INDEX reshuffles, at least in Britain’s FTSE indices, don’t tend to spark much more than some token interest among the trading community. The process is deliberately as transparent as possible and well publicised in advance in order to minimise any dramatic share price movements ahead of the rejig. Unfortunately for spread betters looking to capitalise on price movements, this means that traders generally have a good idea of what stocks will be entering the index and which ones will be leaving and will have repositioned their portfolios.
However, one set of indices that is definitely the exception to the rule is the MSCI indices. Its six-monthly reshuffles – in May and November – are famously hard to predict and tend to surprise the markets, which mean there are plenty of opportunities for the savvy spread better to take advantage of movements in stocks that have either been promoted or relegated.
Last Wednesday, MSCI announced changes to its equity indices, which includes the MSCI World index – a common benchmark of 1,500 stocks from developed markets. As of Wednesday 29 May 78 stocks will be added to its Global Standard indices, while 99 will be deleted. Among the UK stocks entering the MSCI Europe index will be miner Randgold Resources and Fresnillo, a Mexican silver producer, which joined the FTSE 100 back in March at the index’s last reshuffle. Nine have been demoted to the Global Small Cap index, including Tate & Lyle and Logica.
Whether a stock is listed on a particular index or not makes little difference to its worth, but a company that has been promoted tends to see its share price rise while one that has been relegated tends to see a drop.
The main reason is that a large number of institutional investors, especially pension funds, invest in tracker indices which try to follow the performance of the index, by either buying shares in all the index’s components or in a cross-section of the companies. Funds which track the MSCI indices will need to buy shares in the newly added stocks and offload positions in the demoted ones and it is thought that the MSCI indices have around $3 trillion benchmarked against them.
Goldman Sachs estimates that MSCI tracker funds will have to buy 3.5m shares in Randgold and 8.4m in Fresnillo before 29 May – equivalent to 7.8 days average trading volume in Randgold and 9.5 in Fresnillo. Both are very illiquid stocks which means there could be some sharp moves higher over the next seven trading days. Canny spread betters could therefore look to go long on those that have been added and short those that have been dropped.
Manoj Ladwa, derivatives trader at ETX Capital, says: “When their eight-day average volume is around 500,000 shares, then we expect a significant move higher in the share price before the transaction is complete. What we are also likely to see is traders purchasing and riding the trend higher on the back of institutional buying.”
While the FTSE reshuffle is something of an anti-climax, the unpredictable MSCI rejig offers the perfect opportunity for traders to place a well-chosen spread bet in the hope of making some serious profits.