Path to prosperity

This post is a follow up from my earlier post about the MSCI Singapore rebalancing (MSCI Singapore Index Rebalancing Impact on Stocks)

Quick recap: MSCI announced a rebalancing of the MSCI Singapore and MSCI Singapore Small-Cap indices resulting in the trading idea of buying the additions and shorting the deletions. In particular, I highlighted that the impact from the MSCI Singapore changes would be much larger than the Small-Cap index due to the size of funds tracking them. 

The price changes in the abovementioned stocks appear to be reflective of the initial thesis I had. This price was supported by extremely strong volume across the few stocks, way above their daily average trading volumes. Post-cutoff date, as funds finish up with their buying, there is a chance that investors who have benefitted from the price increases would take the chance to realize some profit for stocks that have been added (ie. MLT) and pick up the deletions (ie. SATS) if the sell down is too great. 

Moving forward, the dates for the next MSCI quarterly reviews have been announced. Given the continuing volatility in markets, prices will continue to fluctuate wildly and we can expect the weightings of MSCI constituents to change. Additionally, businesses that are deemed less future proof could see more outflows leading to them being dropped from the index or vice versa. A well-known example is that of Zoom, which has jumped 150% since 2nd Jan 2020 and has been added into the NASDAQ and the MSCI America. 

What happened?

MSCI announced the outcome of their semi-annual review for the MSCI Singapore Index. This will result in Mapletree Logistics Trust (MLT) being added to the index on May 29 while the following 4 stocks will be removed

There was also a change in the MSCI Singapore small caps index as the following stocks were added

What is the MSCI Singapore?

It is another index just like the STI to track the performance of the broader (large and mid cap) market of the Singapore stock exchange. As of Apr20 it had 25 constituents and represents about 85% of the whole market's free-float adjusted market cap. Although the constituents are not fully readily available, readers may wish to compare the Top 10 snapshot provided by MSCI with my previous post on the expected change in the STI where I also posted a Top 10 constituents list. 

While the STI has ETFs traded on the SGX market, the MSCI index also has an iShares MSCI Singapore traded on the New York Stock Exchange. This provides it with greater access to liquidity as the US market is the deepest and most well-traded market in the world. 

Expected impact

As mentioned in the previous post about the STI, newly added stocks tend to trade higher in the lead up to the cut-in date (29 May) and slightly after the date as passive index funds that track the index would have to start adding the stock to their portfolios. The opposite holds for newly cut out stocks as funds sell off their positions. The impact is likely to be larger for MSCI Singapore compared to the MSCI Singapore small cap index due to the size of the passive index funds tracking them and the relatively smaller number of constituents in the MSCI Singapore. 

For investors who wish to capitalize on the rebalancing, MLT should be at the top of their shopping list. However, would be prudent to note that as passive funds flow in, this could drive valuations up more than necessary and lead to some profit-taking after the rebalancing is complete. Vice versa for the stocks that are removed, if the selling is overdone, there could be some value in CDG, SATS, SCI and SPH. 

Happy investing!