The news of ASX:MAY being included in the "All Ordinaries" at 5:03pm after trading on Friday the 03/03/2023, is amazing news with exceptional timing, especially since ASX:MAY is potentially heading into the appraisal program at the end of the month.
I would like to take this time to discuss a few things, one being that the all ordinaries is not just based on market cap alone:
"
Inclusion in the AOI: Any listed, domestic company is eligible for inclusion in the AOI if its market capitalisation is at least0.022% of total domestic market capitalisation and it meets a liquidity requirement. The liquidity requirements were revised with effect from 1 July 1998. Prior to 1 July 1998, a company needed to have an average normal turnover on the ASX in excess of 0.5% of its quoted shares per month over the previous six months. After 1 July 1998, the liquidity criterion for inclusion was that the company’s monthly median liquidity, relative to the ASX median market liquidity must be at least 50% over the previous six months." source: Chan, H. W. H., & Howard, P. F. (2002). Additions to and Deletions from an Open-Ended Market Index: Evidence from the Australian All Ordinaries.
Australian Journal of Management,
27(1), 45–74.
https://doi.org/10.1177/031289620202700103Therefore, not only has the market cap of the company reached top 500 status, but the company has also maintained a liquidity requirement, in other words the company has reached a point where there is significant market demand for ASX:MAY giving it an eligibility into the 'All Ords'.
There has been many studies in the literature which have examined the effect of a company being included in the Index. For example Dhillon and Johnson (1991) examined 187 additions to the S&P 500 from 1978 to 1988 again using daily data and the market model. The announcement effect documented in earlier studies continued unabated in the 1984 to 1988 period.
They found the price overwhelmingly went up on average. Dhillon and Johnson (1991) tracked returns for 60 trading days after the announcement and found no evidence of price reversal (meaning it kept going up or plateaued). source: Chan, H. W. H., & Howard, P. F. (2002). Additions to and Deletions from an Open-Ended Market Index: Evidence from the Australian All Ordinaries.
Australian Journal of Management,
27(1), 45–74.
https://doi.org/10.1177/031289620202700103 | Findings: | Reference: |
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| 1 | - An argument is made that some investors restrict themselves to trading within categories of stocks (funds tied to the performance of the S&P 500 index versus non-index funds, etc) adding to volume and pre-addition momentum, hence playing on the "index-inclusion effect"
| Coakley, J., Dotsis, G., Kourtis, A., & Psychoyios, D. (2022). The S&P 500 index inclusion effect: Evidence from the options market. International Journal of Finance & Economics, EarlyView, |
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| 2 | - Increase in volume and a permanent price change (after the change was announced and implemented)
| Goetzmann, W. & Garry, M. 1986, ‘Does delisting from the S&P 500 affect stock price?’, Financial Analysts Journal, vol. 42, pp. 64-9. |
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| 3 | - Additions were associated with permanent volume increases and price increases
| Harris, L. & Gurel, E. 1986, ‘Price and volume effects associated with changes in the S&P 500 list: New evidence for the existence of price pressures’, Journal of Finance, vol. 41, pp. 815-29 |
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| 4 | - Mean abnormal returns were increased for inclusions
| Shleifer, A. 1986, ‘Do demand curves for stocks slope down?’, Journal of Finance, vol. 41, pp. 579-90 |
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| 5 | - Mean excess return increased as a result of the inclusion to the index
| Jain, P.C. 1987, ‘The effect on stock price of inclusion in and exclusion from the S&P 500’, Financial Analysts Journal, vol. 43, pp. 58-65 |
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| 6 | - The announcement effect documented in earlier studies continued unabated and excess returns were demonstrated
- Dhillon and Johnson (1991) tracked returns for 60 trading days after the announcement and found momentum persisted
| Dhillon, U. & Johnson, H. 1991, ‘Changes in the Standard and Poor’s 500 list', Journal of Business, vol. 64, pp. 75-85 |
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| 7 | - Additions were associated with significant positive abnormal returns.
- Further abnormal returns were then recorded between the announcement day and the change day
- Additions and deletions were also associated with similar abnormal volume
| Lynch, A.W. & Mendenhall, R.R. 1997, ‘New evidence on stock price effects associated with changes in the S&P 500 index’, Journal of Business, vol. 70, pp. 351-83 |
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| 8 | - trading volume increases from the announcement day and peaks on the change day.
- Average trade sizes are also reported to be larger.
- They found that ‘trading activity’ is abnormal and statistically significant when compared to a pre¬announcement period
- total abnormal return from the announcement day close to the change day close is 7.2%
- They attribute the return and trading activity results to index funds, which became increasingly important
| Beneish, M.D. & Whaley, R.E. 1996, An anatomy of the ‘S&P Game’: The effects of changing the rules’, Journal of Finance, vol. 51, December, pp. 1909-30 |
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| 9 | - on average, a positive abnormal return over an 11-day period that included both the announcement and the effective day
| Brealey, R.A. 2000, ‘Stock prices, stock indexes and index funds’, Bank of England Quarterly Bulletin, February, pp. 61-8 |
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There are five long held theories for why the stock price goes up on average after being included to the Index (the 'All Ords' is considered an index: "it is considered the benchmark index for gauging the performance of the broader Australian stock market."):
1)
The Information hypothesis: The decision to include the share to the index conveys "information" to investors. "Standard and Poor's is known to prefer stable firms for its indices, so inclusion of a firm in the S&P 500 may be perceived as a reduction in the risk of its securities" source: Dhillon, U. & Johnson, H. 1991, ‘Changes in the Standard and Poor’s 500 list', Journal of Business, vol. 64, pp. 75-85.
2)
The Price Pressure hypothesis: Heavy trading by index funds around the time of the change (
in our case for ASX:MAY, the change is said to occur on the 20/03/2023) temporarily moves security prices away from their equilibrium values (the price pressure hypothesis). source: Harris, L. & Gurel, E. 1986, ‘Price and volume effects associated with changes in the S&P 500 list: New evidence for the existence of price pressures’, Journal of Finance, vol. 41, pp. 815-29.
3)
The Downward-sloping demand hypothesis: As first recognised by Shleifer (1986) and Harris and Gurel (1986) a permanent price change associated with addition to an index could also be explained by stocks having long run demand curves which are downward sloping (downward-sloping demand hypothesis). When a firm enters a major index such as the S&P 500, index funds will buy its shares which removes a substantial proportion of them from circulation. If demand curves for stocks slope downward, the reduced supply will cause an increase in the equilibrium price. source: Shleifer, A. 1986, ‘Do demand curves for stocks slope down?’, Journal of Finance, vol. 41, pp. 579-90.
4)
The Liquidity Hypothesis: Finally, inclusion in an index may have valuation consequences because it increases a stock’s liquidity (the liquidity hypothesis). According to this view, inclusion may be followed by closer scrutiny of the company by investors, greater institutional interest in the stock and therefore an increase in public information about it. As a result, the stock will be held more widely, will become more liquid and the bid-ask spread will fall which lowers the required rate of return on the stock and leads to a price increase. source: Shleifer, A. 1986, ‘Do demand curves for stocks slope down?’, Journal of Finance, vol. 41, pp. 579-90.
5)
Pre-Addition Momentum Hypothesis: The classical approach supports the view that the index-inclusion effect reflects changes in fundamentals. It argues that index inclusion is either an indirect signal that fundamentals have changed before the inclusion (as indicated for instance by pre-addition momentum) or that index inclusion leads to increased comovement, for example, through closer monitoring of ASX:MAY management by sophisticated and institutional investors after being included to the 'All Ords'. source: Coakley, J., Dotsis, G., Kourtis, A., & Psychoyios, D. (2022). The S&P 500 index inclusion effect: Evidence from the options market. International Journal of Finance & Economics, EarlyView,
Therefore... we might see a positive momentum moving forward all the way up to the 20/03/2023 when it is said that ASX:MAY will be included in the 'All Ords'.
source: extract from 03/03/2023 5:03 pm S&P DJI Announces March 2023 Quarterly Rebalance
https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02639800_PS-6A1139303?access_token=83ff96335c2d45a094df02a206a39ff4Coincidentally the 20/03/2023 is the expected date of completion of the third party gas well, which means we might get notification on that date that the drill rig is heading to the Alameda well pad (a day with potentially two massive news catalysts).
Andrew Purcell: "Sure,
we don't imagine it will have a delay, we've been given a projected completion date, the well has spudded...
"... it's a short simple well, and they'll be coming straight to us once they've completed it, and the scheduling for that is umm.. as I said we should be, we'll know morenext week when I'm on the ground when I catch up with the contractors. They're planning to have it finished by the middle of next month about the 20th, they'll be mobilising to us." source: Feb 22, 2023 Investor Stream Webinar Series: Melbana Energy (ASX:MAY) Investor Briefing (February 22, 2023)
https://www.youtube.com/watch?v=MK-iERpXBWY&t=2068s&ab_channel=InvestorStream
Let the party begin!
p.s congrats to Jon 'Bones' Jones, undisputed champion G.O.A.T.
