Emperador’s inclusion in the STI makes the benchmark index even more international

THE displacement of ComfortDelGro from the Straits Times Index (STI) by Philippines-based liquor giant Emperador marks another step towards internationalisation for the market barometer.

The change was somewhat expected, having been flagged as early as April this year by analyst Brian Freitas of Periscope Analytics, who publishes on Smartkarma.

Emperador’s inclusion also fits within a broader trend of large international companies displacing local names on the blue chip index in recent years.

In 2016, offshore and marine group Sembcorp Marine was dropped in favour of conglomerate Jardine Matheson Holdings . A year later, aerospace engineering specialist SIA Engineering was replaced by now-delisted conglomerate Jardine Strategic Holdings.

The two Jardines had previously been part of the STI, but were dropped in 2015 due to liquidity requirements.

DFI Retail Group , a grocery store operator that is also part of the Jardine Group, replaced StarHub on the STI in 2018.

Apart from the Hong Kong-headquartered Jardines – which are primary listed in London – the STI also includes Thailand’s Thai Beverage and Chinese shipbuilder Yangzijiang Shipbuilding , which is incorporated in Singapore

With Emperador joining the index later this month, the STI now adds exposure to a large Philippines company. This also means that 20 per cent of the STI constituents hail from beyond Singapore’s shores.

Is the sizable proportion of foreign constituents on Singapore’s capital markets barometer a good thing? What are the implications for those who want to use the index for exposure to the performance of the local economy?

An international exchange

It isn’t surprising for the STI to have such broad foreign representation among its constituents, given that SGX has pitched itself as “Asia’s most international exchange”.

The bourse operator’s website also shows that around 40 per cent of the companies listed on the exchange come from overseas.

Under the STI ground rules, a security that is listed on the SGX Mainboard will be considered Singaporean in nationality and therefore eligible for the STI (subject to conforming to all other eligibility criteria).

With that context in mind, it would make sense for the STI – being a market barometer, rather than an economic barometer – to reflect the nature and composition of the local market.

The international counters – despite making up a fifth of the constituents – do not actually take up that much of the weightage in the STI, which is market capitalisation-weighted and adjusted for free float.

Based on Bloomberg data, the existing foreign STI counters have an index weight of around 9.8 per cent. CGS-CIMB analysts estimated that Emperador could have an index weight of 0.39 per cent upon its inclusion. The overall exposure to foreign constituents would thus be around 10 per cent.

This is less than the index weight of each of the 3 local banks, DBS, UOB and OCBC, which range between 11.6 and 19.4 per cent.

Meanwhile, real estate investment trust (Reits), which have been also favoured by local investors, also make up a relatively sizable chunk of the index, at 7 of the 30 component counters. These companies collectively make up for around 13.3 per cent of the index weight, Bloomberg data showed.

Other local large caps, such as Singtel, Keppel Corp, Wilmar International, and CapitaLand Investment also remain on the index.

Investors wanting exclusive exposure to Singapore companies may prefer exposure to the MSCI Singapore Free Index instead. The MSCI Singapore – which is designed to measure the performance of the large- and mid-cap segments of the Singapore market – uses a methodology that takes into account a stock’s country of incorporation and primary listing to determine stocks for inclusion in the country index.

This has resulted in divergence from the STI in certain areas.

For one, none of the secondary-listed or foreign-incorporated STI counters are included on the MSCI Singapore. Meanwhile, US-listed Singapore counters such as Grab and Sea are on that index.

Both indices still have a high degree of overlap, with more than 80 per cent of the index weights in each index made up of the same companies.

It is also worth noting that all the local counters dropped from the STI in recent years aren’t members of the MSCI Singapore either.

ComfortDelGro was dropped from the MSCI Singapore in 2020, along with Sats, Sembcorp Industries and Singapore Press Holdings (SPH), while StarHub was also deleted from that index in 2018.

Survival of the largest

It is apparent that the companies deleted from the STI in favour of large foreign counters in recent years have underperformed in terms of share price and, as a result, market capitalisation.

ComfortDelGro’s share price, for instance, has slipped 14.3 per cent in the past year, underperforming the 3.8 per cent gain in the STI.

SIA Engineering and StarHub shares have also significantly underperformed the STI over the past 5 years, falling 30.7 and 53.6 per cent, respectively, against the 2.2 per cent decline in the index.

Likewise, Sembcorp Marine’s current share price and market capitalisation pale in comparison with when it was an index stock.

Index methodology, naturally, plays a determining role in which companies are included and deleted from various indices, which may not always be within a company’s control.

While there may be merit in indices evolving to track a wider portion of the local equity market, it is also clear that companies need to battle to grow and deliver returns amid stiff competition for investor attention and dollars.

The largest company in the STI reserve list, Olam Group , already had a market capitalisation of S$5.7 billion as at Aug 22, ranking it 25th among eligible securities. If it rises to 20th spot sometime down the road, it would become a part of the STI.

Meanwhile, the smallest STI counters – such as Keppel DC Reit , which is also the worst index performer in the year-to-date – would need to find ways to not slip further. Otherwise, there is the risk of their market capitalisation falling below the 40th position and being booted out from the index.

Membership on the STI or any index is not a given, and companies would need to constantly work hard to grow and outshine the competition to retain their place and stay on the radar of investors.