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05-02-2009: Local funds brace for impact of Bursa’s benchmark change
by Joyce Goh & Nadia Hassan
KUALA LUMPUR: Local funds will likely be impacted by the change in the benchmark index for the local bourse come July.
“Most of the foreign investors are already in the top 30 stocks… but the local funds which include the ones that track the index, spread their money wider than just the 30 stocks.
“So, if there’s any impact, they are probably the ones that will likely be affected by the change in benchmark index,” said an industry observer, adding that the local funds would likely shift their investments from the 70 stocks to be omitted from the benchmark to the top 30 stocks.
Meanwhile, AmResearch Sdn Bhd’s head of research Benny Chew pointed out that the 30 stocks represent a huge chunk of the market capital of the existing index.
“Changes in the benchmark should not affect the market much,” Chew told The Edge Financial Daily. “However, the change will be negative for the stocks that are not included in the new benchmark index.”
At a press conference here yesterday, Bursa Malaysia Bhd chief executive Datuk Yusli Mohamed Yusoff said the FTSE “is basically what the market is asking to do” and it was a proven methodology. He added that the 30 largest companies made up two-thirds of the bourse’s market capitalisation.
Yusli said that bringing down the number of stocks to 30 from 100 would make it easier for investors to track index stocks. “It’s easier for people to make a basket and it makes investing easier,” he said, adding that it would also be easier to create products like futures contracts and exchange traded funds.
While investors may gain from this change, companies that are not in the list would likely lose out. A CIMB Research report yesterday said all in all, 103 stocks would be affected by the change in the index.
The biggest losers, it said, are the 73 companies that will fail to make the cut, including institutional favourites such as AirAsia Bhd, Bursa Malaysia Bhd, EON Capital Bhd, Gamuda Bhd, IGB Corp Bhd, IJM Corp Bhd, KNM Group Bhd, Mah Sing Group Bhd, Malaysian Resources Corporation Bhd, SP Setia Bhd, Top Glove Corp Bhd and WCT Bhd.
The research house added that other major losers are 15 big caps which would see a drop in weightings due to their lower free float and liquidity.
“They are still in the new index but due to their smaller weightings, they may face selling pressure. The steepest fall in weighting is for RHB Cap at over 60% while MAS, Petronas Dagangan and Petronas Gas see falls of over 40%,” it noted.
“Other companies that will suffer a substantial decline in weightings include MISC, DiGi.com, PLUS, Hong Leong Bank, Astro and MMC. Stocks that are less affected with single-digit weighting falls include BAT, YTL Corp, PPB Group, KL Kepong and Tanjong,” it added.
CIMB Research also noted that the biggest winners in terms of a jump in sector weightings are finance, gaming and power. “Out of 21 sectors, only six emerge as winners, including conglos, telcos and plantations. Besides the seven sectors mentioned earlier, the biggest losers are industrial products, transportation and media,” it added.
Meanwhile, according to an analyst with a foreign research house, the plus points with the change in the benchmark index include lower cost of transaction.
“Funds will have smaller tracking errors and incur lower transaction cost. The next benchmark might even stimulate trading volume for the index futures because with a basket of 30 stocks, it’ll be more volatile,” the analyst said.
The current KLCI was launched on April 4, 1986. The FBM KLCI will comprise 30 largest companies on the Main Board that meet the minimum free float requirement of 15%, and a minimum 10% annual turnover of free float shares. The list of constituents will be announced after a review in June.
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%).
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%.
“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.
Banking sector to be main beneficiary of new index
Written by Financial Daily
Friday, 06 March 2009 11:05
THE banking sector is expected to take the lead in market share price recovery, given that the sector will be the main beneficiary of the new benchmark index, said RHB Research yesterday.
The research house maintained its overweight stance on the sector and urged investors to switch out from defensives to battered stocks with large market capitalisation, high liquidity and strong fundamentals.
It named BCHB (Bumiputera- Commerce Holdings Bhd) and AMMB (Holdings Bhd) as its top picks as both BCHB and AMMB would benefit from the new benchmark index.
“Although Public Bank would benefit the most, its relatively high valuations, share price outperformance (versus the market and peers) and lean capital structure that may constrain short-term dividend payout imply that investors could switch out during general share price recoveries in 2H09,” it said in a report.
The new FTSE Bursa Malaysia KLCI will replace the current benchmark Kuala Lumpur Composite Index on July 6.
RHB Research believed that valuations were near the bottom, given that a repeat of the Asian financial crisis was not expected and the trend of earnings rebound in 2010 was intact.
“Thus, risk-reward remains tilting to the positive although there may still be short-term volatility in share prices,” it noted.
RHB Research said despite the rebound in share prices from their recent troughs, price-to-book valuations were still near to post-Asian financial crisis lows and at least one standard deviation below the postcrisis mean, except for Public Bank Bhd.
“With the risk-reward profile remains favouring capital appreciation rather than capital preservation, we expect the sector to take the lead in market share price recovery,” it added.
RHB Research said the risks included slower-than-expected loan growth, deterioration in asset quality and changes in market conditions that adversely affected investments portfolio.
The research house said the fourth quarter (4Q) 2008 reporting season was above its expectations. “Among the seven banks in our universe, two came in above and the other five were in line,” it said. Against consensus, two were below, two above and three in line.
“Affin (Holdings Bhd) was ahead of our forecast mainly due to the sharp NPL (non-performing loan) recovery in the quarter. As for Hong Leong Bank Bhd, it was due to continued profit from Bank of Chengdu and net general provisioning writeback,” it said.
RHB Research said aggregate 4Q net profit for its universe (plus RHB Capital Bhd and Alliance Financial Group Bhd) came in at RM2.63 billion (-0.3% quarter-on-quarter; -0.3% year-on-year).
On the positive side, it was supported by record net interest income (which was boosted by Malayan Banking Bhd’s consolidation of BII earnings for the full quarter) and q-o-q recovery in non-interest income (due to better capital market related income as well as one-off items).
However, it was more than offset by record overheads, largely due to Maybank’s consolidation of BII and BCHB’s integration cost at CIMB Niaga as well as the continued stickiness of cost, as well as higher loan loss provisions.
Aggregate pre-tax profit was lower by 4.3% q-o-q and by 8.3% y-o-y. RHB Research said if not for lower tax deductions, aggregate net profit would have declined.
The research house said immediately after the results, its and consensus forecasts were trimmed.
“We had already downgraded earnings forecasts for all banks earlier in a sector report dated Feb 20 to account for the assumption of a higher rise in gross NPL ratio (+ two percentage points instead of + one percentage point),” it said. As a result, RHB Research’s forecasts are now significantly lower than consensus for all banks under its coverage.
This article appeared in The Edge Financial Daily, March 6, 2009.
FTSE Bursa Malaysia Large 30 Index will cease on July 6 and become a component of the new benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (KLCI), effective the same date.
The FTSE Bursa Malaysia KLCI, which will have 30 constituents, is in line with the exchange's move to embrace FTSE's global index methodology.
The FTSE Bursa Malaysia KLCI will be the benchmark index that closely represents the Malaysian market performance, Bursa Malaysia and FTSE Group said in a joint statement yesterday.
"Enhancing our current KLCI to the FTSE Bursa Malaysia KLCI puts us on par with other global benchmark indices which provide users with effective means to track the market performance.
"In addition, the listed constituents will benefit from the international profiling accorded by the FTSE indices," said Bursa Malaysia chief executive officer Datuk Yusli Mohamed Yusoff.
Financial products using the FTSE Bursa Malaysia Large 30 Index, such as the FBM30etf issued by AmInvestment, Kuala Lumpur Composite Index Futures (FKLI) and the Kuala Lumpur Composite Index Options (OKLI) will adopt the FTSE Bursa Malaysia KLCI as its underlying index with effect from July 6.
"As the Malaysian market evolves in line with investors' requirements, evolutions in indexing are required to keep pace. FTSE and Bursa Malaysia will continue to evolve the partnership indices which provide best in class indices for Malaysia's investors," added Paul Hoff, managing director of FTSE Asia Pacific.
There was no review done for the FTSE Bursa Malaysia Second Board index, in anticipation of Bursa Malaysia's merger of the second board with the main board on August 3. Instead, the second board companies were reviewed together with the main board.
Eligible second board constituents will be added to the appropriate FTSE Bursa Malaysia indices with effect from August 3, the statement said.
The FTSE Bursa Malaysia Second Board Index will be decommissioned during this time.
New benchmark to adopt current FBM30 constituents
Written by The Edge Financial Daily
Thursday, 11 June 2009 23:47
KUALA LUMPUR: The local market's new benchmark, FTSE Bursa Malaysia KLCI, will be adopted on July 6 with the 30 constituents being the same as the current FTSE Bursa Malaysia Large 30 Index (FBM30).
In a statement, Bursa Malaysia Bhd said the semiannual review of the FTSE Bursa Malaysia Index Series concluded yesterday with no constituent changes applied to FBM30, whose constituents would be adopted as the constituents of the FTSE Bursa Malaysia KLCI.
The 30 component stocks are Malayan Banking Bhd (Maybank), Bumiputra-Commerce Holdings Bhd, Public Bank Bhd, RHB Capital Bhd, AMMB Holdings Bhd, Hong Leong Bank Bhd, Tenaga Nasional Bhd, Telekom Malaysia Bhd, MISC Bhd, YTL Power International Bhd, Malaysian Airline System Bhd, British American Tobacco (Malaysia) Bhd, Axiata Group Bhd, Genting Bhd, Kuala Lumpur Kepong Bhd, MMC Bhd, PPB Group Bhd, Sime Darby Bhd, IOI Corporation Bhd, Resorts World Bhd, Berjaya Sports Toto Bhd, Tanjong plc, UMW Holdings Bhd, YTL Corporation Bhd, Petronas Gas Bhd, DiGi.Com Bhd, Parkson Holdings Bhd, Petronas Dagangan Bhd, Plus Expressways Bhd and Astro All Asia Networks plc.
Prior to Bursa Malaysia's announcement, Bloomberg today had reported Credit Suisse Group AG as saying that IJM Corporation Bhd and Gamuda Bhd, two of the country's biggest builders, and S P Setia Bhd may be included in the new benchmark stock index after their market values rose.
Credit Suisse had speculated that MAS, RHB Capital and Petronas Dagangan may be excluded because of their low free-float percentage.
"With US$83 billion (RM290.5 billion) worth of domestic funds benchmarked to the stock index, changes in the weightings and components could impact stock prices," its analyst Stephen Hagger said in the Credit Suisse report.
He said IJM, Gamuda and S P Setia were among the top 35 stocks by market value in Malaysia and among the top 25 in the MSCI weightings. Companies must have a minimum 15% free float to be included, Bursa Malaysia had said.
Meanwhile, Bursa Malaysia said in its statement today that the FTSE Bursa Malaysia KLCI would be the definitive benchmark index that closely represented the Malaysian market performance.
It said the move to adopt the FTSE methodology to Malaysia's primary market benchmark index was in line with global investors' need to track indices that were tradable, investable and transparent.
"Enhancing our current KLCI to the FTSE Bursa Malaysia KLCI puts us on par with other global benchmark indices which provide its users with effective means to track the market performance.
In addition, the listed constituents will benefit from the international profiling accorded by the FTSE indices," Bursa Malaysia's chief executive officer Datuk Yusli Mohamed Yusoff said.
FTSE Asia-Pacific managing director Paul Hoff said: "As the Malaysian market evolves in line with investors' requirements, evolutions in indexing are required to keep pace."
"As the KLCI adopts FTSE's globally accepted methodology standards and indices are updated to reflect Bursa Malaysia's board merger, FTSE and Bursa Malaysia will continue to evolve the partnership indices which provide best in class indices for Malaysia's investors."
Bursa Malaysia said the FBM30 would be retired on July 6, 2009.
It added that financial products using the index or the KLCI, such as the FBM30etf issued by AmInvestment, Kuala Lumpur Composite Index Futures (FKLI) and the Kuala Lumpur Composite Index Options (OKLI), would adopt the FTSE Bursa Malaysia KLCI as their underlying index with effect from July 6.
Separately, also under its semi-annual review, Bursa Malaysia said there was one change in the FTSE Bursa Malaysia Mid 70 with UEM Land Holdings Bhd to replace Ta Ann Holdings Bhd.
It said the FTSE Bursa Malaysia Second Board index was not reviewed in anticipation of the merger of the Second Board with the Main Board on Aug 3. The Second Board companies were reviewed together with the Main Board.
Bursa Malaysia said the eligible Second Board constituents would be added to the appropriate FTSE Bursa Malaysia indices with effect from Aug 3.
It said other indices in the FTSE Bursa Malaysia series were also reviewed yesterday, and a number of constituent changes were approved. The changes will be applied to the index upon the markets opening on June 22.
Full details of all indices reviewed are accessible at its website
KUALA LUMPUR: IJM Corp Bhd, Gamuda Bhd and SP Setia Bhd may be included in a new country benchmark stock index next month after their market values rose, Credit Suisse Group AG said.
Stocks that may be excluded are Malaysian Airline System Bhd, RHB Capital Bhd and Petronas Dagangan Bhd because of their low free-float percentage, according to the report.
“With US$83bil worth of domestic funds benchmarked to the stock index, changes in the weightings and components could impact stock prices,” Stephen Hagger, an analyst at Credit Suisse, said in a report yesterday.
Bursa Malaysia Bhd will cut the number of companies in its share index to 30 from 100 on July 6, removing the smallest and most tightly held companies in a bid to lure investors.
The KL Composite Index will become the FTSE Bursa Malaysia KLCI.
The companies may enter the new index because of their higher free floats, Hagger said.
The new gauge would mirror the FTSE Bursa Malaysia 30 Index, which comprised the 30 largest stocks and free-float adjusted, Hagger said.
IJM, Gamuda and SP Setia were among the top 35 stocks by market value in Malaysia and among the top 25 in the MSCI weightings, he said.
As such, they could possibly be included in the new index, he added. — Bloomberg
