- The MSCI Singapore Free Index is made up of 32 stocks, of which 26 stocks are STI constituents and 6 constituents are part of the FTSE ST Mid Cap Index.
- SGX provides two portfolio products based on the MSCI Singapore Free Index: SiMSCI futures and ETFs.
- The extended hours of SiMSCI futures provide stock investors with an indicative level for where the Singapore stock market will next open.
- The size of the price discount of the SiMSCI futures to the MSCI Singapore Free Index can also give an indication of ex-dividend activity of Index stocks in the relevant month.
- SiMSCI futures currently trades at a discount to the MSCI Singapore Free Index which is expected to narrow tomorrow as three Index stocks, DBS, Sembcorp Marine and Starhub go ex-dividend.
The MSCI Singapore Free Index is made up of 32 stocks, of which 26 stocks are STI constituents and 6 constituents are a part of the FTSE ST Mid Cap Index. The 6 non-STI stocks are Hutchison Port Holdings, Ascendas REIT, Keppel Land, United Overseas Land, Yangzijiang Shipbuilding and Cosco Corp. Together these 6 non-STI stocks account for 7.06% of the MSCI Singapore Index weightings.
In the 2012 year-to-date, the MSCI Singapore Free Index has appreciated 16.6% to 351.84. Singapore Exchange (SGX) provides two portfolio products based on the MSCI Singapore Free Index, Exchange Traded Funds (ETFs) and Futures Contracts. ETFs are open during stock market hours while futures contracts trade in an extended hours in the case of MSCI Singapore Index (SiMSCI) Futures the market is open for trading from 8.30 to 5.15pm, then 6.15pm to 2.00am.
Using futures contract as a portfolio product to hedge portfolios of stocks or to build a leveraged, synthetic portfolio is not an activity for non-experienced investors, and for this reason futures contracts are designated as Specified Investment Products. It is essential that investors understand the risks and nature of these products before participating in its market.
Application
There are two aspects of SiMSCI futures that investors can use in making a broad assessment of the focus of the Singapore stock market. The first and relatively straightforward aspect makes use of the price level of SiMSCI futures as proxy for the Singapore stock market in extended hours. The second aspect makes use of the difference in pricing of the SiMSCI futures to the MSCI Singapore Free Index as an indication of ex-dividend activity in constituent stocks.
1. Extended Hours
The extended hours of SiMSCI futures provides indicative pricing of where the Singapore stock market will next open. For instance at 8.30am this morning, the open of SIMSCI futures was up 0.17%, suggesting the Singapore stock market could open flat to marginally higher. At 9.00am the STI opened at 3065.83 after closing yesterday at 3064.81.
2. The Cost of Carry
Investors who hold SiMSCI futures contracts rather in place of the stocks do not receive dividend payments when the constituent stocks of the MSCI Singapore Free Index go ex-dividend.
For this reason, if there are constituent stocks with ex-dividend dates between now and the expiry date of the futures contract, then the futures contract should be priced lower than the index it is based on. This is based on the principle of fair and efficient pricing, simply put, the futures don’t come with dividends, thus should be less expensive than the relevant index of stocks. The greater the dividend yields and number of Index constituents going ex-dividend, the more discounted the SiMSCI futures should be to the MSCI Singapore Free Index.
On the other side of the cost of carry equation, SiMSCI futures are a leveraged market. Because futures are funded on margining, less funds are required to maintain a position in futures which has the same dollar value as the underlying shares. Thus the balance of those funds not utilized because of the futures margining can be earning fixed income returns reflective of SIBOR rates. This aspect of the cost of carry implies a benefit of SiMSCI futures over stocks, and the price should be at a premium to the underlying index.
The relative size of the two cost of carry components of dividends and interest rates will determine whether the SIMSCI futures should be priced at a premium or discount to the MSCI Singapore Free Index. Overall market sentiment as well as arbitrage costs will also have an effect on the margin for discount or premium outside the theoretical cost of carry calculations.
Example: August SiMSCI futures
On Monday, the MSCI Singapore Free Index closed at 351.839. Into the close, the August SiMSCI futures were trading at a price of 351.1. This represented a discount of 0.74 points while the theoretical discount was 1.19 points based on the cost of carry calculations. On Tuesday afternoon, SiMSCI futures was trading at a discount of 0.67 points to the MSCI Singapore Free Index.
Thus on both these occasions, SiMSCI futures were priced 0.4 to 0.5 points higher than the theoretical futures price based on cost-of-carry. Aside from market sentiment at that moment, part of the deviation could be attributed to the fees that could be associated with purchasing a basket of Index stocks versus the futures.
Taking sentiment and fees into account, the cost of carry saw SiMSCI futures end yesterday at a discount to the MSCI Singapore Free Index. This discount is expected to narrow on Wednesday with three stocks scheduled to go ex-dividend with a combined cost of carry of 0.838 points.
As detailed in the table below, five constituents of the MSCI Singapore Free Index are scheduled to go ex-dividend before the expiry of the August futures contract. Investors can subscribe to a weekly calendar of upcoming ex-dividend dates, in addition to reporting dates and economic events here.
Security Name |
Dividend Expiry Date |
Index Weight for Monday |
Dividend Amount |
Stock Price |
Dividend Yield |
Futures Price Impact |
DBS GROUP HOLDINGS |
15/08/2012 |
11.1% |
0.28 |
14.88 |
1.88% |
0.735 |
SEMBCORP MARINE |
15/08/2012 |
1.74% |
0.05 |
5.11 |
0.98% |
0.060 |
STARHUB |
15/08/2012 |
0.91% |
0.05 |
3.72 |
1.34% |
0.043 |
CAPITAMALLS ASIA |
29/08/2012 |
0.96% |
0.01625 |
1.685 |
0.96% |
0.033 |
UNITED OVERSEAS BANK |
30/08/2012 |
10.53% |
0.20 |
19.98 |
1.00% |
0.371 |
Source: MSCI Group & Bloomberg
In calculating the futures price impact of a constituent stock that goes ex-dividend, the stocks with the largest weightings will have the most impact. As shown in table above, despite the dividend yield of StarHub and CapitaMalls Asia being higher than United Overseas Bank, the latter has higher futures price impact because of its higher index weighting. The futures index impact is calculated by comparing the stock dividend yield and index weighting to the MSCI Singapore Free Index.
As mentioned above, the MSCI Singapore Free Index is made up of 32 stocks. The table below details the Index weightings of each of these stocks as well as year-to-date performances. Price performances have ranged from 66.11% for Keppel Land to -32.98% for Wilmar International.
MSCI Singapore Free Index Constituents
|
Source: MSCI Group & Bloomberg
SGX has introduced dual currency trading functionality which enables listed securities to be traded in two different currencies. The first listed security to launch dual currency units, in USD and SGD was Hutchison Port Holdings Trust (HPHT) effective 2 April 2012. As detailed in the table above HPHT is a constituent of the MSCI Singapore Free Index.
This functionality aims to deliver greater cost efficiency to investors as they are able to trade foreign-denominated securities in their local currency. With dual currency trading, a company can now choose for its listed security to be traded in any two different currency denominations. The securities will be fungible, i.e. an investor can buy and/or sell the security in any currency regardless of the currency in which it was first bought and/or sold.
Exchange Traded Funds
SGX also offers non-leveraged mediums to participate in the MSCI Singapore Free Index through two ETFs. The cash-based ETF (I19) is managed by iShares®. The cash-based categorisation implies this ETF holds the same stocks in the same weightings as the benchmark index or a sample of constituent stocks that statistically representing the index. In addition, db x-trackers offer a synthetic ETF (09A) based on the MSCI Singapore IM Total Return Index.
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