All eyes on Contact, Meridian as S&P index rebalancing looms

Shares in Contact and Meridian look likely to remain on a rocky road until key index changes take effect on April 16.

Trade in both stocks has been extremely volatile as clean, green power generators have became flavour of the month for exchange traded funds (ETFs).

BlackRock – the world’s biggest asset manager – has two iShares clean energy exchange traded funds (ETFs) which have amassed big stakes in Meridian Contact.

Both funds track the S&P Dow Jones Global Clean Index.

S&P Dow Jones Indices said last month that it had conducted a consultation with market participants on potential changes to the index.

As a result, S&P will introduce changes aimed at reducing the concentration of those existing index constituents.

Among the changes will be the expansion of the index’s target constituent count to 100 from 30. There will also be modifications to the index’s constituent weightings scheme.

S&P Dow Jones said it was possible the final constituent count could be below 100.

The changes become effective prior to the market open on Monday, April 19 and ETF-related adjustment is expected to take place on the preceding Friday (April 16).

S&P Global does not comment on individual weightings but the understanding in the market is that Contact’s weighting will fall from 4 per cent to just under 0.7 per cent and Meridian’s will go from 4.5 per cent to just over 0.7 per cent.

Shares in the Kiwi power generators had been highly sought following the election of US President Joe Biden on the expectation that the new administration would take strong action on climate change, thereby putting the low-impact power companies in the investment spotlight.

S&P’s index rebalancing “has been one of the most anticipated events for quite some time,” Matt Goodson, managing director of Salt Funds, said.

Going on NZX disclosures issued in January, BlackRock had 14.34 per cent of Contact and 7.09 per cent of Meridian.

With a combined market capitalisation of nearly $19 billion, both companies have substantial influence on the local benchmark index, the S&P/NZX50, so the rise and fall of these two stocks has played a part in the market’s weaker performance so far this year.

Meridian and Contact hit $9.40 and $10.75, respectively, in early January but have come back sharply since then.

Goodson expects to see tens of millions of Meridian and Contact shares trade when the index adjusts.

“I’ve seen various estimates,” Goodson said.

“It will depend on actual share price movements in the index between now and then, but in round terms we expect about 70m shares in Contact and 100m in Meridian,” he said.

Goodson said there had been speculation that Mercury might be added to the index, but the stock had fallen just short of S&P’s required liquidity threshold.

“The question is, how much stock (in Meridian and Contact) has already been traded,” he said.

Data on short selling – when investors sell stock they have borrowed with the intention of buying at a lower price – is quite comprehensive in Australia but not so in New Zealand.

“Our best guess is that maybe a quarter or a third may have traded in terms of people short selling, hoping to buy back cheaper,” he said.

“On top of that, you may have had people trimming back their long positions, hoping to buy back cheaper,” he said.

Goodson, whose firm is an active investment manager, is not a big fan of ETFs.

He said the index adjustment and subsequent changes to the ETF’s exposure to Meridian and Contact was “poor form” for investors in ETFs.

Oliver Mander, chief executive of the New Zealand Shareholders’ Association (NZSA), said he was not sure the impact of the index change will be as marked as people were assuming.

“But the reality is that individual investor sentiment seems to amplify those movements,” he said.

“In other words, what may be a relatively small change created by passive funds gets ‘amplified’ by the actions of many individual trades,” he said.

“While passive funds have been around a while, they are still relatively ‘new’ in investing terms,” Mander said.

“It’s an area that NZSA thinks is worthy of tertiary research to help everyone – active and passive investors alike – understand the impacts.”

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