Some Notes On FBM KLCI

CIMB Research had a good article out today. The following are some snippets from the research report.

• KLCI constituents to fall from 100 to 30
  
  It was announced on 21 January that from July 6 onwards, FTSE Bursa Malaysia KLCI (FBM KLCI) will replace the KLCI as the benchmark index for Bursa. The new index has only 30 constituents compared with 100 in the KLCI. The 30 stocks will comprise the 30 largest market-cap stocks with a minimum free float of 15% and 10% nnual turnover of free float shares. The KLCI is weighted by market cap whereas FBM KLCI is market cap weighted adjusted for free float and liquidity. This adjustment is the last leg of Bursa Malaysia’s revamp of all its major indices in line with FTSE’s internationally accepted calculation methodology. The existing FTSE Bursa Malaysia (FBM) Large 30 index will cease to exist from 6 July. Effectively, the KLCI will be replaced with FBM Large 30 to make it more tradable and transparent.
  
  Impact is significant
  Some investors benchmark closely
  Our checks 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 :
  
  • 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
  
  A handful of big winners…
  The biggest winners in terms of a jump in sector weightings (see Figure 3) 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 (see Figure 4), 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 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, KL Kepong and Tanjong.