MSB Even Bigger In Index Than Expected The last time I wrote on...

MSB Even Bigger In Index Than Expected

The last time I wrote on MSB's likely index inclusion, only a few days ago, I expected MSB to enter the ASX200 around stock number 123. That was when the price was $3.60 and it is currently $4.00. That boosts the likely position to stock number 118 and increases the Index weight from around 11bp to around 12bp.

These numbers are significant for index funds and imply around 10% more impact on their portfolios than previously. It doesn't really change the number of shares they will buy, but it does make it 10% more likely they will be forced to buy. Some index funds "stratify" their samples of stocks and don't fully replicate the index, some of those funds are that much more likely to buy MSB because of the price rise in the past few days.

Not all the stocks entering the index have risen as much in the past few days, MP1 is down 7.5% since my last calculation and PRU is down 5.5%. The others are all higher. MSB is the biggest market cap of the stocks entering the index (even taking into account the IWF Index Weight Factor discount of 15%) and, even though trading volumes and values have been very high recently, MSB remains a tightly held stock with very low traditional institutional ownership.

Turnover in the new entry stocks has been higher than normal in the past week, and MSB's turnover has been extremely high since interest really fired up in the stock in March. The past week's turnover in MSB hasn't been high compared to the big turnover days since hopes took off for a Corona virus cure. The alue of turnover graph looks much higher now, since the share price is up 4x since the March low, however the number of shares traded is the subject of today's note. See bottom turnover panel below.



I have previously noted the explosion in global interest in MSB as charted on Google Trends, measured as the number of searches now relative to the number of searches in the past. Worldwide searches in April are the highest ever (100), May fell to 86, and June is provisionally 44 - but the current interest is still so high that it blows away any other month in Mesoblast's past (pre the April surge).

That's the reason I think MSB has remained strong, and why it is benefitting more than the other stocks entering the index today - it is the interest from global investors. Global investors are buying both on Nasdaq (MESO ADRs) and also on the Aussie market (MSB shares). The way to get the most volume is almost always on the Aussie market, and usually the price is a little cheaper in Australia - though that moves in waves over time. Sometimes the US price is cheaper for a period and vice versa - it depends on local supply and demand for stock at the time.

Today, demand for stock in Australia will be much higher than demand in the US as MSB is entering the ASX200 at the opening on Monday morning - which means "pure" index funds need to buy at today's closing price so they can fully replicate the index. So the MSB price today will trade at a premium to the US price today (unless some big market moving data comes out during the day today to dramatically cause "active" funds to sell and therefore increase supply - that is highly unlikely unless the US futures crash or Mr Trump says something crazy - but everything would then fall together and MSB would still outperform due to the index inclusion).

Some of the main analysts covering index inclusion estimate the likely demand from "pure" index funds on the day of index inclusion. They estimate demand of 12.7m shares from "pure" index funds - though of course many other funds are quasi-index funds and "index huggers". The latter two can pre-buy MSB before index inclusion or may average in over weeks or months. Most of the "pure" index estimated demand will be crossed today at the closing price or will be bought in the closing match.

That way, the "pure" index funds can guarantee, no matter what the closing match price is that they will perform in line with the index from Monday. In other words, they couldn't care less what the closing price is - whether it be $1 or $4 or $10 - their only mandate is to match the index, and the only way to do that is to buy all of their stock at today's closing price. Even if the price plunges to 10c on Monday morning, they will perform in line with the index and their job is done. Strange as it sounds, they just don't care what they pay today as long as it is the official closing price.


Bottom Line - all calculations done at $4

I note that the price is already $4.21 (high $4.27) - I've done the calcs at yesterday's $4 closing price. At $4.21 the index weight goes up another 5%.

The price will move around a lot more before the close - could be up, could be down!

Mesoblast has at least 50% of its shares tied up with very loyal, non index players. Aussie Index funds are scarce on the register at the moment. It is going to be difficult to get set today, so many of the "quasi-indexers" and "index huggers" will have been buying early and several will continue to buy over the next month or so. They risk competing with big announcements due in July/August on major trial results and potential partnership deals.

Thursday a week ago, brokers and funds were still very uncertain as to whether MSB would enter the ASX200 today (they were calling me and asking) - there is still a lot of mistrust in MSB after the share price fell from $9.95 in 2011 to $1. Most of them haven't bring able to bring themselves to buy a stock which has fallen so far. That's normal and it takes a long time for "the market" to get comfortable enough to buy a stock after such a big fall. Remember the low was effectively only 3 months ago when the price was $1.02 - so there hasn't been nearly enough time for funds to get comfortable - and they have been left stranded. There is a lot of buying yet to go - especially if some of MSB's global blockbuster products are proven to work in their phase 3 trial results to be released "mid-year".

This is why the price is more likely to rise than fall - we have global players buying due to Covid19, we have index buyers, we have small cap fund buyers (ex the ASX100) who are being hurt by the price rise, we have a quant signal for momentum buyers, we have short covering and finally we have retail buyers who like to jump on the bandwagon of rising prices.

That's why I was questioning the wisdom of people who were selling in the past week. There is always some mini-panic, and in the past few weeks we have had panics from US Futures falling during Asian trading hours and panics about alternative Covid19 treatments. Both were misplaced fears in regard to MSB - the US futures were falling on Covid fears and MSB has a Covid cure - so that didn't make sense. The Dexamethasone panic actually showed the value of MSB's cells - the Dexa press release only quoted saving 1 in 8 lives - leaving 7 in 8 to be treated by MSB's cells. Personally, I'd welcome something which treated 5 in 8 lives - that would clear ICU's and still leave more than enough of the really serious cases to be treated by MSB and would also give a big push to the stock market and lift all shares. Outside of MSB's already spectacular results, I don't think we'll get anything nearly as good in the medium term and that MSB's cells are the world's best hope - I just hope we get a major manufacturing partner in the near term so that we can save lives on an industrial scale.