When is a backflip a backflip with pike and twist? When it’s the ASX and its corporate
partner in all things indices, Standard and Poor’s, retreating at full speed on
last year’s decision to remove News Corporation from local stockmarket indices. It’s being dressed up as a decision
to try and attract more foreign companies to list here and offers the carrot
to local fund managers of a bit more index performance.

The
SMH
reports today that Rupert Murdoch’s News Corp would be a
prime beneficiary:

Rupert Murdoch’s News Corp is set
for a dramatic reinstatement to Australian market indices just two years after
an investor backlash failed to keep one of the country’s largest companies on
local screens after it relocated to the United
States. The move by the Australian Stock
Exchange and index provider Standard & Poor’s last night was designed to
stop other large Australian companies from heading
overseas.

“Under the proposed changes, foreign
domiciled companies trading on the ASX will become eligible for index inclusion
based on their Australian market capitalisation and
liquidity. If
the proposed changes are adopted, News Corporation may be readmitted to the
indices,” the ASX and S&P said.

What’s amazing is why this wasn’t so obvious to them in 2004 when News
was flicked after bolting for a new life in the US, despite a lot of
opposition from local investors. S&P in particular, worried about
double counting of companies. Also amazing was that the ASX, which has
been against the move, did nothing to dissuade its partner from
flicking News. After all, the various indices are called the
ASX/S&P 200 etc…

There are 16 foreign based companies listed on the ASX and eligible
for inclusion, including Telecom New Zealand, Henderson Group, Fletcher
Building and News Corp. If this happens then 16 local companies will be
removed from the ASX/S&P 200. That will mean a drop in liquidity
and interest from big investors, especially Index investors and those
who “hug the index” but are also active investors. These two groups are
thought to control around $100 billion of investment in the local
market.

Friday morning reports said
that companies like Fleetwood Corp, Novogen, McGuigan Simeon Wines and Colorado could be flicked from the index. That
will weaken the shares in those companies as the Index investors
sell.

There are going to be some very
unhappy shareholders around after this backflip. Only local shareholders in the
companies that could be included under the change (it is open for discussion for
a month) will get any benefit because the value of their holdings in these
foreign based companies will rise.

But
the impact on them will be far less than the adverse impact on those local,
Australian companies knocked out of the index.

Peter Fray

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