Treasure Chest | Dec 19 2012
By Greg Peel
The ASX has announced that Integra Mining ((IGR)) will be removed from the ASX 200 subject to final approval by shareholders and authorities for its merger with Silver Lake Resources ((SLR)). Assuming Integra leaves, Silver Lake will see its index weighting increased due to the impact of the merger.
JP Morgan notes the capitalisation of Silver Lake will increase to 368m shares from 220m shares due to the scrip swap arrangement of the merger. This will take the company's weighting in the ASX 200 to 0.107% from 0.043%, suggesting index-tracking funds will need to buy Silver Lake shares to rebalance, however most of the additional shares required will be picked up by participating in the merger rather than outright buying, JPM notes.
Index trackers will nevertheless need to acquire shares in Sirtex Medical ((SRX)) which will replace Integra in the ASX 200. The initial weight of Sirtex will be 0.049% on JP Morgan's calculation.
These changes will become effective at the close of the market on December 24.
“Window dressing” is a term commonly heard in financial markets, referring to the practice of fund managers to buy/sell certain stocks (or other instruments) as a quarterly/yearly “books close” approaches in order to either make the fund returns look a little better than they are or not as bad. Fund managers are stuck with this published return for the quarter/year and results determine just what funds flow they might experience.
One trick is to offload stocks which have performed badly over the period even if the fund manager still expects those stocks to recover value in the next period. A weaker return is locked in, but the poor performers, now sold, do not stand out like sore thumbs in portfolio breakdowns thus avoiding lots of questions and accusations from all-knowing, 20/20 hindsight investors. Once books have closed and returns are locked in, the fund manager simply repurchases those sold stocks at the beginning of the next period. If their original theses prove correct, and those beaten-down stocks do recover, then the fund managers look like heroes at the end of the next period even if the net result is still negative.
The evidence is clear. CIMB Securities notes that the most ten beaten-down stocks in the ASX 200 over the calendar year outperform the index by an average 3.6% in the new month of January – over the past 18 years. The effect is further exacerbated in “tough” times, the analysts note, and 2012 qualifies. Outside of window dressing, there is a supportive effect in that investors often look to open their new year's gambit by buying name stocks that were hit the year before and now look like good value.
CIMB has identified a group of stocks that look like good candidates to benefit from this January Effect in 2013. The stocks are in the ASX 200, have had a tough 2012 price-wise, but look good on a price to book value basis. They are Atlas Iron ((AGO)), APN News & Media ((APN)), Boart Longyear ((BLY)), Emeco Holdings ((EHL)), FKP Property ((FKP)), Gindalbie Metals ((GBG)), Macmahon Holdings ((MAH)), Paladin Energy ((PDN)), Seven West Media ((SWM)), and Ten Network ((TEN)).
Traders should be warned, nevertheless, that there are reasons behind each of these stock's poor performance in 2012.
Moving from short-term stats to longer-term stats and the concept of “mean reversion”, the Deutsche Bank strategists note the past five years have been one of the worst five-year periods for the Australian stock market in history, ranking up there with the depressions of the 1890s and 1930s, the two World Wars and the 1970s oil shock period. Over 2008-12, investors have been chanelling funds into fixed income rather than equities.
Under “normal” circumstances, equity markets rise. At least they've done so for 97 of the past 137 years, Deutsche notes, for an average capital gain of 6.5% with an average 4% dividend yield kicker. Is it possible that 2013 might finally see a trend back towards “normal”?
Deutsche thinks this is possible. Australian company earnings and gearing are now low compared to history. Valuations look slightly cheap in price/earnings terms but quite cheap on a comparison to bond yields. Equity exposure in investor portfolios is at a 15-year low. The strategists see scope for a gradual rise in earnings in 2013 from low levels, encouraging a reduction in investors' underweight equity positions.
Deutsche is looking for a total return (price plus dividends) in 2013 of around 10%. the strategists have set their ASX 200 forecasts at 4650 by mid-year and 4850 by year-end.
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