Rejigging the KLCI 100 stock index with FBM Large 30• Announced on 21 January, FBM KLCI to replace KLCI from 6 July onwards.
FTSE Bursa Malaysia KLCI (FBM KLCI) will replace the KLCI as the benchmark index for Bursa. Comparedwith the KLCI which has 100 constituents, the new index will have only 30 stocks, which are the 30 largest by market cap with a minimum free float of 15% and 10% annual turnover of free float shares. The existing FTSE Bursa Malaysia (FBM)
Large 30 index will cease to exist on 6 July. Effectively, the KLCI will be replaced with the FBM Large 30 to make it more tradable and transparent
Large 30 index will cease to exist on 6 July. Effectively, the KLCI will be replaced with the FBM Large 30 to make it more tradable and transparent
• Transition should be seamless.
When the new FBM KLCI starts on 6 Jul, it will start off from the closing level of the existing KLCI. The historical data of the KLCI will remain relevant as FBM KLCI has a 98% correlation to the KLCI and 99% correlation to the FBM Emas Index. The exact components of FBM KLCI will be determined in June, just before it becomes effective in July, and will be reviewed twice a year in June and December. The FBM KLCI will also adopt a higher calculation speed of 15 seconds vs. 60 seconds currently.
• Impact could be quite significant.
Our 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. Seven sectors – building materials, construction, hotels, insurance, property, timber and technology – will disappear from the radar screen altogether as they do not feature in the FBM KLCI.
• Finance, gaming and power the big winners.
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%). Besides the seven sectors dropped, other major losers include industrial products (6% to 2%) and transportation (10% to 6%). In terms of stocks, the biggest winners are companies excluded from the KLCI because of double counting, i.e. Resorts, YTL Power and Parkson. The biggest losers are the 70+ companies that fail to make the cut including institutional favourites such as AirAsia, Bursa, EON Cap, Gamuda, IJM Corp, Lafarge, Mah Sing and SP Setia.
• Final impact could be marginally positive.
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. However, the net impact could actually be slightly positive as big-cap liquid stocks with high free float also happen to be blue chips that are reasonably well managed too. This concentration on quality could push up the FBM KLCI, especially if funds only make the adjustments to their portfolios from 6 July onwards instead of earlier. Selling of the 70+ stocks no longer in the index and buying of FBM KLCI component stocks should help to lift the market higher.
Some investors watching benchmark closelyChecks with local investors indicate that the switch from KLCI to FBM KLCI could have a significant impact, particularly for index-tracking and KLCI benchmark funds. Some investors indicated to us that they will gradually shift their exposure from 100 stocks to 30 stocks over the next six months though they are uncertain about the exact timing. Others who are broadly benchmarked against the KLCI mentioned that the shift will have no impact on their portfolio weightings as they adopt a bottom-up approach to stock picking. Also, we believe it should have a lesser impact on foreign investors as most already invest in the biggest and most liquid stocks on Bursa.
Seven sectors disappear altogether
The index change, however, could have a major impact on the type of sectors investors choose to invest in. Seven sectors – building materials, construction, hotels, insurance, property, timber and technology – will disappear from the radar screen altogether as they do not feature in the FBM KLCI (currently known as FBM Large 30). Interest in these sectors, in turn, may diminish over time. Within these sectors, some of the bigger names that are popular with local and foreign investors will be dropped. They include:
The index change, however, could have a major impact on the type of sectors investors choose to invest in. Seven sectors – building materials, construction, hotels, insurance, property, timber and technology – will disappear from the radar screen altogether as they do not feature in the FBM KLCI (currently known as FBM Large 30). Interest in these sectors, in turn, may diminish over time. Within these sectors, some of the bigger names that are popular with local and foreign investors will be dropped. They include:
• building materials - Lafarge and Ann Joo
• construction - Gamuda, IJM Corp, MRCB, Muhibbah and WCT
• property - IGB, KLCC Prop, Mah Sing, SP Setia, Sunrise and YNH Property
• timber - Lingui, Ta Ann and WTK Holdings
• technology – MPI, Uchi and Unisem
• construction - Gamuda, IJM Corp, MRCB, Muhibbah and WCT
• property - IGB, KLCC Prop, Mah Sing, SP Setia, Sunrise and YNH Property
• timber - Lingui, Ta Ann and WTK Holdings
• technology – MPI, Uchi and Unisem
A handful of big winners .....
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%). 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 (6% to 2%), transportation (10% to 6%) and media (1.7% to 0.6%). In terms of stocks, the biggest winners are companies currently excluded from the KLCI because of double counting, i.e. Resorts, YTL Power and Parkson.
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%). 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 (6% to 2%), transportation (10% to 6%) and media (1.7% to 0.6%). In terms of stocks, the biggest winners are companies currently excluded from the KLCI because of double counting, i.e. Resorts, YTL Power and Parkson.
From nothing, Resorts will have the 11th largest weighting at 2.6%, YTL Power the 22nd largest at 1.7% while Parkson comes in at number 26 based on 0.7% weighting.
..... but many more losers
Other major winners in terms of an increase in weightings are two banking stocks – Public Bank and Bumi Commerce – whose weightings rise by more than 80% in the shift from KLCI to FBM KLCI. Other heavyweights with significant gains in weightings include Sime Darby, Tenaga, Maybank, IOI Corp, Genting, TM International, AMMB, B Toto and UMW Holdings. All in all, out of 103 stocks affected, there are 15 gainers against 88 losers. The biggest losers are the 73 companies that fail to make the cut, including institutional favourites such as AirAsia, Bursa, EON Cap, Gamuda, IGB Corp, IJM Corp, KNM, Mah Sing, MRCB, SP Setia, Top Glove and WCT.
Other major winners in terms of an increase in weightings are two banking stocks – Public Bank and Bumi Commerce – whose weightings rise by more than 80% in the shift from KLCI to FBM KLCI. Other heavyweights with significant gains in weightings include Sime Darby, Tenaga, Maybank, IOI Corp, Genting, TM International, AMMB, B Toto and UMW Holdings. All in all, out of 103 stocks affected, there are 15 gainers against 88 losers. The biggest losers are the 73 companies that fail to make the cut, including institutional favourites such as AirAsia, Bursa, EON Cap, Gamuda, IGB Corp, IJM Corp, KNM, Mah Sing, MRCB, SP Setia, Top Glove and WCT.
Other major losers are 15 big caps which will 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%. 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, KLKepong and Tanjong.
Valuation & recommendation
FBM KLCI could be slightly positive for market
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. However, the net impact could be slightly positive as big-cap liquid stocks with high free float also happen to be blue chips that are reasonably well managed too. This concentration on quality could push up the FBM KLCI, especially if funds only make the adjustments to their portfolios from 6 July onwards instead of earlier. This would true particularly for index-tracker funds. Selling of the 70+ stocks no longer in the index and buying of FBM KLCI component stocks should help to lift the market higher. We maintain our NEUTRAL weighting on Malaysia and our end-09 KLCI target of 1,013 points.
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. However, the net impact could be slightly positive as big-cap liquid stocks with high free float also happen to be blue chips that are reasonably well managed too. This concentration on quality could push up the FBM KLCI, especially if funds only make the adjustments to their portfolios from 6 July onwards instead of earlier. This would true particularly for index-tracker funds. Selling of the 70+ stocks no longer in the index and buying of FBM KLCI component stocks should help to lift the market higher. We maintain our NEUTRAL weighting on Malaysia and our end-09 KLCI target of 1,013 points.
Huge concentration in big-5 sectors
The finance sector will make up 32% of the FBM KLCI while plantations, including Sime Darby and PPB Group which are categorised under conglomerates but really are largely plantation companies, will make up over 20% of the new index. Their combined weighting of over 50% makes these two sectors the most important to focus on for any fund to outperform. The power sector, including utilities since YTL Corp derives most of its earnings from YTL Power, has a weighting of over 11% while telecommunications and gaming both have 9% weightings. Broadly speaking, five big sectors – finance, plantations, power, telecommunications and gaming – make up over 80% of FBM KLCI’s weightings. This concentration is negative for all other sectors as they may gradually suffer from neglect.
The finance sector will make up 32% of the FBM KLCI while plantations, including Sime Darby and PPB Group which are categorised under conglomerates but really are largely plantation companies, will make up over 20% of the new index. Their combined weighting of over 50% makes these two sectors the most important to focus on for any fund to outperform. The power sector, including utilities since YTL Corp derives most of its earnings from YTL Power, has a weighting of over 11% while telecommunications and gaming both have 9% weightings. Broadly speaking, five big sectors – finance, plantations, power, telecommunications and gaming – make up over 80% of FBM KLCI’s weightings. This concentration is negative for all other sectors as they may gradually suffer from neglect.
Greater concentration in top-10 stocks
Under the KLCI, the top-10 stocks have a combined weighting of slightly above 50%. Under FBM KLCI, the weighting of the top-10 stocks jumps to 68%. This means that
investors can replicate quite closely the FBM KLCI by just buying the top 10 or 15 stocks. The top-10 FBM KLCI stocks are three banks (Public Bank, Bumi Commerce and Maybank), two plantation companies (Sime Darby and IOI Corp), two telcos (TM
International and TM), one power (Tenaga), one gaming (Genting) and one transport
company (MISC). Again, we see a huge concentration in banking and plantation sectors. In fact, Public Bank’s weighting of 12% may be higher than the mandate for most funds which limits exposure to a single stock to 10%. Stocks which we have an Outperform on that will benefit from the greater concentration include Public Bank and Genting. The top-10 stocks we are neutral on are Tenaga, Maybank, TM International and TM.
Under the KLCI, the top-10 stocks have a combined weighting of slightly above 50%. Under FBM KLCI, the weighting of the top-10 stocks jumps to 68%. This means that
investors can replicate quite closely the FBM KLCI by just buying the top 10 or 15 stocks. The top-10 FBM KLCI stocks are three banks (Public Bank, Bumi Commerce and Maybank), two plantation companies (Sime Darby and IOI Corp), two telcos (TM
International and TM), one power (Tenaga), one gaming (Genting) and one transport
company (MISC). Again, we see a huge concentration in banking and plantation sectors. In fact, Public Bank’s weighting of 12% may be higher than the mandate for most funds which limits exposure to a single stock to 10%. Stocks which we have an Outperform on that will benefit from the greater concentration include Public Bank and Genting. The top-10 stocks we are neutral on are Tenaga, Maybank, TM International and TM.
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