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INVESTORS need to be aware of the influence of the biggest five constituents of the incoming benchmark FTSE Bursa Malaysia KLCI (FBM KLCI), which will replace the Kuala Lumpur Composite Index (KLCI) come July 6, RHB Research said.
Based on June 26 closing prices, the top five stocks on the FBM30 — Bumiputra-Commerce Holdings Bhd, Public Bank Bhd, Sime Darby Bhd, Malayan Banking Bhd and Tenaga Nasional Bhd — commanded 47.3% of the index. This implied a “significant influence on the index’s movements”, RHB said in a note on Tuesday.
“Closer analysis indicated that the top five often accounted for more than 50% of the index’s daily movement (ie more than their index weighting). On certain days, the combined attributed change was more than the change for the index,” RHB added.
From July 6, the benchmark index (KLCI) will switch to the FTSE Bursa Malaysia Large 30 Index (FBM 30), which will be renamed the FBM KLCI. The FBM KLCI will also adopt the KLCI’s closing on July 3 for its opening on July 6.
“Between June 19 and 26 (except for June 23), the implied FBM KLCI would have marginally outperformed the KLCI. Given the limited data, this may just be coincidence but in any case, investors tracking the FBM KLCI need to be aware of the power of the big five,” RHB said.
RHB’s “back-testing” using FBM30 data for the month of June indicated 97.5% correlation to KLCI.
“We performed a correlation test on the data assuming the FBM30 had adopted the May 31 closing. The result was not surprising and reflected the conclusion of FTSE Bursa Malaysia — that back-testing data from the past 13 years, indicates 98.3% correlation to the KLCI,” RHB said.
The 25 FBM KLCI stocks RHB has under its coverage have an estimated full-market capitalisation of around 90.2% of the 30 constituents, and around 83.9% of RHB’s universe of stocks, which in turn account for around 66.2% of the market cap for all the listed stocks on Bursa Malaysia.
The five FBM KLCI stocks RHB does not currently have under its coverage are PPB Group Bhd, YTL Corp Bhd, MMC Corp Bhd, Petronas Dagangan Bhd and RHB Cap Bhd.
RHB said it was expecting more volatility ahead.
“Given our analysis above, we believe there could be more volatility ahead, especially if the government announces more liberalisation of the banking sector, incentives for the plantation sector, or an electricity tariff review for TNB.
“Moreover, given our view that economic recovery will begin towards end-2009/early-2010, which would benefit the three sectors (banks, plantation and power), this could skew the benchmark on the upside against the broader market,” it said.
RHB’s value picks in the FBM KLCI include AMMB Holdings Bhd (RM4.29 target price), Kuala Lumpur Kepong Bhd (RM14.90), TNB (RM10.30) and Tanjong plc (RM19.10).
“Nevertheless, we believe any pull-back in the market would be an opportunity to accumulate highly-rated stocks regardless of whether they are in or out of the FBM KLCI,” RHB added.