New Next 50 Indices help shape investment decisions, but could take time to gain traction

[SINGAPORE] The iEdge Singapore Next 50 Indices launched by the Singapore Exchange (SGX) this week will likely prove useful in helping investors shape their investment decisions, analysts say. But they warn that it could take time for institutional investors and financial institutions such as fund managers to get on-board.

“At the early stages, these indices most likely will act as benchmarks for institutional investors,” Thilan Wickramasinghe, head of research for Singapore at Maybank Securities, told The Business Times.

This means that investors could use the iEdge Singapore Next 50 Index and iEdge Singapore Next 50 Liquidity Weighted Index as standards for measuring and structuring their portfolios. “The new indices should help in guiding investment decisions,” he added, noting that they will “complement existing benchmarks”.

However, market watchers believe that broad acceptance of the new indices will not come immediately.

“It will require time for the new (indices) to gain wide acceptance,” said Carmen Lee, head of OCBC Investment Research. In general, a well-established index with a long track record is likely to be more closely followed by the investing community, she noted.

The way she sees it, only after the indices have established their credibility will they be able to unlock a feature that can aid them in gaining traction: the creation of linked products such as exchange-traded funds (ETFs) by financial institutions.

And this will allow for broader participation by both retail and institutional investors.

“Clearly, there will be new products based on these new indices,” said Adrian Loh, head of research at UOB Kay Hian. However, it is “not easy to put a number” on how many of such products will eventually be created, he added.

More investor interest

The iEdge Singapore Next 50 Indices comprise the 50 largest and most liquid SGX-listed stocks beyond the blue-chip constituents of the Straits Times Index (STI).

Their sector composition also differs from that of the benchmark STI. Real estate has the largest weighting at 47.7 per cent, followed by industrial services at 11.6 per cent, and chemical, plastic and rubber materials at 7.5 per cent.

In contrast, the STI is heavily represented by financials, Lee noted.

The indices’ launch comes amid the Monetary Authority of Singapore’s (MAS) equities market review. Among its key initiatives is a S$5 billion Equity Market Development Programme (EQDP) for fund managers to boost investor interest and liquidity in the local bourse.

“In the near term, we believe the (iEdge Singapore Next 50 Indices) constituents should benefit from further support measures, including EQDP fund deployment and ETF creation,” JPMorgan analysts Khoi Vu and Rajiv Batra said in a Sep 22 report.

They added that a 30 per cent allocation to small and mid-cap companies by EQDP funds could result in an inflow of around S$1.5 billion, equivalent to about nine days’ turnover.

“(The indices) should help in attracting investor interest into Singapore’s mid-cap space, especially as institutional investors look towards deploying MAS EQDP funds,” said Wickramasinghe.

While there is a “vast sea” of stocks beyond the 30 STI constituents, “many struggle to meet the liquidity and market capitalisation criteria needed to absorb investments from institutional investors”, he added.

To this end, the new indices could also prove useful. Their constituents must fulfil certain criteria to be included, including a free-float threshold of 15 per cent, market capitalisation of at least S$100 million, and median daily turnover of S$100,000.

“Providing enhanced access to diversified benchmarks will likely strengthen the retail segment’s analytical capabilities and investment options,” Oriano Lizza, sales trader at CMC Markets Singapore, told BT.

Increased coverage

Along with increased visibility, companies on the Next 50 Indices should gain a corresponding rise in coverage, analysts say.

UOB Kay Hian estimates that 60 to 70 per cent of the Next 50 stocks are already covered by sell-side analysts, with the firm itself covering 31 of the 50.

OCBC’s Lee noted that there is an average of 14 analysts covering each of the 30 STI constituents. However, only five analysts on average cover each of the Next 50 stocks.

The counters which are covered by more than 10 analysts each include StarHub and four real estate investment trusts (Reits): CapitaLand Ascott Trust, CDL Hospitality Trusts, Keppel Reit and Suntec Reit.

The remaining 45 stocks receive less attention, Lee said. “The inclusion into the Next 50... could over time help to generate more interest and analyst coverage.”

Among the companies with analyst coverage, JPMorgan expects average earnings growth of about 14 per cent for 2026, with a projected 5.1 per cent dividend yield. This is higher than the STI constituents’ average of 9 per cent growth and 4.8 per cent yield.

It is likely that Next 50 constituents will attract greater analyst coverage.

“If these indices become benchmarks for the Singapore mid-cap sector, more coverage will follow,” said Maybank’s Wickramasinghe.

However, UOB Kay Hian’s Loh noted that a few of these companies are arguably difficult to cover, given their business models.

“The key change will be to see whether the companies that are included in the Next 50 will have to improve their overall investor relations,” he said. This includes being more active in communicating with the wider investor community.

“This is something that the SGX has said that it wants to do,” he added.