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A reset, reboot and revalue from MSCI's 'killer blow'

Chew Sutat
Chew Sutat • 10 min read
A reset, reboot and revalue from MSCI's 'killer blow'
Many SGX companies have undergone structural transformation and the results are showing up in their share prices / Photo: Albert Chua
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Market commentaries in our mainstream press noted the “unusually high” trading volume of 2.8 billion shares worth some $4.4 billion on May 31. This was almost four times the daily average recorded in the first half of 2024.

No reason was provided to explain this anomaly. Perhaps, the higher turnover in the newsrooms amid waning interest in the local stock market has deprived the industry of local market and company reporters, as many cynical local pundits pointed out.

There is a simple explanation. It was the effective date of the rebalancing for the MSCI Global indices tracked by institutional investors and portfolio managers. This takes place four times a year. After May 31, the next two will be on Sept 2 and Nov 25, with announcements of impending changes made two to three weeks earlier.

Traditionally, brokers look to such “events” for some extra volume and would either short stocks that are to be removed or buy those that are to be added and then hold out for arbitrage opportunities on the last trading day of the rebalance.

For the May 31 rebalancing, five one-time blue-chip heavyweights suffered the ignominy of deletion. These were City Developments (CDL), Jardine Cycle & Carriage C07 -

, Mapletree Logistics Trust M44U - , Mapletree Pan Asia Commercial Trust N2IU - and Seatrium. There were no new inclusions, which meant the loss of a quarter of the components of MSCI Singapore. Out of the 16 remaining component stocks, Sea and Grab Holdings are US-listed, which makes them less accessible to investors close to home.

Singapore is not unique. Despite a recent pick-up in activity, China too suffered from a swathe of deletions as its relative global market size continued to shrink. In contrast, one of the beneficiaries of this global indices rebalancing was Japan, our dark horse that keeps galloping, which attracted more interested investors, including our very own GIC. The other winner was India, which enjoyed net additions ahead of Prime Minister Narendra Modi’s historic third election victory.

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Getting a haircut
Jardine Cycle & Carriage, one of the five stocks listed on the Singapore Exchange S68 -

(SGX) that were removed from the index, had earlier taken a hit after Norwegian wealth fund Norges cut its stake in the Indonesia-centric conglomerate, citing the poor treatment of orangutans. It recovered from $24 to $28 but eventually fell back to $25.74 on May 31. CDL, whose removal caught many by surprise, rebounded somewhat following news of the deletion but ended May 31 at $5.61, down by more than 5% for the day.

Since the merger of Keppel and Sembcorp Marine , Seatrium has been a punters’ favourite as the sub-10-cent price range made it susceptible to bigger percentage swings: prices can be pushed up with yet another new order announcement or nudged back down with yet another lawsuit or regulatory action from pre-merger days. Following news of the deletion, Seatrium shares, now consolidated 20 into 1, dropped some 15%, as short sellers maintained their relentless pressure. When it announced a massive $11 billion contract from Petrobras, the massive short cover took it back to as high as $1.91 intraday on May 29, before easing back to $1.76 on May 31. Heavily traded for years, Seatrium alone accounted for 10% of the total value of shares changing hands on May 31.

Both Mapletree REITs fared better with prices already drifting 4%–5% shy of pre-announcement levels over two weeks before the rebalancing took effect. On May 31, some $400 million each in trading volumes were well absorbed as yields for both REITs settled above 6.5%. They seemed to have found a level to reset from.

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At least for the stocks that were dropped, it looked like traders and arbitrageurs who traded into the news and final action mostly had their day in the sun. Will the stocks now be rebooted from here, if we assume that they have absorbed the bulk of selling off by the MSCI tracking funds?

However, some were puzzled how all these could take place even as the Straits Times Index (STI) continues to accrete up. This is especially so as it continued to recover from 3,144 points in mid-April despite large caps going ex-dividend in May, the MSCI announcement jolt on May 14 (but May 15 Singapore time), and still finished the final rebalancing date higher even as four out of the five of the deleted stocks sold off were also component stocks of the STI?

Has the shift in investors’ interest from growth to value stocks with steady cash flows and dividends since March this year (that has already taken the FTSE100 representing the UK market out of its stable boring misery) helped the long-forgotten STI be gradually revalued? If we could absorb what one highly cynical local fund manager called the “killer blow” of a quarter of the local counters getting deleted by MSCI, does our local market have more legs to run?

Big is beautiful
The good news for those who were more sceptical about Singapore’s relevance (or at least its capital market) is that many of our bellwether companies including our listed Temasek-linked companies have undergone a transformation of their businesses in the last few years. By venturing overseas, they have grown their stock prices sustainably over different periods, supporting the stability of the STI which now seems to be entering the summer months with a broad range of rotational support.

Technically, unless a company continues to grow its business and its market cap, it risks being dropped from an index. Conversely, its inclusion in an index attracts additional liquidity from new passive index funds and a host of financial products including exchange-traded funds.

Aside from delivering record profits consistently and rewarding shareholders with bonus shares which came with extra dividends, DBS Group Holdings’ stock price has nominally increased 20% in the last year. Should funds that sold off individual stocks that were dropped from the MSCI but still want to stay over-weighted in Singapore, DBS is a natural choice. It finished May 31 close to its all-time high with almost $400 million value traded as well. With a market cap of just over $100 billion, it is 50% larger than Oversea-Chinese Banking Corp at $65 billion, twice United Overseas Bank U11 -

’s $52 billion and 2.5 times that of Singapore Telecommunications Z74 - (Singtel), the previous top stock that is now languishing fourth at $40 billion.  

Still, the fact that the STI finished 0.4% higher on May 31, when Singapore was down-weighted from the MSCI can practically be explained that in the closing auction that took the haircuts off the 5 stocks that were dropped, while the positive weight adjustments to our Big Four of the STI lifted the index to 3,336 points. This is less than 2% shy of its 52-week high. What could carry us there?

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Whilst DBS had generally led the way for banking stock valuations historically with a 1.60 times P/B and 10 times P/E, UOB since its acquisition of Citigroup’s retail business across Asia last year has also seen its market cap grow as it garnered more institutional investors along the way as it reset perception with the street.

The gain by UOB has just about kept ahead of laggard OCBC which only caught up more recently as investors responded positively in early May to its latest attempt to privatise closely-held subsidiary Great Eastern Holdings G07 -

(GE) for $1.4 billion. At $25.60 per share, the offer is a mouthwatering 36.9% premium to the illiquid share price of GE. Yet it is also a 30% discount to GE’s embedded value per share of $36.59.

If OCBC succeeds, it could appear as a cheap buy after the reboot. This could keep its share price above $14, a level which has not been seen for a long time. However, given how the current offer is at just half the value of its previous attempt back in 2006 using the embedded value metric, some expect a counteroffer. Before EY, the appointed independent financial adviser could issue an opinion, some investors, myself included, have already voted with our feet by paying up to 4% premium over OCBC’s $25.60 now on the table.

Bigger than sum of its parts
Perhaps, the most misunderstood of Singapore’s Big Four has been Singtel. In its latest FY2024 ended March earnings, many headlines focused on its impairments which had long been announced. Excluding exceptional items, underlying net profit was up 10% to $2.26 billion. It is even rewarding shareholders a higher full-year dividend of 15 cents, representing a yield of more than 6%. This was after it introduced a new value realisation dividend (VRD) component of 3.8 cents, which will be paid at a range of between three cents and six cents a year in future with excess cash from its capital recycling.

Optus, its Australian subsidiary, has been suffering from a slew of negative newsflow, including the denial of an “impending” sale to Brookfield. With Singtel’s 29% stake in India associate Bharti Airtel almost equal to its own entire market cap, investors should have little doubt that the VRD can be sustained and grown. If DBS Group Research’s price target of $3.50 is right, there is a 40% upside to its current price and it will regain its position as one of the top three STI stocks.  

We have seen how the stocks of companies that have successfully transformed their businesses performed, including our perennial favourites Sembcorp Industries U96 -

and Keppel. Other STI components we had been bullish about included those at the tail end of the index such as ComfortDelGro C52 - and Yangzijiang Shipbuilding. ComfortDelGro has seen its market cap grow by a third in the last year in step with its aggressive overseas expansion from Down Under to Europe. Yangzijiang Shipbuilding, with a record order book of US$16.1 billion, has seen a 25% increase in stock price just in the last couple of weeks well above $2.20. Seatrium, too performed with its 25% bounce on the back of Petrobras contract announcement just before the MSCI rebalance on May 31. Sats, another unheralded brave soul that ventured out last year to swallow Worldwide Flight Services for US$1.8 billion, has completed its full-year turnaround and is aiming to grow its revenue from $5.5 billion in FY2023 to $8 billion revenue in FY2028. Its share price has gained some 10% in the past month. One does not need to stay up at night to trade Nvidia for these gains.

As the STI overcomes the MSCI non-event and looks to a breakthrough at 3,390 points this time, perhaps the stocks that have had a pause, reset and reboot are worth a deeper look after a revalue. Just look at Singapore Post S08 -

, another long-forgotten stock whose domestic mail business is no longer core and is more of a regional logistics enterprise. If so, its 25% rebound from its March lows of 38 cents back to its one-year high of 50 cents might be a small story for now but could have a bigger impact to come.

Chew Sutat retired from Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi­-asset exchange, and he was awarded FOW’s Lifetime Achievement Award. He serves as chairman of the Community Chest Singapore

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