On the upcoming adjustment and re-weighting of PSEi

Not much is being written on tips/newsletters and forums yet on the upcoming PSEi adjustment (effective MOnday), but this could be very important and impactful in the next two weeks. We might have something short-term (in days) to take advantage of. And since we're still in that type of market where we're just riding the wave of volatility, hoping to time the right entry and get  +5% in one upswing, and then quickly hit sell, the possible effect of this re-weighting deserves particular attention.

BPI, Philequity, and supposedly some foreign funds (not immediately visible to us) hold billions in the index funds that they manage. These uitf and mutual funds have to re-allocate their capital accordingly by [ideally] Sept 16, probably [latest] Sept 30. There are also foreign funds (which again are not readily available to us) that are also basically (if not completely) anchored on the PSEi. They also have to adjust according to the charter of the particular.

1) The addition of GTCAP and LTG would have immediate positive impact on these two issues, since the funds would be forced to add them based on a deadline date rather than price. I already profited 15%+ on GTCAP recently. Explaining the gain--presumably some of the funds did already some proactive adjustment immediately after the announcement. Some funds would add more. Further, since it went down, Im readying to enter again [hopefully] at 750 which served as good support for GTCAP in the past. If not 750, Im thinking whatever price below 800 on Thursday.

Im not favoring LTG, mainly because I dont trust its management. Not even Lucio's broods now managing the conglomerate have good credentials to me. LTG also made considerably big loans in USD recently. Similar to SMC and JGS, they have to make provisions for forex losses soon.

But for both LTG and GTCAP, the immediate positive jump can go as high as +10% (but Ill be comfortable selling at +5%).

2) The disclosure does not include yet the weight changes among the incumbent blue chips in the PSEi. We have to watch out which increased/decreased. Im assuming JFC, AGI, and AC would have more weight, and SM less, SMC less and less (less than 0.5%?). TEL could also probably shed some of its weight (which is warranted, I think; we have more and more companies heavily traded, more so contributing to our GDP). The one assuming more weight of course should be the one to enter in on short term, but Im only speculating at this point which ones are affected. We have to wait for the real data. The %weight is also important. If a stock will have +0.5% or more to be added as contribution in the index, that would substantial.


Now on to the two which will be removed:

3) MER has only a 1.63% weight in the index. It might go down -5% in the next two weeks, but not for long. Considering the high average volume it trades historically in the past few months (prompted by extraordinary transactions like the selling of SMC shares, among others), it will not stay down in one week. Those divested by the funds will be chomped up by retail (including me) and other funds for sure.

I still have considerable holdings in MER showing -5% paper loss at this time. Im willing to hold out the short-term negative even up to -15%, keeping in mind that this is respectable-paying in terms of dividends. Moreover, MER used to be one of the most resilient issue and was gunning for 400 PhP just a few weeks ago--it was only pulled down by SMC's need for cash. Its forward P/E is also only at 15 to 16--which is cheap for a steady cash cow and monopoly company by MVP.

BEL, on the other hand, shouldn't have been in the index on the first place. By 2014, yes, but not this year. Anyway, its weight is only at 0.8%. It might have already gone down to reflect the removal, and might not go down further. But if it flirts with 4.0, I will buy add a substantial position, preparing for its definite jump by latest mid-year 2014. Other unique merits of BEL also mentioned here.