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Rudi’s View: Newcrest, AP Eagers & Speedcast

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Nov 15 2019

Dear time-poor reader: Preview to S&P December index re-weighting and long term trends reflected in index changes

In this week's Weekly Insights (this is Part Two):

-Positive Momentum Continues For CSL
-Conviction Calls
-Focus On Index Changes
-Focus On Index Changes (2)

Tickets to Conference on Agricultural and Veterinary Biotechnology
Rudi Talks
-Rudi On Tour

[The non-highlighted items appeared on Thursday in Part One]

Focus On Index Changes

By Rudi Filapek-Vandyck, Editor FNArena

Index inclusions and exclusions can have a noticeable impact on share prices, in particular for smaller caps that either land on or fall off funds manager radars. Decision-makers at Regal Funds Management in particular have made it no secret they sometimes buy and sell around such index updates.

Standard & Poor's is scheduled to announce the next set of adjustments on 13th December, which is yet a while off, but this hasn't stopped some analysts already looking forward to what may eventuate.

At Wilsons, analysts believe Newcrest Mining ((NCM)) seems poised to replace South32 ((S32)) in the ASX20. They think it is also possible that AMP ((AMP)) loses its spot in the ASX50 to a2 Milk ((A2M)) while TPG Telecom ((TPM)) might be replaced by Saracen Mineral Holdings ((SAR)) in the ASX100.

Such changes would likely remain without direct consequences for the stocks involved.

Of more importance might be the predicted ASX200 inclusions for AP Eagers ((APE)), Avita Medical ((AVH)), Centuria Metropolitan REIT ((CMA)) and Perseus Mining ((PRU)) while Megaport ((MP1)), EML Payments ((EML)) and Ingenia Communities Group ((INA)) are also considered a possibility.

With the pending disappearance of Aveo Group ((AOG)) and Bellamy's ((BAL)) due to corporate action, both AP Eagers and Avita Medical are expected to be included sooner. As has now happened with the inclusion of the latter as of yesterday.

Stocks predicted to lose their inclusion in the index are Speedcast International ((SDA)) and Galaxy Resources ((GXY)), and potentially also Pinnacle Investment ((PNI)), Orocobre ((ORE)), and Estia Health ((EHE)).

Wilsons believes there will be a large number of changes when the next update for the ASX300 is announced in March next year, but we'll cross that bridge when we move closer to the date.


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Analysts at Morgan Stanley report since March 2007, fresh index inclusions have outperformed the broader market by 7.2% over the period covering 20 days prior to the S&P announcement up to actual implementation.

Morgan Stanley agrees with the idea that Newcrest Mining might replace South32 in the ASX20, but also offers the option of Aristocrat Leisure ((ALL)) replacing Amcor ((AMC)).

As far as the ASX50 goes, a2 Milk should replace AMP, but Morgan Stanley also suggests Tabcorp Holdings ((TAH)) might replace Caltex Australia ((CTX)).

The ASX100 might see Saracen Mineral replace TPG Telecom, but also Harvey Norman ((HVN)) making a come-back to the detriment of Whitehaven Coal ((WHC)). Investors should note, with exception of the Newcrest-South32 swap, Morgan Stanley doesn't put too high a probability on each of these scenarios.

A higher chance is put on three potential changes to the ASX200 with Avita Medical, Centuria Metropolitan REIT and Ingenia Communities Group seen as likely replacements for Speedcast International, Galaxy Resources and Estia Health. On a lower probability, Morgan Stanley thinks Megaport and Perseus Mining might also be included upon removal of Orocobre and Pinnacle Investment.

Focus On Index Changes (2)

This might have escaped most investors' attention, but CSL ((CSL)) is now the second largest index weight for the ASX200. Considering how concentrated Australia's leading share market index is around large cap financials and iron ore producers, this truly marks one grand achievement.

CommBank is still Australia's number one, of course, and when it comes to total market cap one should include BHP Group's UK listed shares, but in terms of local index weighting Australia's most successful biotech and flu vaccine manufacturer has now separated itself from BHP and the three other major banks, to settle solidly in index position number two.

While the distance between positions number one and two remains more than 1% in index weight (6% versus 7%-plus) it doesn't seem too far fetched anymore to anticipate the day that CSL might become Australia's largest cap index weight.

After all, CBA shares are trading around similar levels as in early 2017 and still well down from their peak in May 2015 while for BHP shares, long forgotten are the dark days of early 2016, but today's share price has not moved one inch from April 2011.

Similar observations can be made for Westpac, National Australia Bank, ANZ Bank, Woolworths (mid-2014), Telstra (today similar to May 2012 and well down from February 2015), and Woodside Petroleum.

The top end of the Australian share market -traditionally referred to as the Blue Chips- has effectively stood still while outperformers such as CSL, Macquarie Group ((MQG)), Transurban ((TCL)), Goodman Group ((GMG)), Aristocrat Leisure ((ALL)), and others are steadily working their way up on the rankings.

REA Group ((REA)) is now the 28th largest index constituent, larger than AGL Energy, Stockland, GPT, Lendlease and Qantas. Aristocrat Leisure has climbed to position number 17, not far behind Goodman Group (15). Macquarie, on position number 7, only has the Major Four, BHP plus CSL in front of it.

The reason why these index changes should be on investor radars is because they very much reflect the multitude in changes that are taking place in Australia and around the world.

I have lived long enough in Australia to remember when News Corp was the largest index constituent. Today, News Corp shares represent but a paltry 0.05%. Admittedly, there was the spin-off of Twentieth Century Fox, but that doesn't alter the big picture trend.

The true sad story remains, of course, that on the day CSL crowns itself as the number one index weight in Australia, large swathes of the investment community will have never owned one single share in the company, instead referring to the old tune they have been playing for most of the past 25 years: Cannot own it. It's too expensive.

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When it comes to index changes on the back of broader macro trends (and other impacts such as GFC and M&A), Shaw and Partners Chief Investment Officer Martin Crabb published some interesting tidbits recently. Consider, for example, that since 2000 only 43 stocks have remained inside the ASX100.

Now consider also that from the original 100 constituents 27 companies are still listed on the ASX, just no longer inside the Top100. This means no fewer than 30 companies (43+27=70) have vanished over the past 19 years. And that's just from the ASX100. I am sure we all still remember iconic names such as Foster's, Fairfax Media, Lion Nathan, and Lihir Gold.

When it comes to the 57 index seats that have rotated since 2000, Crabb has worked out no less than 80 stocks have come and gone to fill the vacant spots. Some are spin-offs, others simply got demoted as time and trend worked against them. Here we find more inspiration to reminiscence with names like David Jones, DuluxGroup, Goodman Fielder, Pacific Brands, Toll Holdings, Corporate Express, UGL and Sirtex Medical.

Among the "remainers" from the original crop of 2000, Telstra has been by far the biggest loser in terms of diminishing index importance, but large reductions in relevance have equally befallen AMP, National Australia Bank, Alumina ltd, and Lendlease. The most prominent gainer, no surprise here, has been CSL, followed by Wesfarmers, Transurban and Macquarie Group.

What might surprise many, is that CommBank, Westpac, Woolworths, Newcrest Mining and ANZ Bank are equally among the big winners over the period.

What Crabb's historical flash back fails to capture, of course, is that for the major banks the trend has already started bending in the opposite direction.

Interesting is also that Woodside Petroleum has hardly benefited from substantially higher oil and gas prices with Crabb's research pointing to a near stand-still in terms of index importance while the price of a barrel of crude oil has gone from US$19/bbl to US$147/bbl and back to US$60/bbl. The index importance for BHP is equally near unchanged over the past 19 years.

The original 43 stocks that still form part of the ASX100 have increased their index importance to 72.73% from 59.91% in 2000. The gainers in this group (CSL, WES, TCL, etc) increased their weighting by 26.17% while the losers (TLS, AMP, NAB, etc) lost -13.35%.

Stocks that lost their inclusion detracted -11.60% while the newcomers added 27.70%. The index impact of those who entered and left has been another 25.35%.

As an avid observer of the Australian share market myself, I'd wager significantly more changes have materialised in recent years, and many more are poised for the decade ahead. Of that, I am pretty certain.

Tickets to Conference on Agricultural and Veterinary Biotechnology

Pitt Street Research, whose work can also be found on the FNArena website: https://www.fnarena.com/index.php/pitt-street-research/, is organising its inaugural Life Sciences Conference with the focus on Agricultural and Veterinary Biotechnology.

The Conference takes place in Sydney's CBD on November 28th and runs from 8.45am till 1pm on the day. ASX-listed companies presenting include PainCheck, Anatara Lifesciences, Abundant Produce, PharmAust ltd, CannPal, EM Vision and Osteopore.

FNArena has ten tickets available for investors who'd like to attend this event at no cost; paying subscribers receive this opportunity first. If interested, send an email to info@fnarena.com

Rudi Talks

Last week's audio interview about portfolio rotation and what it means for the Aussie share market:

https://www.youtube.com/watch?v=bZ8AybO5aDE

We created a YouTube channel for such interviews, which was recently upgraded (technically speaking):

https://www.youtube.com/watch?v=bZ8AybO5aDE&list=PLVMOgaPqrk1s55RujzgMerIzdOX2RrXl9

Rudi On Tour In 2020:

-ASA Hunter Region, near Newcastle, May 25

(This story was written on Monday 11th November 2019. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website. Part Two was completed on Thursday and published on Friday morning).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via the direct messaging system on the website).

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– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
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– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
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CHARTS

A2M ALL AMC AMP AOG APE AVH CSL EHE EML GMG GXY HVN INA MP1 MQG NCM ORE PNI PRU REA S32 SAR SDA TAH TCL WHC