ASX set to change

THE Australian Stock Exchange will become more transparent to foreign investors when the Global Industry Classification Standard (GICS) is applied to it

The GISC consists of 10 economic sectors aggregated from 23 industry groups, 59 industries and 123 sub-industries, which currently cover 12,000 companies around the globe.

The system was created to establish a common global standard for categorising companies into sectors and industries.

The Australian equity market had previously been divided into 24 industry sectors unique to this country.

The GICS process adopts a bottom-up approach, by assigning each company at the “sub-industry” level according to its principal business activity.

Then the system follows a hierarchical structure upward with each company automatic-ally being assigned its respective industry, industry group and sector.

The 10 sectors are energy, materials, industrials, consumer staples, consumer discretionary, health care, financials, information technology, telecommunications and utilities.

In the main, the titles of these sectors are self-evident as to their contents.

However, two have been created from a consolidation of previous industry sectors.

The “financials” sector is split up into two industry groups – property trusts and financials-x-property trusts.

The main concession to the Australian market was the retention of a property trust sector.

The “materials” sector is made up from six previous industry sectors- gold, other metals, diversified resources, building materials, chemicals and paper and packaging.

The changes will allow overseas global investors to apply the same criteria as in their own overseas markets.

A significant change is the removal of the resource sector.

For a market that has been viewed as a “resource” economy and market for all of its life, this change is extremely significant.

It will give the foreign investors a new perspective on the Australian market and could influence the direction of cash flows into and out of our market.

The implementation of the GICS is expected next April.

At the same time, Morgan Stanley have recommended certain changes to the Morgan Stanley Capital Index.

One of the main changes relates to a “free float” methodology for calculating individual stock weightings.

The changes will be announced before December 31.

The proposed MSCI change involves companies being weighted according to a series of inclusion bands depending on their level of free float.

A significant change is the removal of the resource sector from the Australian Stock Exchange.

The term “free float” describes the proportion of a company’s shares available for trading.

This refers to the proportion of the shares that are not locked up in a controlling stake or other significant minority shareholding.

So if company A has a 34 per cent holding in company B, Company B’s free float is only 66 per cent.

The move to a free float will be quite significant with MSCI estimating that a transitional turnover of 17.5 per cent will be needed to rebalance their world index.

Australia has a fairly high level of free float. As a result of this, our weight in the world index will rise from 1.3 per cent to 1.4 per cent. Our weight in the Asia Pacific Index ex Japan would jump from a 44 per cent to 60 per cent weight. This would mean that substantial cash flows to our region could result from the re-balancing that is required of large international funds.

The impact on specific stocks can also be significant.

Telstra, due to its part government ownership and foreign ownership restrictions will be negatively impacted.

Telstra will only be included in the 20 per cent free float band.

The total weight of Telstra would decrease from 11.3 per cent to around 4.4 per cent, a fall of some 6.9 per cent.

This would have quite an impact on the fund and institution managers who look to track the index as part of their investment strategy.

News Corporation would need to have the stock held by Rupert Murdoch adjusted out.

This would result in a 75 per cent free float band being applied. The weight of News Corp’s non-voting preference shares is expected to reduce by 1.2 per cent and the ordinary shares to reduce by 1.1 per cent.

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