Analysts welcome launch of new stock indices - Jun 07, 2007 (BT)

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The Straits Times / The Business Times News On SPH

Analysts welcome launch of new stock indices

By Conrad Tan
Jun 07, 2007
The Business Times

EQUITY analysts yesterday welcomed the proposed launch of 18 new stock indices later this year to complement the benchmark Straits Times Index (STI) but said the associated pruning of the STI would have limited impact.

'I think it was long overdue,' said Kenneth Ng from CIMB, of the new indices to be rolled out in October. They include 13 sector indices that will track stocks in sectors such as oil and gas, healthcare, financials, and real estate.

With these 13 sector indices spanning almost all stocks listed on the Singapore Exchange (SGX) mainboard, 'it's a lot easier to tell which sector does well and which does not', he said.

Kevin Scully, managing director of independent research house NetResearch Asia, said the launch of the new indices would serve to highlight to international investors 'specific sectors where Singapore companies are dominant in, such as oil and gas'.

He saw it as a necessary strategic move by SGX to raise the profile of such sectors to attract new listings. Foreign companies operating in these sectors seeking to list and raise funds from the public would be able to tell easily if their shares would command a premium in the Singapore market, he added.

SGX, Singapore Press Holdings and London-based index specialist FTSE Group are collaborating to create the new indices. The main market barometer, the STI, is also being pruned from the usual 50 members to just 30 to sharpen its focus on the largest and most liquid blue-chip stocks. Separate indices for mid-cap, small-cap and 'fledgling' companies will track the remaining mainboard stocks.

But the cut in the number of STI members was seen as unlikely to have much impact on the market.

'My assumption is it is aimed at increasing the volatility of the index,' said one analyst, who declined to be named. This would likely encourage the development of financial derivatives based on the STI, he added. 'It's the right move. All derivatives markets thrive on volatility.'

Still, Carmen Lee, head of OCBC Investment Research, said the cut would 'definitely affect' the stocks soon to be left out of the revamped STI. 'Being on it gives a lot of credibility. If you're tracking the STI, you really have to look at every single component stock ... once they're included, people do put them into portfolios,' she added.

The analysts also pointed out that most fund managers here already use competing indices provided by New York-based index provider MSCI Barra as benchmarks for the performance of their funds and other products.

'The STI is only used for retail investors and hardly used when fund managers measure their own performance,' said CIMB's Mr Ng.

It is still unclear which stocks will be left out when the revamped STI is published in September, as FTSE will employ its own methodology to compile the index. But dealers speculate that those dropped will be infrequently traded stocks such as the Hong Kong-based Jardine conglomerates, Jardine Strategic and Jardine Matheson, and the smallest stocks by market capitalisation in the STI.

Currently, the three stocks with the lowest weight in the index are Jurong Technologies, Datacraft Asia and Creative Technology, each with a weight of less than 0.2 per cent.

Collectively, the bottom 20 stocks in the STI, ranked by index weight, account for just 8.6 per cent of the index, at yesterday's closing prices. There are now 49 members, since STATS ChipPAC was removed from the index earlier this week after a takeover offer by Temasek Holdings substantially reduced its free float.