Local bank shares may not ebb with Sea's rising tide

Singapore

A BIG question mark looms over how the inclusion of Nasdaq-listed Sea Ltd on a market index would finally weigh on the shares of Singapore banks - key components of this critical benchmark.

On March 10, MSCI said eligible foreign-listed shares would be included into its MSCI Singapore index over four phases starting May. These could include Sea, Maxeon Solar Tech, and Hong Kong-listed Razer.

There is uncertainty over Sea's eventual weightage in the revamped index, and its impact. On a market cap basis, Sea's inclusion should cause the most disruption, given that its free-float adjusted market cap of S$71.8 billion as at March 25 is 40 per cent larger than DBS, currently the largest component of the index.

The potential inclusion of Sea into the index will see more buying of the stock and the "unfortunate ramification" of funds selling out of the largest constituents, said UOB Kay Hian analyst Adrian Loh in a report.

As Singapore banks hold the largest weighting within the index, financials will be hit the hardest with DBS bearing the brunt, he noted.

The belief here is that institutional investors have to ensure their portfolio holdings beat benchmark performances. Doing so for funds means actively tracking and managing stock pickings, and this would inevitably involve trading certain stocks held by the benchmark.

Assuming there is a limited pool of money to invest to beat a benchmark, funds are assumed to have to sell down on their existing holdings to make room for new inclusions.

Studies that look at the impact of S&P 500 inclusion on stock prices found that stocks freshly included on a benchmark tend to rise in value, though the gains may also correspond with better earnings just as a counter is added to an index.

Tesla's inclusion in the S&P 500 generated significant buzz, and while the stock fell on its index debut in December, it reflected some investors taking profit on earlier trades when the announcement was made that Tesla would join the index.

Back in Singapore, the final impact on Sea's benchmark inclusion on bellwethers of the market such as Singapore banks' counters remains too early to call. Phillip Securities analyst Tay Wee Kuang pointed out that the determination of weightage in the MSCI Singapore index is not simply a "market-cap-weighted" index.

Other factors, such as sector weightage, are also considered when assigning eventual weightage of a new counter to the index.

MSCI will introduce new counters into the index with the aim to "ensure stability and integrity" of the stock market. Based on the calculation methodology, Sea may be assigned a smaller weightage to the revamped index, Mr Tay told The Business Times.

"Until the eventual weightage of Sea in the new index is determined, it is still too premature to understand and quantify the impact on the other constituents of the index."

Large fund holders of the local banks include Capital Group, Vanguard Group and Blackrock. DBS is 29.8 per cent held by Temasek, according to latest Bloomberg data. Shares of OCBC and UOB are also held by the respective founding families of the two banks.

Most fund managers BT reached out to declined to comment directly on their recalibration strategy. But as funds rotate into recovery plays, Singapore banks are, for now, still a favourable bet. For one thing, the local banking trio is expected to raise dividends on expectations of an earnings rebound this year, and as they await decision from its regulator on lifting the cap on dividend payouts.

Fidelity International portfolio strategist Christopher Wong told BT that, in the South-east Asian markets, the firm is more optimistic on more cyclically-oriented sectors like financials in the short to medium term, which could provide exposure to a global economic recovery.

Banks' system loan growth in Singapore has been steadily returning, up 1.2 per cent month on month in February to bring year-to-date growth to 3.7 per cent. This is a stark contrast from the 1.1 per cent contraction in FY2020. "We think that improving business sentiment and ample liquidity conditions set the stage for credit growth momentum," said CGS-CIMB in a sector note this week.

Shares of the three banks have gained 15-20 per cent since the start of the year.

To minimise dislocation amid changes to the MSCI Singapore index, eligible foreign listings will be brought into the index over four phases spread across nine months, coinciding with quarterly index reviews starting May 21.

The new securities would be initially included at 5 per cent of its free-float adjusted market cap on May 21, rising to 25 per cent on Aug 25, 50 per cent on Nov 21, and finally to full 100 per cent on Feb 22, 2021.

UOBKH's Mr Loh projected for DBS' weightage to fall around 4.7 basis points (bps) between the May 21 to Feb 22 review, while OCBC's and UOB's will decline by 3.6 bps and 2.8 bps respectively.

While passive funds tracking the MSCI Singapore, Asean and Asia ex-Japan indices will have to buy Sea shares, many active Asian and global emerging markets funds do not hold a position in the firm.

"(They) will need compelling reasons not to buy, otherwise they may lose out on performance versus benchmarks," said Mr Loh.

While the rebalancing may see short-term selloff of constituent stocks, the inclusion of Sea will ultimately raise the profile of the index, which will be beneficial over the longer term, Phillip's Mr Tay noted.

The revamped MSCI Singapore index is expected to outperform relative to the Straits Times Index, given its exposure to e-commerce and gaming in South-east Asia, UOBKH's Mr Loh said.

Fidelity's Mr Wong said over the longer term, the fund sees "huge opportunities" from a shift to online lifestyles and structural trends such as expansion in the mobile gaming segment, rising e-commerce and fintech penetration in the South-east Asia region.

On Thursday, shares of DBS rose S$0.21 to end at S$29, while shares of OCBC inched up S$0.02 to S$11.77. UOB shares slipped S$0.03 to close at S$25.80.