The PSE announced last Friday the results of its review of the widely followed PSE index (PSEi). As widely anticipated by the market, Megaworld Corporation (MEG) and Robinsons Land Corporation (RLC) will be replaced by DMCI Holdings, Inc. (DMC) and Union Bank of the Philippines (UBP) by February 6. These changes will be carried out on Friday, February 4, 2023.<\/p>\n\n\n\n
Our recommendation: Buy RLC and MEG (stocks to be deleted from the PSEi) and sell DMC and UBP (stocks to be added to the PSEi).<\/strong><\/p>\n\n\n\n Interestingly, what we have seen since 2020 is that the PSE index additions have underperformed stocks that were taken out of the index, while those removed from the index outperformed. On average, stocks deleted from the PSEi jumped 5% a day after implementation. In the succeeding weeks, the same stocks further rose in price, peaking at 27% upside after around 120 days.<\/p>\n\n\n\n How the stocks fared throughout the next 228 days (approximately 1 year after effectivity) can be seen in the following table.<\/p>\n\n\n\n Data shows that stocks added to the PSEi saw price reductions, declining by 5% on effectivity date and further decreasing by 31% around 180 days after index rebalancing. This could be due to the speculation prior to the rebalancing. These stocks already rose in price weeks before any official announcement and, once the announcement is made, traders would then sell the stocks at a gain, causing the price decline.<\/p>\n\n\n\n For the February 2023 rebalancing, implementation day is on Friday, February 4, 2023. Based on the last 5 rebalancings, a holding period of 120 days appears to be the optimal holding period that maximizes the return on this strategy.<\/p>\n\n\n\n The consensus target price for MEG and RLC are at Php 2.87\/share and Php 22.80\/share, respectively. Loosely using these values, MEG offers a 27.6% upside from its close last Friday while RLC offers a higher much upside of 40.2% measured from its Friday close of Php 16.26.<\/p>\n\n\n\n Still we see an oversupply both in the vertical residential units and office spaces which supports our underweight position on the Property sector. However, an \u201cartificial\u201d decline in stock prices caused by passive selling flows warrant a tactical\/trading position on both RLC and MEG.<\/p>\n\n\n\n Between the two, we believe RLC is the more defensive company as ~63% of its revenues are generated from its malls and office leasing segments. In contrast, 64% of MEG\u2019s revenue comes from its property development segment which is seen to be challenged this year.<\/p>\n\n\n\n The February 2023 index rebalancing is the first of two scheduled rebalancing for the year, where the exchange implements changes to the index composition as well as their respective weightings on the index. The aim is to ensure that the index contains the biggest listed stocks in terms of market capitalization as well as the most actively traded during the review period.<\/p>\n\n\n\n The changes: The new members will have a bigger weight on the index, a cumulative weight of 2.91%, compared to the combined weight of 1.3% from MEG (0.58%) and RLC (0.80%). <\/p>\n\n\n\n In addition, ACEN, EMI and SMC have all increased their free float levels to 20% leading up to this February rebalancing to avoid getting replaced due to failure to meet the 20% minimum free float requirement for all PSEi index members.<\/p>\n\n\n\n These changes will only mean a reduction in weight for the other index members where the biggest expected outflow will be on ALI, JGS, ICT, BPI, AEV, SM and SMPH.<\/td> Stocks added to PSEi<\/strong><\/td> Stocks deleted from PSEi<\/strong><\/td><\/tr> Effectivity day<\/td> -5%<\/td> 5%<\/td><\/tr> 30 days after<\/td> 1%<\/td> 15%<\/td><\/tr> 60 days after<\/td> -2%<\/td> 19%<\/td><\/tr> 120 days after<\/td> -10%<\/td> 27%<\/td><\/tr> 180 days after<\/td> -31%<\/td> 0%<\/td><\/tr> 228 days after<\/td> -29%<\/td> 11%<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n Analysis and Opinion<\/h2>\n\n\n\n
This passive-driven outflow should be a good opportunity to consider buying or adding to your favorite index names, especially in light of the shallow correction that we\u2019ve seen so far.<\/p>\n\n\n\n