PETALING JAYA: Analysts are positive on the expansion of the FBM KLCI to 50 stocks as it improves representation on the index and also reduces the dominance of certain stocks and sectors.
Bursa Malaysia Bhd
and FTSE-Russell recently said the FBM KLCI will move from a 30-stock index to a 50-stock index beginning December.
CGS International (CGSI) Research said the weighting of the financials sector will reduce from 42.7% to 39.4% (phase 1) and then 36.6% (phase 2), with the technology sector (based on Bursa’s sector classification) weighting going from 0% currently to 1.9%, and then 3.4% by June 2027.
These were calculated based on data as at end June, it added.
CGSI said the weighting of the largest stock on the index will fall from 13.2% to 12.1%, then 11.1% based on the new criteria and the top five KLCI stocks’ cumulative weighting would ease from 50% currently to 42.1% by June 2027.
Kenanga Research said the two-phased approach reduces the market impact of concentrated trading flows that normally occur during portfolio balancing.
The move to phase in the impact halves the once-off “overhang” to sectors such as financials and utilitiles as funds, especially passive ones, rebalance their portfolios on or close to the rebalancing date, it said.
“For financials, we believe the market impact is manageable,” it said, adding that the seven stocks that currently make up the financials sector in the FBM KLCI now in aggregate trades around RM600mil a day in value terms.
On the financial sector weight easing by 3.3% to 39.4%, the change in importance would be equivalent to around 5 days of trading value, by our count, it added.
Investing using a benchmark is the domain for institutional fund managers, and a sizeable proportion of foreign investors adopt passive investment strategies, the research house noted.
“We also earlier examined in our earlier note that the correlation of sector returns and find that the expanded sectors are indeed lowly correlated with the dominant financials sector, supporting argument of greater diversity, reducing potential large index swings, it said.
“This low correlation could mean portfolio managers carefully choosing the right sector exposures becomes more crucial in determining overall performance.
“Historically, the stocks ranked 31 to 50 have slightly weaker trading liquidity than FBM KLCI top 30 stocks, and some improvement can be envisaged, which will also enhance their appeal.”
MBSB Research said it expected the FTSE Bursa Malaysia Index Series - Ground Rules to be updated soon, particularly on the thresholds for additions and deletions.
Based on the current rules, any stock that has risen to 25th of above will be bumped up into the FBM KLCI while those that have fallen to 36th or below will be relegated during the half-yearly periodic review, it said.
