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

THE likely imminent inclusion of Nasdaq-listed Sea Ltd in the MSCI Singapore Indices is widely expected to boost investment sentiment across the local market.

Yet, until many more such "new economy" companies are added to Singapore's key market benchmarks, Sea may well be treated as an anomaly by investors - a stock to watch separately and analyse differently from the staid stalwarts that currently dominate the scene.

More than 58 per cent of the MSCI Singapore Index (MXSG) is weighted towards DBS, OCBC, UOB and Singtel - companies that are tightly regulated and which investors assess on the basis of valuation metrics such as price-to-earnings ratios, price-to-book values and, perhaps most importantly, dividend yields.

The three banks and Singtel also account for a significant 46 per cent of the widely followed Straits Times Index (STI).

Not surprisingly, the MXSG and the STI have charted similar trajectories over the years. Since the end of 2010, the MXSG has returned 35.9 per cent, while the STI has returned 33.2 per cent.

More recently, since the end of 2019, the MXSG and STI have returned minus 2.8 per cent and minus 2.4 per cent, respectively.

Over the same period, DBS returned 12.4 per cent while OCBC was not far behind with a return of 10.1 per cent. UOB returned just 1.8 per cent.

Singtel was a big underperformer with a return of minus 27.2 per cent.

Sea could change the nature of the MXSG and provide the local market with a much needed growth-oriented dimension.

The company, which has businesses spanning online gaming, e-commerce and digital financial services, has not reported positive earnings since it was listed in 2017.

Yet, its American Depositary Receipts (ADRs) have climbed more than 480 per cent since end-2019, and the company now has a market capitalisation topping US$117 billion - more than twice DBS's current market value of S$71 billion.

In its February quarterly review, MSCI estimated that Sea's ADRs would account for 25.8 per cent of the MXSG.

Whether fund managers outperform or underperform the MXSG in the future may come down to whether or not they had significant exposure to Sea during the period in question.

Will Sea be ignored?

Yet, local brokers and investors might well choose to ignore Sea as it does not trade on the local exchange - a case of out of sight, out of mind.

Many are also unfamiliar with Sea's businesses, and may simply view the company as having little to do with the local economy and market.

Jardine Matheson and its affiliated companies, which moved their listings from Hong Kong to London and Singapore in the 1990s, received a collective cold shoulder from local investors for years.

With chronically illiquid shares, and a history inextricably tied to Hong Kong rather than Singapore, questions were raised from time to time about whether the Jardine group companies even belonged in the STI.

Yet, the Jardine group arguably has more in common with Singapore's bellwether stocks than Sea. Its businesses - which range from retailing to real estate to automobile dealerships - are decidedly "old economy" enterprises.

Moreover, the potential for value to be "unlocked" has been a big part of the attraction of the Jardine group, much like Singapore's leading listed companies.

Over the past year, Sembcorp Industries unlocked significant value by separating itself from the beleaguered Sembcorp Marine. Wilmar International realised a lot of value with the listing of its China-based subsidiary Yihai Kerry Arawana in Shenzhen.

Since the end of 2019, Sembcorp Industries and Wilmar have returned 55.6 per cent and 33 per cent, respectively.

On Monday, Jardine Matheson said it will acquire the 15 per cent of Jardine Strategic it does not already own.

Minority shareholders of Jardine Strategic will receive US$33 for each share they own - 20 per cent more than the stock's market price before the announcement, but 32 per cent less than Jardine Strategic's net asset value of US$48.71 per share as at June 30, 2020.

Jardine Matheson and Jardine Strategic ended Monday with gains of more than 15 per cent and nearly 19 per cent, respectively.

More tech stocks coming?

Companies like Sea reflect emerging growth avenues in the local economy. If many local public investors are unfamiliar with them, it's only because these companies have been quietly funded in the private equity space before seeking listings overseas to obtain valuations they could not have in their home market.

Sea might just be the first of several technology-oriented companies with links to Singapore to find its way into local market indices.

In its February quarterly review, MSCI indicated that Hong Kong-listed Razer and US-listed Maxeon Solar Tech are also eligible for inclusion in its Singapore index, with weights of 0.42 per cent and 0.13 per cent, respectively.

Separately, Singapore-based Grab is reportedly seeking a listing in the US. The company, which was valued at some US$14 billion earlier this year, has businesses spanning ride hailing, food delivery and financial services.

Other homegrown "new economy" companies reported by The Business Times to be considering US listings include co-working operator JustCo, courier Ninja Van, retail technology and computer vision company Trax, and fintech startup M-DAQ.

A proliferation of such up-and-coming companies in key market indices, especially if accompanied by a roll out of exchange-traded funds, could go a long way in reshaping investor attitudes.

Over time, that might result in a healthy tilt away from value-oriented, dividend-paying stocks that have made the local market so dull and boring, and such infertile ground for hot new listings.