Treasure Chest: Pending Index Changes

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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

Treasure Chest: Pending Index Changes

On Friday S&P/ASX will announce which stocks will be added to and which stocks will be dropped from the ASX200 and other indices.

By Greg Peel

The ASX and Standard & Poor's will announce the end result of their Quarterly Index Review on the morning of December 5 which come into effect at the market close on December 19. JP Morgan and Morgan Stanley suggest which stocks they believe may be promoted or relegated as a result of the review.

Given the subjective element to such an exercise, as noted above, JP Morgan ascribes a high probability to APN News & Media ((APN)) and Vocus Communications ((VOC)) entering the ASX200 and a high probability to Medusa Mining ((MML)), Resolute Mining ((RSG)) and Singapore Telecom ((SGT)) departing.

The broker ascribes a medium probability to Syrah Resources ((SYR)), TFS Corp ((TFC)) and Corporate Travel Management ((CTD)) entering and a low probability to Dick Smith Holdings ((DSH)) and Growthpoint Properties ((GOZ)) entering.

The broker ascribes a low probability to Evolution Mining ((EVN)), Beadell Resources ((BDR)) and Horizon Oil ((HZN)) departing.

In the case of recent listings, JP Morgan suggests off-quarter changes will be made in January to include Medibank Private ((MPL)) and IPH Ltd ((IPH)).

Outside of the ASX200, the broker does not expect any changes to the ASX20 but ascribes a low probability to Transurban ((TCL)) being added and Westfield Corp ((WFD)) being dropped.

No changes expected either for the ASX50, although there is a low probability of Seek ((SEK)) being added and Iluka Resources ((ILU)) being dropped (Medibank added in January).

The broker ascribes a high probability to Healthscope ((HSO)) being added to the ASX100 at the expense of Myer ((MYR)) (Medibank added in January).

The ASX300 will next be reviewed in March.

Morgan Stanley agrees with JP Morgan that Healthscope will enter the ASX100 but believes it is Arrium ((ARI)) that will go. The broker ascribes a lower probability of Myer going but also of TPG Telecom ((TPM)) being added.

For the ASX200, Morgan Stanley agrees on APN coming in but believes Syrah is the better chance ahead of Vocus and of TFS Corp. Morgan Stanley also agrees Medusa will be shown the door but suggests Lynas Corp is more likely to join Medusa, followed in preference by Evolution and Resolute.
 

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