Business

Saturday February 7, 2009

Short-term impact seen on stocks as FBM KLCI takes shape


COME July 6, the FTSE Bursa Malaysia KLCI (FBM KLCI) will replace the KLCI as the benchmark index for Bursa Malaysia.

Compared with the KLCI which has 100 constituents, the new index will have 30 stocks, based on market cap with a minimum free float of 15% and 10% annual turnover of free float shares.

The components stocks of FBM KLCI will be determined in June and will be reviewed twice a year (June and December).

Broadly speaking, five big sectors – finance, plantations, power, telecommunications and gaming – will make up over 80% of FBM KLCI’s weightings. Seven sectors – building materials, construction, hotels, insurance, property, timber and technology – will not be featured in the FBM KLCI. And there will be reduced weightage on industrial products (6% to 2%) and transportation (10% to 6%).

According to CIMB Investment Research Head Terence Wong, the biggest winners in terms of a jump in sector weightings are finance (from 24% to 32%), gaming (5% to 9%) and power (5% to 9%).

Alexander Chia

The biggest beneficiaries are companies now excluded from the KLCI due to “double counting” because their parent companies already have a spot in the index, for example Resorts World Bhd, YTL Power Bhd and Parkson Holdings Bhd. The finance sector will make up 32% of the FBM KLCI while plantations, including Sime Darby Bhd and PPB Group Bhd which are categorised under conglomerates (but are largely plantation companies), will make up over 20% of the new index.

Their combined weighting of over 50% will naturally make these two sectors hard to be ignored by funds.

The power sector has a weighting of over 11% while telecommunications and gaming both have 9% weightings. Wong says the companies that may potentially lose out or see some knee jerk reaction as they may not make the cut (to the list) are institutional favourites such as AirAsia Bhd, Bursa Malaysia Bhd, EON Capital Bhd, Gamuda Bhd, IJM Corp Bhd, Lafarge Malayan Cement Bhd, Mah Sing Group Bhd and SP Setia Bhd.

Wong says checks with local investors indicate that the switch from KLCI to FBM KLCI could have a significant impact, particularly for index-tracking and benchmark funds. “It should have a lesser impact on foreign investors as most already invest in the biggest and most liquid stocks on Bursa. The index change, however, could have a major impact on the type of sectors investors choose to invest in.”

He adds that as investors have six months to adjust their portfolios before the new FBM KLCI comes into effect, the impact on the market should be muted.

He opines that the concentration on the five main sectors may eventually see the rest of the sectors taking a backseat in investor attention.

Even so, Areca Capital Sdn Bhd chief executive officer Danny Wong expects the impact on the overall market to be minimal. While fund managers who manage index portfolios may tweak their stock selections, it will provide a minimal jolt to the index.

“Most fund managers don’t track the Composite Index’s (CI) performance anyway. In fact, they aim to outperform the CI. I think what is more important is picking the right stock at the right time.

“Let’s just say a fund manager does closely track the CI. For instance, stock A has a 8% weightage in the CI, and 10% of the fund manager’s portfolio contains stock A. The weightage of stock A in the portfolio is already 10% and not 8%.

Danny Wong

“So, there are two factors to consider. It’s not just about picking an index-linked stock, but also the weightage of the stock in the portfolio that’s important,” he says.

Standard and Poor’s director of Asian equity research Alexander Chia says there could be some short-term selldown on stocks with previously high weightage on the CI.

“These stocks may experience some weakness as index-linked funds rebalance their portfolios. Over the long term, I don’t think it really matters because people still buy stocks based on their industry outlook and individual valuations,” he says.

There will be short-term impact, but whether a stock outperforms or underperforms still depends on fundamentals and valuations.

But naturally, being included as an index-linked stock will provide an additional reason for investors to consider scooping up its shares. “Yes. There will be one more reason to buy these stocks,” he says.

When the market is lacklustre and trading volumes are thin as currently, Areca’s Wong says sectors which are not covered by the index may take a beating as investors tend to be cautious and conservative and are satisfied if their performance matches up to that of the CI. Moreover, index-linked stocks are generally deemed safer and more liquid.

Nonetheless, once the market resumes its normalcy, where stocks across the board have a better chance of performing, investors will start to consider them. — Story by TEE LIN SAY

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