Arthur Pineda of Citi Research warns that the Straits Times Index (STI), which has gained more than 13% year to date to record levels, may lag relative to the small- and mid-caps as funds now invested in the STI counters could potentially be rotated.
SGX, as part of its broader bid to promote the non-STI universe of stocks that had been less traded, has introduced the iEdge Singapore Next 50 Indices, where the component stocks are the "next 50" stocks measured by market value.
"While institutional investors have traditionally been focused on MSCI Singapore & STI constituents given size and liquidity requirements, this move to devise a new index could potentially allow additional inflow and reallocation into small & mid cap names within the market," states Pineda in a Sept 19 note, ahead of the official launch of the indices on Sept 22.
Terence Wong, CEO of Azure Capital, is not too worried that the STI will wane from these indices. “Liquidity begets liquidity. You have crowd in now, and it is very clear,” he says, referring to the pick up in volume and value of the market after the EQDP measures were announced, where local equities have been drawing in additional funds invested by family offices and other institutional investors.
Wong is confident that the market is big enough. “Many of these guys were under-invested in the first place, not so much that there was a lot of investments in the bellwethers; it is because of the lack of investments.
“The whole pool is going to be increased substantially and I feel that that's enough for everybody.” The risk is only when for example a fund house has a hard cap on how much can be allocated for Singapore as a whole, he adds.
See also: SGX’s ‘Next 50’ indices to benchmark and help funnel potential components into STI
In his Sept 19 note, Pineda also points out that most of the small- and mid-caps remain relatively poorly covered — if at all — which means consensus estimates are unreliable.
He warns that not all small- and mid-cap stocks, even with this wave of liquidity, ought to be viewed favourably and that fundamental stock picking rigour has to be applied.
"We see the need to be prudent in identifying quality given potential risks if and when this liquidity inflow ends," he adds.
See also: Hong Kong’s capital markets resurgence: Asia’s pre-eminent financial powerhouse
Wong, who made his name in this industry first running SIAS Research, and later on, managing the research team at DMG & Partners Securities, agrees that there are only a handful of analysts with the sell side brokers focusing solely on small and mid cap coverage.
He is optimistic that the research community will pay more attention to this space and analysts now focusing on small and mid-caps will not feel like lone wolves for long. “Things will change. It will be back to the heydays where we had good teams of analysts looking for ideas out in the market. It has to happen, right?”
