What Does The Change In STI Components Mean For Singapore’s Investors?
14/09/2016 at 10:51 am #527
Jardine Matheson Holdings will rejoin the Straits Times Index (STI) on 19 Sept 2016, replacing Sembcorp Marine in the index.
STI components are free-float weighted to ensure that only the investable opportunity set is included in the index. With the changes in STI components, Jardine Matheson Holdings is expected to be the 5th largest component in the STI, holding 6.5% of the total market capitalization (price x number of shares). This weightage can also represent the sensitivity of the STI to the change in the price of an individual stock. That is, every 100% increase in the price of Jardine Matheson Holdings would translate to 6.5% increase in the price of the STI, with all else being constant.
The inclusion of Jardine Matheson Holdings would also change the weightage of STI components. The following are the changes:
Is This Something To Be Worried About?
It is not unusual for companies to be replaced during the semi-annual review. Previously, Jardine Matheson Holdings, Olam International, and Jardine Strategic Holdings were also replaced by SATS, UOL Group, and Yangzijiang Shipbuilding Group since they did not fulfil the liquidity requirement. For existing companies to remain in the STI, securities must trade at least 0.08% of their issued shares in 8 of the 12 months prior to the review.
What We Can Expect
In the short run, due to changes in the weightage of the individual components, there might be some fluctuations in the prices of individual components as funds which track STI. For example, Nikko Asset Management and SPDR STI ETF will be rebalancing their portfolio to reflect the change.
As for the long run, since Jardine Matheson Holdings is now the fifth largest STI component, we can see that the performance of STI is dependent on the performance of the stock. However, we can see the health of STI remains largely dependent on the 3 banks and 1 local telecommunication company as they take up 40% of the total weight.
As for Jardine Matheson Holdings, its re-entrance to STI might cause an increase in stock price as index fund trackers buy up to rebalance their portfolio. However, it is important for investors to conduct due diligence on the business growth stories and the potential long-term upside before investing in the stock.
DollarsAndSense.sg is a website that aims to provide interesting, bite-sized financial articles which are relevant to the average Singaporean. Subscribe to our free e-newsletter to receive exclusive content not available on our website. Follow us as well on Instagram @DNSsingapore to get your daily dose of finance knowledge through photos.
You must be logged in to reply to this topic.