Standard & Poor have announced the structure of the News Corporation (NCP) index transition, subject to the domicile shift being approved and NCP being included in the S&P 500 index. The stock will be removed from the S&P/ASX 200 index over a nine month period in four equal tranches (spaced three months apart). Inclusion in the S&P 500 index at 100% weight will occur during the first phase.
Macquarie Research Equities (MRE) believe that the nine-month / four-tranche transition is more “gentle” than the market was expecting. In theory the parallel inclusion in the S&P/ASX 200 and S&P 500 would be a positive for NCP as it give institutions the opportunity to sell out at any point over the nine months and switch to the other index.
The imperative question amongst all the numbers is obviously how the index changes will impact the price of the stock. Despite the huge nature of this change, US funds do have the capacity to soak up Aussie selling if they choose to do so. However, they also have the capacity to largely ignore the change if they so choose. The phased removal of the stock will obviously help to dampen the impact Aussie selling will have, but MSCI removal coming in the midst of Aussie removal will not help.
In a nutshell the Aussie funds have to react with more urgency than US funds do given the impact on tracking error & risk and as a result MRE believe a negative impact to the stock is inevitable. The extent and duration of the sell-off will depend on the fundamentals of the stock at the time of removal, a factor we will be much better placed to address later this year / early next.
