Treasure Chest: Pending Index Changes

This story features AMCOR PLC, and other companies. For more info SHARE ANALYSIS: AMC

Standard & Poor’s compiles indices of companies listed on the Australian Securities Exchange ranked predominantly by market capitalisation. The S&P/ASX 20 index thus reflects the “top 20” companies listed in Australia, the S&P/ASX 200 reflects the “top 200” and so on. While “size” is the overriding factor, liquidity is also a consideration, and S&P attempts to compile indices that offer a spread of companies across all sectors to best reflect the Australian economy, hence there is also a subjective element in an index’s constitution.

S&P rebalances its indices on a quarterly basis unless a significant capital event occurs in the interim prompting a more expedient rebalance. On rebalance, companies may be added to or deleted from a particular index. The criteria for inclusion will often result in, for example, the ASX 200 being comprised of slightly more or less than 200 stocks. S&P also compiles equivalent “All Australia” indices which preclude foreign-domiciled companies (eg News Corp).

Fund managers offering “index-tracking” funds, which guarantee the return on a particular index, are obliged to rebalance their own portfolios to match any changes made by S&P. They will thus buy stocks newly included, and sell stocks now deleted. S&P announces upcoming index changes two weeks before the changes are implemented. All things being equal, a stock’s addition/deletion will prompt a rise/fall in share price as fund managers rebalance. However, stock analysts attempt to pre-empt the changes ahead of the announcement, implying relevant stock prices movements can actually occur before the changes are official. Correct predictions thus offer up the opportunity for short-term trading profits. In the longer term, promotion to an index will often put a stock “on the radar” of investors who would not otherwise have considered investment in that stock.

See: Profit From Index Trade Prediction
 

By Greg Peel

JP Morgan has published its expectations of index changes in the next rebalance. S&P will announce the official changes on the morning of Friday, June 7, and those changes will come into effect at the close of trade on Friday, June 21. Given the element of subjectivity within S&P’s assessment, the analysts ascribe high, medium or low levels of probability to their index change expectations.

The analysts do not expect any changes to the S&P/ASX 20, but suggest Insurance Australia Group ((IAG)) and then Amcor ((AMC)) are knocking at the door.

The ASX 50 will be impacted by the upcoming spin-off of Fox Group/News Corp ((NWS)), which is expected to occur close to the end of the financial year (June 30). Neither new entity will qualify for the top 50, and will likely squeak into the top 100 at least until the next review. JP Morgan ascribes a medium probability to APA Group ((APA)) being added to the ASX 50 and a low probability to Tatts ((TTS)), with a medium chance of Leighton Holdings ((LEI)) being relegated.

For the ASX 100, the analysts see a high probability of IOOF Holdings ((IFL)) being promoted and a medium chance for Perpetual ((PPT)), with a high chance of Perseus Mining ((PRU)) being relegated and a low chance for Lynas Corp ((LYC)).

Changes to the benchmark ASX 200 index this quarter could be relatively substantial. Stocks which the analysts suggest have a high probability of addition are REA Group ((REA)), Automotive Holdings ((AHE)), Linc Energy ((LNC)), Domino’s Pizza ((DMP)) and Sirius Resources ((SIR)). Forge Group ((FGE)) has a medium chance and G8 Education ((GEM)) a low chance.

Stocks with a high probability of deletion are Australian Infrastructure Fund ((AIX)), Troy Resources ((TRY)), Maverick Drilling & Exploration ((MAD)), Energy World Corp ((EWC)) and Mirabela Nickel ((MBN)). FKP Property ((FKP)) is considered a medium chance and Coalspur Mines ((CPL)) a low chance.

JP Morgan sees a low chance of APA being included in, and Leighton being deleted from, the All Australia 50. The analysts see a high chance of REA Group, Automotive Holdings and Linc Energy being included in the All Australia 100, with a medium chance for Domino’s Pizza, and a high chance that Australian Infrastructure Fund, Gryphon Minerals ((GRY)) and Saracen Mineral Holdings ((SAR)) will be deleted, with a medium chance for Bathurst Resources ((BTU)).

The analysts make note that on a net basis, total potential promotions/relegations reflect the poor performance of the resources sector over the past few months.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms