The Stock Exchange of Thailand (SET) plans to adopt free-float adjusted market capitalisation in the calculation methodology for the SET50, SET100 and SETHD indices, effective from July as it strives to prevent speculation on low free-float stocks.
The new methodology is scheduled to be applied to the three main indices first before expansion to other indices next year.
The replacement of full market capitalisation with the free-float adjusted market capitalisation method in calculating the indices should better reflect market conditions in terms of liquidity, and aims to prevent speculation on low free-float stocks as occurred with Delta Electronics (DELTA) last year, causing the SET index to fluctuate widely.
Paradorn Tiaranapramot, assistant vice-president at Asia Plus Securities (ASPS), said stocks with a high portion of free-float shares will see their weight increase following the implementation of the new methodology. Picks from ASPS among this group include Bangkok Bank (BBL), Siam Commercial Bank (SCB) and Kasikorn Bank (KBANK).
Meanwhile, stocks with low free float will lose weight accordingly, including Airports of Thailand (AOT), Delta Electronics (DELTA) and PTT Oil and Retail Business (OR).
Mr Paradorn said some new stocks would be added to the SET50 Index following their increase in weight, while others would be withdrawn as their adjusted weight would not qualify them for selection.
ASPS expects Banpu (BANPU), Kiatnakin Phatra Bank (KKP), KCE Electronics (KCE), Sri Trang Argo-Industry (STA), and IRPC (IRPC) will be selected for the SET50 after the new calculation takes effect.
Meanwhile, stocks likely to exit the SET50 Index are VGI (VGI), TOA Paint (Thailand) (TOA), Siam Global House (GLOBAL), Total Access Communication (DTAC) and COM7 (COM7).
He said the change in the index weighting calculation will affect 31% of the SET’s market capitalisation turnover, which is currently recorded at 17 trillion baht. The weight of stocks would either increase or decrease depending on their levels of free-float shares.
After the adjustment, the prices of stocks that gain or lose weight will be highly volatile, said Mr Paradorn. To reduce the risk from such fluctuations, the SET plans to adjust only 50% of the listed stocks on July 1, moving to the other half at the end of the year.
He said the change would also affect domestic passive funds, which are equity mutual funds with a policy to adjust stock weights according to market indices, as they would be re-weighted accordingly to meet the new criteria.
It is expected these funds will adjust their portfolios at the end of June, before the implementation date, said Mr Paradorn.
Individual investors and some institutional investors are expected to speculate on stocks set to gain or lose following the new methodology, aiming to make short-term profits before the passive funds adjust portfolios, he said.
“The modification of the calculations will make the index less volatile because it will be more difficult for anyone to speculate on low free-float stocks to manipulate the index. The new methodology is also in line with international standards,” said Mr Paradorn.