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Treasure Chest: Pending Index Changes

Treasure Chest | May 21 2014

This story features REGIS RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: RRL

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

The ASX and Standard & Poor's will announce the end result of their Quarterly Index Review on the morning of June 6 which come into effect at the market close on June 20. JP Morgan suggests which stocks may be promoted or relegated as a result of the review.

Given the subjective element to such an exercise, as noted above, JP Morgan only ascribes a high probability to Australand ((ALZ)) moving into the S&P/ASX 200 and Regis Resources ((RRL)) moving out, while Aurora Oil & Gas ((AUT)) will depart after takeover. Aurora will also leave the ASX 200 and Steadfast ((SDF)) is a good chance of moving in.

Thereafter, Amcom Telecommunications ((AMM)) and Japara Healthcare ((JHC)) are low chances of entering the ASX 200 with NRW Holdings ((NWH)) and Acrux ((ACR)) low chances of departing.

Transpacific Industries ((TPI)) and Fletcher Building ((FBU)) are medium chances of entering the ASX 100 while Recall Holdings ((REC)) is a low chance of dropping out.

Seek ((SEK)) and WorleyParsons ((WOR)) are a low chance of entering/departing the ASX 50 respectively while there is a low chance of Transurban ((TCL)) reaching the ASX 20, a low chance of Westfield Financial ((WFD)) departing and a low chance of Santos ((STO)) departing.
 

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CHARTS

ACR AUT FBU JHC NWH RRL SDF SEK STO TCL WOR

For more info SHARE ANALYSIS: ACR - ACRUX LIMITED

For more info SHARE ANALYSIS: AUT - AUTECO MINERALS LIMITED

For more info SHARE ANALYSIS: FBU - FLETCHER BUILDING LIMITED

For more info SHARE ANALYSIS: JHC - JAPARA HEALTHCARE LIMITED

For more info SHARE ANALYSIS: NWH - NRW HOLDINGS LIMITED

For more info SHARE ANALYSIS: RRL - REGIS RESOURCES LIMITED

For more info SHARE ANALYSIS: SDF - STEADFAST GROUP LIMITED

For more info SHARE ANALYSIS: SEK - SEEK LIMITED

For more info SHARE ANALYSIS: STO - SANTOS LIMITED

For more info SHARE ANALYSIS: TCL - TRANSURBAN GROUP LIMITED

For more info SHARE ANALYSIS: WOR - WORLEY LIMITED