Brokers' take: Banks, Singtel, Wilmar the most negatively hit by MSCI rule change

UOB Kay Hian (UOBKH) in a report on Monday singled out DBS, OCBC, UOB, Singtel and Wilmar as the most negatively affected by the change in MSCI rules.

Last November, MSCI announced that it will allow foreign-listed shares into its MSCI Singapore Index. This included Nasdaq-listed Sea Limited, which has businesses spanning e-commerce, gaming and financial services.

UOBKH analyst Adrian Loh said that the potential inclusion of Sea Limited, which has a market capitalisation of S$71.8 billion as at March 25, 2021, "will see more buying of the stock and the unfortunate ramification of funds selling out the largest constituents", including DBS, OCBC, UOB, Singtel and Wilmar.

The inclusion of Sea will be carried out in four phases and spread over nine months, which will somewhat minimise the impact, according to the brokerage.

Given that the three Singapore banks have the largest weighting within the MSCI Singapore Index, Mr Loh said that financials will be hit the hardest, with DBS witnessing the largest impact. Its weight is expected to fall around 4.7 percentage points between May 2021 and February 2022 in a review, according to the analyst.

He also noted that OCBC and UOB will decline by 3.6 and 2.8 percentage points, respectively, while the fourth and fifth-largest weights Singtel and Wilmar will decline by 1.8 and 0.9 percentage points, respectively, over the same period.

Further, the brokerage highlighted the likelihood of the MSCI Singapore Index displaying higher volatility relative to the Straits Times Index (STI) as a result of the impending inclusion of Sea. In fact, Sea could lead to a divergence in the performance of of the two Singapore market indices.

"We expect the MSCI Singapore Index to outperform in the medium to long term relative to the STI, given its exposure to e-commerce and gaming in South-east Asia," said Mr Loh. UOBKH also noted that although the STI has a larger number of constituent companies, the financial sector's weighting overshadows the other companies. "In addition, those 'extra' companies in the STI generally tend to be old economy and thus exhibit lower earnings and therefore share price volatility," said Mr Loh.

UOBKH has "buy" calls for OCBC, Singtel and Wilmar, with target prices of S$14.68, S$2.84 and S$6.40 respectively. It has a "hold" call on DBS with a target price of S$29.20.