MSCI Inc. (formerly Morgan Stanley Capital International and MSCI Barra), is an American finance company headquartered in New York City and serving as a global provider of equity, fixed income, hedge fund stock market indexes, and multi-asset portfolio analysis tools. It publishes the MSCI BRIC, MSCI World and MSCI EAFE Indexes.
The MSCI Singapore Index (SIMSCI) is designed to measure the performance of the large and mid cap segments of the Singapore market. With 25 constituents, the index covers approximately 85% of the free float-adjusted market capitalization of the Singapore equity universe
Since SIMSCI is widely followed by fund managers, the component stocks that are added or deleted from the index should have big impact to their stock prices. ETFs tracking the index will need to follow the index and buy and sell the stocks added and deleted respectively. Fund managers with the index as a benchmark will also likely need to act.
Let us take a historical look at the price impact of the addition and deletion of the stocks from the index
|
Stocks Added |
Stocks Deleted |
|
MSCI index announcement/Implementation date |
7-11-2019/26-11-2019 |
|
Mapletree Com |
Golden Agri |
|
|
|
|
MSCI index announcement/Implementation date |
14-05-2018/31-05-2018 |
|
Venture |
Hutchison Port Starhub |
|
|
|
|
MSCI index announcement/Implementation date |
14-11-2016/30-11-2016 |
|
SATS |
Noble SembMarine |
|
|
|
|
MSCI index announcement/Implementation date |
6-11-2014/25-11-2014 |
|
Suntec |
Olam |
Stocks Added to SIMSCI
Let us look at the following charts that were added to SIMSCI. The huge volumes on the charts were the markers for the index implementation day.
For the stocks that were added to SIMSCI, there seemed to be a mild tendency for the stocks to have some gains shortly before to after the implementation date but the patterns were not consistent. All the stocks closed at near day high on the implementation date.
Let us look at the following charts that were removed from the index. The huge volumes on the charts were the markers for the index implementation day.
The following were observed for the stocks that were removed from the index
1. There were tendency for the stocks to drop two days before the implementation date
2. All the stocks closed at near day low on the implementation date
3. There were tendency for the stocks to rebound after the implementation date for a few days and all the stocks closed higher three days after the implementation date
For readers that want to take know the market sentiment for each implementation date, the charts of STI were attached below.
Conclusion
Component stocks added and deleted from SIMSCI will force passive funds such as ETFs to buy and sell the stocks added and deleted respectively. This action resulted in much higher trading volume for the affected stocks on the implementation date. The stocks that were deleted closed at near day low and the stocks that were added closed at near day high on the implementation date. Stocks that were deleted had relatively stronger price movement compared to stocks that were added. Perhaps this is because investors were psychological more risk adverse. Behavioral science concept is that the pain of losing is psychologically about twice that of the pleasure of winning.
There was a strong tendency for the stocks removed from the index to close at a short term low on the implementation date or day after. It seemed that investors can profit by selling (shorting) stocks that were removed from the index one to two days before the implementation date, double buy back the stocks at close of implementation date and finally sell to close positions about three days after the implementation date.
The next index implementation date for SIMSCI is this Friday 29 May 2020. Mapletree Log will be added and Comfort, SATS, SembCorp Ind and SPH will be removed. History can repeat if market participants continue to take advantage of the predictable actions of passive funds!
