We have noticed press reports recently noting global changes in the MSCI (Morgan Stanley Capital International) indices. GICS (Global Industry Classification Standards) run by the United States company Standard & Poors are also considering a realignment of listed companies.

Those following the markets, will be interested to note fund managers reactions to this. They believe that the Australian market will experience a massive upheaval.

MSCI Free Float index refers to the amount of stock "freely traded" rather than by market capitalisation. This has large implications for stocks such as Telstra and Newscorp. If this proposal goes ahead, stocks are categorised into 10 brackets according to the percentage of shares that are freely available to investors. Shares that are not freely available are classed in a number of ways, and this includes holdings by Director's/Founder's or the Government. If this comes about, Telstra's rating would be at 50% instead of the full 100% it has now. Mr Murdoch would face a similar problem at Newscorp. Foreign ownership restrictions are also accounted for.

MSCI may have affect on the following;

Large stocks at Risk from Potential Downgrades:
The US standards rate stocks with large holdings by founders differently than we have in the past in Australia.

News Corp, Telstra, Cable and Wireless Optus, Coca-Cola Amatil, AXA Asia Pacific, Wesfarmers, Computershare & Aristocrat These are the companies where either govt and / or owner founders have large holdings, ie the percentage of stock available to trade is less, making the stock less liquid. Under the new ratings, these companies will have less importance and weight in the index. hence global index fund managers will have to shed some stock.

Note: News Corp, Telstra, Cable and Wireless Optus, are currently in a downtrend Coca-Cola Amatil, AXA Asia Pacific, Wesfarmers, Computershare & Aristocrat are currently sideways or up.

Large Stocks with High Free Float:
If these stocks remain at full weight, they will increase in importance in the country index. National Bank, Commonwealth Bank, Westpac, ANZ, BHP, AMP and Brambles. It is interesting to note that these charts are already either up or sideways. One would expect this to continue into the date these changes take effect.

Larger Stocks Possibly included in Indices:
Australian Stock Exchange, Lang Corporation, Macquarie Bank, Qantas, Sonic Healthcare, Woodside, Westfield America, Westfield Holdings. All of these stocks are up, except for Qantas, which is currently trending sideways. (QAN announced a major capital outlay, expected to reduce earnings in the near term).

This is classic Dow Theory in action. All the news, good or bad, has already been factored into the price. The fund managers would have known about the possibility of these changes months before the news was made public and hence bought or sold shares to match the new weighting the stock will hold in the index after the changes.

Attached are the charts of Newscorp, National Australia Bank & Australian Stock Exchange. Notice how in all these charts, a change in trend or a stronger continuation of the current trend, occurred roughly 2 months prior (September) to news announcements in late November. Keep your eyes on these developments and future announcements.

See also, AFR reporting, nov 20th in the market wrap section.