OREANDA-NEWS.  Singapore’s four largest capitalised stocks Singapore Telecommunications (SingTel), DBS Group Holdings (DBS), Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB) are amongst the region’s biggest growth, value and momentum stocks. All four stocks are within the ten biggest constituents of the MSCI South East Asia Growth Index, the MSCI South East Asia Value Weighted Index and the MSCI South East Asia Momentum Index.

Growth, Value & Momentum

The blend of value and growth means the stocks have met the index criteria of trading at discount to intrinsic values in addition to being associated with the segment of stocks that increase in capital value rather than yield high income. The MSCI South East Asia Growth Index is made up of stocks that meet criteria for long term and short-term forward Earnings per Share (EPS) growth, current internal growth, long-term historical EPS growth and long-term historical sales per share growth.

The MSCI South East Asia Value Weighted Index reweights constituents to emphasis stocks with lower valuations with weights determined by fundamental accounting data such as sales, book value, earnings and cash earnings rather than market prices. SingTel, DBS, OCBC and UOB are the four largest constituents of the MSCI South East Asia Value Weighted Index. Other Singapore stocks to be included with the ten largest constituents of this index are Keppel Corp and Noble Group.

The MSCI South East Asia Momentum Index is designed to reflect the performance of an equity momentum strategy by emphasising stocks with high price momentum, while maintaining high trading liquidity, investment capacity and moderate index turnover. Other Singapore stocks to be included with the ten largest constituents of this index are Singapore Exchange and Singapore Airlines.

Heavyweights & Index Correlation

Together the four stocks (SingTel, DBS, OCBC and UOB) that are associated with all three of the style indices represent around half of the free float market capitalisation associated with the Straits Times Index (STI) and the MSCI Singapore Index (SiMSCI). As of yesterday those weightings stand at 47% and 51% respectively.  To see more information on the four stocks in SGX StockFacts – please click on the following names:

SingTel          DBS          OCBC          UOB

A portfolio of the four stocks, equally weighted at the beginning of 2011 has generated a 2.5% compound annual growth rate through to the end of October. This does not include dividend distributions which currently averages a yield of 4.0% for the four stocks. Accounting for reinvested dividends the average total return of the four stocks was 36.8% over the period.

From the beginning of 2011 through to the end of October, the returns of the four-stock basket have been 93% correlated to the returns of the SiMSCI.  While the two mediums have seen some longer term divergence in price performance over the almost five year period, similar short term swings have been observed. This accounts for the high correlation over the period.

With periodical market swings, the correlation of the basket to the index has exemplified the hedging application of the SiMSCI Futures. As a hedging medium, SiMSCI Futures have also become more accessible, with the notional value of the futures contract halved effective 2 November. Each one (1.0) point move of the SiMSCI Futures is now S$100. This means that a trading price of 330.0, the notional value of one single contract is S$33,000. A 0.05 point movement from 330.0 to 330.05 has a dollar equivalent of S$5 per contract.  SiMSCI Futures require margin payments, and initial margins are currently S$1,540 per contract.

Portfolio Example

As an educative example, if an investor wanted to gain exposure to the dividends associated with the four heavyweight stocks while attempting to protect the portfolio from downside price risk, the investor could buy a basket of stocks while simultaneously selling the SiMSCI Futures. To construct a similarly valued portfolio with the four largest SiMSCI stocks – a near balance of 24% SingTel 25% DBS, 24% OCBC and 26% UOB could be achieved with S$33,092 based on this Tuesday’s opening prices. As noted above, at a trading price of 330.0, the notional value of one single SiMSCI Futures contract is S$33,000.

September Decline & October Advances

On 31 August the September SiMSCI Futures opened at 329.0. On the previous contract multiplier the notional value of the contract was S$65,800. The contact’s settlement price, published after constituent stocks had opened for trading on the morning of 30 September, was 310.19. Hence a short position in one contract held from the 31 August open to expiry would have yielded 18.81 points. This was equivalent to a gain of S$3,762 before transaction fees, corresponding with the futures price declining 5.7%.

Meanwhile from the 28 August close through to the 30 September close, the portfolio of SingTel, DBS, OCBC and UOB declined 6.4%. Hence the futures position did not completely offset the decline in the portfolio, at 5.7% nine-tenths of the 6.4% loss in the portfolio was offset by the short position in the futures contract. Furthermore the SiMSCI Index declined 4.9% over the same period of time that the portfolio declined 5.7%. A key caveat to this style of hedging activity is that while the correlation of the portfolio was significant over the longer period of time, the ability to perfectly hedge stocks and futures is an uncommon occurrence. Please also note the portfolio is based on equal weightings on the base date of 13 January 2011.

September Portfolio Example

From the close of 30 September through to the close of 30 October the portfolio of SingTel, DBS, OCBC and UOB gained 7.6%. Over the same period of time the SiMSCI Index gained 7.6%. The SiMSCI futures gained 6.5% from the 1 October open price through to the October expiry price of 333.36. Hence while the portfolio gained 7.6% the futures declined 6.5% over the period.

October Portfolio Example

The current SiMSCI constituents and weights are tabled below.

Security Name

SGX Code

Index Weight (%)

GICS® Sector

Singapore Telecommunications

Z74

13.8

Telecommunication Services

DBS Group Holdings

D05

13.6

Financials

Oversea-Chinese Banking Corporation

O39

11.9

Financials

United Overseas Bank

U11

11.5

Financials

Keppel Corporation

BN4

4.5

Industrials

CapitaLand

C31

3.5

Financials

Global Logistic Properties

MC0

3.1

Financials

ComfortDelGro Corporation

C52

2.9

Industrials

Singapore Press Holdings

T39

2.8

Consumer Discretionary

Singapore Exchange

S68

2.6

Financials

Singapore Airlines

C6L

2.6

Industrials

Wilmar International

F34

2.6

Consumer Staples

Singapore Technologies Engineering

S63

2.2

Industrials

Genting Singapore PLC

G13

2.2

Consumer Discretionary

CapitaLand Mall Trust

C38U

2.1

Financials

Ascendas REIT

A17U

2.1

Financials

Hutchison Port Holdings Trust

NS8U

1.9

Industrials

Suntec REIT

T82U

1.7

Financials

Jardine Cycle & Carriage

C07

1.7

Consumer Discretionary

Sembcorp Industries

U96

1.5

Industrials

City Developments

C09

1.4

Financials

UOL Group

U14

1.4

Financials

CapitaLand Commercial Trust

C61U

1.2

Financials

Golden Agri-Resources

E5H

1.2

Consumer Staples

Noble Group

N21

1.1

Industrials

Yangzijiang Shipbuilding Holdings

BS6

1.0

Industrials

StarHub

CC3

1.0

Telecommunication Services

Sembcorp Marine

S51

0.9

Industrials

Specified Investment Products

Please note that SiMSCI Futures are Specified Investment Products (SIPs).

Under MAS’ guidelines to enhance safeguards to retail investors, brokers must assess if investors have the relevant education, knowledge or experience before they can invest in SIPs. SIPs are products that have structures, features and risks that may be more complex in nature.