Eligible foreign listings to join MSCI Singapore indices in four steps

ELIGIBLE foreign listings will be included on the MSCI Singapore Indices over four phases, starting with 5 per cent of their free float adjusted market capitalisation in May.

In a statement, MSCI said some market participants suggested a stepped transition would be appropriate due to the size of the changes. Based on simulations as at March 1, foreign listings would have a 27.8 per cent weight in the MSCI Singapore Index.

The phased approach would mean a longer time before the full impact of foreign listings - which could include Sea - is felt in the indices.

MSCI announced last November that foreign listings will become eligible for the MSCI Singapore Indices from the May 2021 semi-annual index review (SAIR), after the Singapore market met the foreign listing materiality requirements.

This requirement is calculated by MSCI based on an Investable Market Index (IMI), which measures the performance of the large-, mid- and small-cap segments of each country's market.

During the February index review, three foreign-listed securities were eligible for the MSCI Singapore IMI: US-listed Sea and Maxeon Solar Tech, as well as Hong Kong-listed Razer.

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Simulations at the February review showed Sea's American depositary receipts constituting 20.9 per cent of the MSCI Singapore IMI and 25.8 per cent of the MSCI Singapore Index. The other two counters were much smaller, with simulated weights of under 0.5 per cent in the MSCI Singapore IMI, and were classified as small-caps.

MSCI will begin the adjustments to the index in May by applying an Index Inclusion Factor (IIF) of 0.05 to the free float adjusted market cap of eligible foreign listed companies. The IIF will, respectively, be increased to 0.25, 0.5 and 1 in subsequent reviews in August 2021, November 2021, and February 2022.

Brian Freitas, an analyst who publishes on Smartkarma, estimates Sea's potential weight on the MSCI Singapore Index would be 1.73 per cent at the May 2021 SAIR, increasing to 8.1 per cent, 14.99 per cent and 26.07 per cent, respectively, over the subsequent reviews.

The initial inclusion of Sea on the MSCI Singapore Index "will not have much of an impact on trading activity, especially for index arbitrage traders, since the stock will have less than a two per cent weight in the index", Mr Freitas said in a note on Thursday.

When the full weight of Sea is included from February next year, however, Mr Freitas noted that 26 per cent of the index would not be trading during the Asian trading time zone.

"This will create issues for index arbitrage trading desks and other liquidity providers on futures and (exchange-traded funds) but will at the same time create opportunities to take on risk at a larger spread," he said. "The improved visibility of the index and a higher weight in global indices will result in larger flows from portfolio investors and passive funds in the medium to long-term."

Analysts previously told The Business Times that the potential inclusion of a large tech counter such as Sea on the MSCI Singapore Index could be positive news for Singapore as it brings the index in line with other global indices that already have exposure to the new economy sector.

Finance and real estate currently make up almost three-quarters of the sector weights of the MSCI Singapore Index, while the information technology and communication sectors make up roughly 11 per cent.

The final list of securities represented by foreign listings is expected to be announced on May 11.

READ MORE: Will local investors take to foreign-listed tech stocks like Sea after inclusion in key indices?