When will this happen and what is the likely effect on the sp?
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Probably a great rise! With bubble stocks like PEB, XRO & LNG most recently we have seen massive falls after index inclusion. Why? Probably something to do with greater access to borrowing stock and the increased activity from institutions actively shorting it. Be interesting to see what happens though (I was just joking with the first line) ;)
http://www.msci.com/products/indexes/country_and_regional/dm/announcements.html
Announcement October 30, 2014
THIS IS AN ANNOUNCEMENT FOR THE MSCI GLOBAL STANDARD INDEXES
[snip] MSCI NOVEMBER SEMI-ANNUAL INDEX REVIEW ANNOUNCEMENT SCHEDULED FOR NOVEMBER 6, 2014 [...] the list of additions to and deletions from the indexes [...] on its web site, www.msci.com, shortly after 11:00 p.m. Central European Time (CET) on November 6, 2014. [...] All changes will be made as of the close of November 25, 2014. [end snip]
So ... if XRO is dropped, what would be the likely effect on the sp?
:confused:
Basic laws of economics state that when supply outsrips demand, price will fall.
There will be approximately 7m shares for sale, so I'll let others digest and debate wether there is demand for that amount of stock at current prices. My feeling is that there isn't but big lines of stock do bring people out of the wood work. I expect SP weakness post announcement and particularly on the 25th November, albeit short term in nature. MSCI is notorious for providing abnormal SP returns around inclusion announcements due to the volume of funds/ etfs that passively track it.
Ignore what BFG said about 3 independent examples of when it doesnt work. Statistics suggest those that go in go up and those that go out go down, plain and simple. Returns are abnormal and revert overt time.
Good opportunity to buy on the 25th if you are bullish on XRO/ sell now buy back in a few weeks for the traders.
Intriguing notion, Intel.
I like your use of fundamental economic principles to explain your point.
Perhaps, then, you can explain the large drop in price to the tune of 7 million shares on 30 May 2014 when XRO was added to the index.
This would seem counterintuitive when compared to your basic laws of economics.
Please explain for the forum.
BFG already gave one explanation - inclusion in the MSCI brought XERO to the attention of large investors.
They analysed it then promptly shorted it.
Im, sorry but I dont get what you are trying to say?
But for teh sake of teh forum I will explain my thesis, however that chart explains exactly what I was trying to convey.
XRO was announced to enter into MSCI on May 16th, SP approx $30,
XRO enters MSCi on 30 May, increased volume, Sp closes approx $32.
Approx two days after the inclusion date the SP has reverted back down to $30 and then continues on with its downward slide.
Its a simple equation, when the stock goes in you have built up demand, when it goes out you have built up supply. It creates a short term disequilibrium and severely impacts SP's.
This is a trading play and if you are trying to get me to explain why XRO's SP has gone down post index inclusion then thats not what I am conveying. In fact if anyone believes that index inclusion helps a stock in the long run they are a long way from the truth. Sure it will get more analyst coverage etc but it is your classic cause and effect relationship.
History has shown that MSCI inclusion creates significant abnormal returns that can be taken advantage of. And those returns can be significantly enhanced if you can pre determine wether stocks will go in or out before the announcements. There are quant funds who purely focus on this trade. CLSA have a pretty good research team focused exactly on this subject so if you want to trade australasian stocks, setup an account with them and read their research.
For BFG you should go back and look at the SP performance of PEB and LNG, you'll find both of their SP's were helped in the short term by increased demand. I sold my PEB's into the index inclusion so I would now and I own LNG so and saw that spike about 20c in the closing auction the day it went into the ASX200.
Hope that assists.
On an aside, BFG how do you determine something is a bubble? Do you just look at SP performance and call it on that or do you genuinely try to value the business?
Man that's so random :D:D:D:D:D I totally see how the demand for 7 million shares sent the SP upwards as per the fundamental laws of economics. It's just so crazy how it wasn't the actual inclusion but rather the hype leading up to the fateful day where 7m shares traded and the stock closed down for the day and fell downwards. I can totally see your point.
Kind of like LNG in similar circumstances. Although, quite contrary to the notion that these laws of economics guarantee the absence of supply will make the SP go up, here we see the volumes are below average until the fateful day. Then, amazingly, the average volumes are beaten down as the SP falls. I would have thought, as with XRO, the high SP and the lack of supply would make it go higher.
It's almost as thought you're calling it a sure thing when it's not actually a sure thing.
Thanks for all your thoughts re the MSCI, I've looked at the USA and Aus stocks that were removed from the MSCI in May'14, searching for some clues, and from their price charts there was possibly some correlation, though nothing particularly dramatic or formulaic - perhaps a long bow drawn to suggest any causation. Nevertheless, it may provide some modicum of interest on or about the days that XRO comes off the MSCI, if it does.