in the index.
The group has a free-float adjusted market capitalisation of $4.53 billion, making it currently larger than the 17th to 19th largest companies on the 19-member index.
Previously, YZJ was removed from the index in November 2020 when its share price stood 45-50% lower than its current share price.
In the near-term, Loh notes that investors should mark their calendars towards the end of November this year when Sea’s inclusion factor increases to 50% after MSCI’s semi annual index review (SAIR).
The counter’s inclusion factor will then rise to a full 100% at the February 2022 quarterly index review.
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While Sea will also be included into the MSCI Asean and MSCI Asia ex-Japan indices, the impact the counter has on the rest of the constituents in the index will be “much less” compared to the ones in MSCI Singapore, he says.
“Since our initial report on Sea’s inclusion into the MSCI Singapore, the company’s share price has risen by 59% and outperformed the Straits Times Index or STI (-1.4% in USD terms), MSCI World (+12.1%) and MSCI Asia ex-Japan (-4.3%),” writes Loh.
“While passive funds tracking the MSCI Singapore, Asean and Asia ex-Japan indices will have to buy Sea, we believe that many active Asian and global emerging markets funds do not hold a position in the company and thus will need compelling reasons not to buy, otherwise they may lose out on performance versus benchmarks,” he adds.
As at 4.39pm, the MSCI Singapore index is trading 4.27 points lower or 1.2% down at 352.78 points.