Treasure Chest: Pending Index Changes

This story features RAMSAY HEALTH CARE LIMITED, and other companies. For more info SHARE ANALYSIS: RHC

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 and UBS have both published their predictions ahead of the upcoming rebalance of Standard & Poor’s ASX indices. The above information notes that while market cap is the predominant determinant, liquidity considerations and a subjective element of a spread of stocks representing the Australian economy ensure rebalance candidates do not simply choose themselves. This is apparent in the predictions of two brokers, who agree to some extent but disagree as well.

S&P/ASX will announce its rebalance decisions before market open on Friday, December 6 and implement the rebalance after the close of trade on Friday, December 20.

UBS suggests potential additions to the ASX 50 are Ramsay Healthcare ((RHC)), Tatts Group ((TTS)) and James Hardie ((JHX)). Potential deletions are Qantas ((QAN)) and Toll Holdings ((TOL)). UBS predicts Ramsay will replace Qantas.

Potential additions to the ASX 100 are JB Hi-Fi ((JBH)), Super Retail ((SUL)), REA Group ((REA)) and IOOF Holdings ((IFL)). Potential deletions are PanAust ((PNA)), Whitehaven Coal ((WHC)), UGL ((UGL)) and OZ Minerals ((OZL)). UBS predicts JBH and Super Retail will replace PanAust and Whitehaven.

Potential additions to the benchmark ASX 200 are ARB Corp ((ARP)), Slater & Gordon ((SGH)), Kathmandu ((KMD)), Village Roadshow ((VRL)), Virtus ((VRT)), Steadfast ((SDF)) and BC Iron ((BCI)). Potential deletions are Linc Energy ((LNC)), Virgin Australia ((VAH)), Fleetwood ((FWD)), OceanaGold ((OGC)), Boart Longyear ((BLY)), Kingsgate Consolidated ((KCN)), Santa Barbara ((SBM)) and Perseus Mining ((PRU)). Austbrokers ((AUB)) passes the market cap test but is too illiquid. UBS predicts ARB Corp, Slater & Gordon, Kathmandu and Village will replace Linc, Virgin, Fleetwood and OceanaGold.

JP Morgan organises its predictions on high, medium and low probabilities.

For the ASX 20, the broker sees the yet to be listed Recall spin-off from Brambles ((BXB)) drop out as a high probability, with a low probability that Insurance Australia Group ((IAG)) could replace Newcrest Mining ((NCM)).

For the ASX 50, the broker sees both the Recall spin-off and the Orora spin-off from Amcor ((AMC)) dropping out as a high probability. There is a high probability Ramsay Healthcare will replace Qantas.

For the ASX 100, the broker sees a low probability of JB Hi-Fi and DuluxGroup ((DLX)) being added, a high probability PanAust will be deleted, and a medium probability of deletion for Recall and Whitehaven Coal.

For the ASX 200, the broker sees Village Roadshow, Virtus, NextDC ((NXT)) and Skycity Entertainment ((SKC)) as high probabilities for addition, with ARB Corp, Slater & Gordon and FKP Property Trust ((FKP)) as low probabilities for addition.

On the deletion side, the broker sees Virgin, Fleetwood, Sundance Resources ((SDL)), OceanaGold, Boart Longyear and Kingsgate as high probabilities for addition and CuDeco ((CDU)) and Santa Barbara as low probabilities. The broker notes that on balance of its predictions, two extra deletions will be required.

The ASX 300 and All Ordinaries are not up for rebalance until March.
 

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